I. An Roinn Airgeadais Department of Finance Ref: 90/2017 51/1 December 2017 Mr Ken Foxe, Right to Know Re: FOI request Dear Mr Foxe, I refer to the request which you made under the Freedom of Information Act 2014 for records held by this Department in relation to: Budget submission Changes to FED and SARP A search was carried out for records relevant to your request. A schedule of these records and the decisions in relation to them is appended. Right of Review I am satis?ed that all reasonable steps have been taken to identify any records in relation to your request. I may be contacted by telephone on 01 604 5568 in order to answer any questions you may have, and to assist you generally in this matter. In the event that you are not happy with this decision you may seek a review of this decision by writing to the Freedom of Information Unit, Department of Finance, Government Buildings, Upper Merrion Street, Dublin 2 seeking an internal review of the matter and referring to or enclosing a copy of this letter. Please note that a fee applies for such a review. The level of this has been set at ?30 (or ?10 for medical card holders) and payment should be made by way of bank draft, money order, postal order or personal cheque, and made payable to the Department of Finance. Should you wish to make a payment by electronic means please contact Mr Owen Coyle in the F01 Unit. You should submit this within 4 weeks from the date of this noti?cation, where a day is defined as a working day excluding the weekend and public holidays. The making of a late appeal may be permitted in appropriate circumstances. The review will involve a complete reconsideration of the matter by a more senior member of the staff of this body and the decision will be communicated to you within 3 weeksi_7, - .- 7: Tithe an Rialtais Fc'm Tel: 353 1 676 7571 Government Buildings Sraid Mhuirfean Uacht Facs Fax: 353 1 678 9936 Upper Merrion Street Baile Atha Cliath 2 Glao AitiL?iiI 66 10 10 Dublin 2 Eire Ireland If you have any queries regarding this correspondence you can contact me by telephone at 01 604 5568. Yours sincerely, Patlick Brennan (01) 604 5568 [Assistant Principal Tax Policy Division FOI Request Reference: 390-2017 Basis of Decision Refusal: Public Interest Record No. of Grant/Part Section of Considerations (for Edited/identify Date Record No Brief Description Pages Grant/Refuse Act Reason for Decision and against release) Deletions 01045?17: Budget 18#20 Suggested 07/10/2017 1 Changes to FED and SARP 1 Grant Print Submission Page 1 of 11 01045?17: Budget 18#20 Suggested Changes to FED and SARP To: Minister Author: Alan Status: Completed Owner: Alan Purpose: For Decision Reviewers: Patrick Bremian,Joe Cullen,J 01m Hogan Division/Of?ce: Tax Division Decision By: Final Comment I agree to this evaluation of FED and SARP and will not go ahead with these proposals. Action Required Consideration of pre-Budget proposals from the Tanaiste, and the agencies under her remit, in relation to the Foreign Earnings Deduction (FED) and the Special Assignee Relief Programme (SARP). Executive Summary The Tanaiste has put forward, in conjunction with agencies under her remit (Enterprise Ireland, IDA Ireland and Science Foundation Ireland), pre-Budget proposals in relation to the FED and SARP measures as summarised below. FED and SARP are income tax schemes designed to incentivise enterprises in various aspects of business operations: FED provides for a deduction from salary of up to a maximum of ?35,000 for employees who travel to qualifying countries as part of the duties of their employment. - SARP aims to reduce the cost to companies of assigning skilled individuals and key decision makers from abroad to take up positions in the Irish-based operations of their employer, with the aim of leading to additional investments and consequential job creation in Ireland. The proposals put forward include: - that all non?EBA countries be included as FED eligible destinations (for a temporary three-year period), and 15/12/2017 Print Submission Page 2 of 11 to extend SARP from ?ve to ten years for individual bene?ciaries. We have evaluated these proposals and, for the reasons outlined below, do not recommend their adoption. Comments There are no Comments. Detailed Information Foreign Earnings Deduction (FED) Background 1. The Tanaiste and Minister for Business, Enterprise and Innovation put forward, in conjunction with the agencies under her remit, a number of proposals for consideration in the context of the Budget and Finance Bill. During pre-Budget discussions at of?cial level, her