Competitiveness: New firms still exempt from paying levy for three years
SOME new businesses will continue to be exempt from corporation tax for the first three years after Finance Minister Brian Lenihan extended and altered a scheme aimed at helping small- and medium-sized companies that create new jobs.
The three-year corporation tax exemption for start-up companies was first announced in 2009 but is now being changed so the value of the relief will be linked to the amount of employers' PRSI paid by a company up to €5,000 per employee.
"I suspect this change is an attempt to limit abuse," said Paul Brady, a tax consultant and founder of TaxandLegal.ie.
"It is interesting that they are linking it to PRSI. They are trying to stop people from making capital investments."
The scheme only applies to people who are setting up a new business in manufacturing and a few other sectors. It excludes services and only benefits new companies that make a profit in their first three years.
Under the changes announced yesterday, if the amount of qualifying employers' PRSI is lower than the reduction in corporation tax liability, relief will be based on the lower amount.
While welcoming the move, Kevin McLoughlin, of Ernst & Young, expressed fears that possible alterations to the British tax code could lure foreign direct investment to the UK rather than Ireland.
Britain has proposed changes to the taxation of income from intellectual property and foreign profits.
Pressure is also growing in Northern Ireland to reduce corporation taxes to the rates in the Republic which could draw investment north of the Border.
"It is interesting to contrast the corporate tax measures with those announced in the recent UK consultation document on corporation tax.
"Ireland is very much adopting a 'what we have we hold' approach whereas the UK is proposing some interesting measures which could make the UK a more significant competitor for mobile inward investment than heretofore," Mr McLoughlin warned.
Mr Lenihan reiterated that corporation tax would remain at 12.5pc, adding that several European finance ministers now understood that Ireland needed to keep the rate low. He did not name the ministers.
Senior figures in Germany and France have said repeatedly that they would like Ireland to raise the rate to a level closer to the level in countries which are funding Ireland's EU-led €85bn bailout.
Industrialist Michael Smurfit said yesterday he saw no reason not to raise the rate to 15pc.
While corporation tax remains at 12.5pc for now, it is likely rise in the future, Mr Brady said. "Since the Lisbon Treaty, groups of European countries will be able to club together to harmonise taxes. If they do that, we will have to do the same," he predicted.