Department identi?ed four of the items as being of particular priority viz. - Delivery of the share-based remuneration scheme for SMES, - Expansion of the Foreign Earnings Deduction (FED) - Further modi?cation of the Special Assignee Relief Programme (SARP), and - Enhancement of the Enterprise Investment Incentive (EII) Scheme. Separate submissions are being prepared for you in relation to the share-based remuneration scheme for SMEs and the EII scheme. This submission addresses the proposals related to FED and SARP. FED Background 2. FED was introduced in Budget 2012 to incentivise individuals to seek expansion opportunities for trade into non?traditional export markets for Irish goods and services. At the time, economic growth was relatively stagnant among our traditional trading partners while growth in developing countries was much stronger. The incentive was reviewed in 2014. This resulted in its extension in Budget 2015, with some additional enhancements. In Budget 2017, FED was extended until the end of 2020 in order to provide certainty for potential investors in Ireland, following on from the UK vote to leave the European Union. 15/12/2017 Print Submission Page 3 of 11 Nature of the Incentive 3. The FED incentive provides for a deduction from salary of up to a maximum of ?35,000 for employees who travel to qualifying countries as part of the duties of their employment. This deduction remains within the charge of USC and PRSI. The deduction is proportional in that it is calculated based on the numbers of days spent abroad, the salary of the employee and the length of the employment. The relief is provided by way of refund at the end of the tax year. The main features of the incentive are as follows: The individual claiming the deduction must be absent from the State for a minimum of 30 days in a period of 12 months beginning or ending in a relevant tax year. These days can be accumulated from a number of trips. (ii) The individual must be present in the foreign State for a minimum of 3 days per trip. Travelling time to a qualifying country, between qualifying countries and return travelling time to Ireland is deemed to be time spent in a qualifying country. If an employee is engaging in a multi-state trip, the 3 day minimum stay requirement can be accumulated among qualifying countries. (iv) An individual camiot claim relief under FED if they: 0 are a civil or public servant, 0 receive the hey employee research and development relief, 0 are taxed using the split year residence rules, 0 receive the Transborder Workers' Relief, or 0 receive relief under SARP. The main changes to FED since its introduction are summarised in the following table: Budget Actions Legislative Changes to FED 2012 FED introduced in Budget 2012. Original qualifying countries are Brazil, Russia, India, China and South Africa 2013 Qualifying countries extended to include Algeria, Democratic Republic of the Congo, Egypt, Ghana, Kenya, Nigeria, Senegal and Tanzania 2015 Full review of FED undertaken by and Revenue in October 2014, including public consultation. Subsequent changes enacted in Budget 2015 included: - Extension of FED until end 2017 Reduction in the days required to be spent abroad each year from 60 to 40 15/12/2017 Print Submission Page 4 of 11 - Reduction in the minimum duration of each trip abroad from 4 to 3 days - Deeming travelling time to a qualifying country, between qualifying countries and return time travelling to Ireland to be time spent in a qualifying country. Qualifying countries extended in line with the Government's Trade, Tourism and Investment Strategy to include Bahrain, Chile, Indonesia, Japan, the Republic of Korea, Kuwait, Malaysia, Mexico, Oman, Qatar, Saudi Arabia, Singapore, Thailand, the UAE and Vietnam. . 2016 FED extended until 31 December 2020 to allow certainty for enterprises in the context of Brexit. Reduction in the days required to be spent abroad each year from 40 to 30. Qualifying countries extended to include Colombia and Pakistan. Changes Sought 4. The Tanaiste is seeking the temporary extension of FED to non?EEA countries (excluding the UK were it to leave the EEA) for a period up to the date Brexit occurs plus two years (a total of 3 years). 5. She is also seeking a change in how FED is delivered to bene?ciaries, suggesting that the relief be awarded via payroll through the PAYE system rather than after the end of the relevant tax year, with the aim of simplifying the administrative process. FED Considerations 6. FED was introduced to encourage ?rms to diversify export markets and encourage employees to travel to non-traditional markets, including those that present language barriers for Irish ?rms. As noted above, the number of qualifying countries that are eligible under FED has been expanded since the scheme was ?rst put in place. These additions have consistently been based on recommendations from the Department of Business, Enterprise and Innovation that were grounded on established trade policies, such as the Government's Trade, Tourism and Investment Strategy. 7. The current proposal represents a signi?cant departure from this approach in seeking to allow a blanket expansion of the scheme to all non?EEA countries but without any speci?c 15/12/2017 Print Submission Page 5 of 11 justi?cation. As such, we are not in favour of making such a signi?cant change to a scheme that has been very targeted in nature up to now. 8. We are conscious of the risks that Brexit poses to the Irish economy and Irish exporters. However, there still remains signi?cant uncertainty around Brexit. Since the Tanaiste's request was initially delivered to your of?ce, the British Prime Minister has indicated that the UK is proposing to remain within the Customs Union for a transitional period of two years. A possible implication of this is that it could well be argued in due course that the initial timeframe proposed should be allowed to become more ?uid, and, once the change is introduced, it may be very dif?cult to restrict it to the speci?c years in question (Brexit 9. Prior to the last Budget, a recommendation was made to include travel to Australia as eligible for the relief along with the addition of Colombia and Pakistan. This recommendation was rejected on the basis that, as exports were growing strongly to Australia, and that it did not present any language barriers for Irish ?rms, it appeared that no incentive was needed to encourage travel to this market. These same arguments would again apply to many non-EBA countries, and it is likely that this proposed change would result in a signi?cant increase in deadweight in the scheme. 10. In addition, were this proposed expansion of FED eligibility to proceed, it may result in signi?cant unintended consequences and fu1ther deadweight costs, particularly around multinational enterprises (MNES). For individuals working in Ireland for a corporation which has its head of?ce in another non-EEA country, such as the USA, any travel to work or attend meetings of over 30 days per year at the parent company would become eligible for tax relief under FED. This would represent a signi?cant loophole in the scheme, and it is likely that any attempt to explicitly prevent its use by employees of MNEs in this manner would be counter? productive and would go against EU State Aid rules. 11. The potential cost of such an expansion of the scheme is also an issue. At the time of Budget 2015, it was estimated that the cost of the relief could ultimately amount to ?25 million per year. For 2014, the most recent year for which actual data are available, the scheme cost ?11 million and was utilised by 144 applicants. 12. The Depaltment of Business, Enterprise and Innovation suggests that an expansion along the lines sought might tripple the 2014 costs to around ?3.5 million per annum for the proposed three-year timeframe; no basis for this estimate is offered. A concern on our part is that, if the scheme is expanded as proposed, especially to locations such as the US and Canada, the cost to the Exchequer could escalate and, as suggested above, it might be difficult to contain the arrangement to a temporary three year period. Our View is that the addition of the United States alone could have a substantial impact on the cost. 15/12/2017 Print Submission Page 6 of 11 13. Finally, to provide the relief via the PAYE system would require employers to assume a certain amount of travel by employees to qualifying countries in advance. It is our view that certi?cation to determine that all the qualification criteria have been met after a tax year has expired is the most straightforward and appropriate manner in which to administer the scheme. Therefore, we do not recommend the adoption of this proposed change. Recommendation: We do not recommend progressing with any of the proposed changes to FED at this time. There has been a signi?cant degree of broadening out in recent years and the full impact of these changes will take time to feed through. Also, such a broad extension to FED as proposed, even within the context of Brexit, could result in unintended consequences as well as signi?cantly increased, as yet unquanti?ed, costs to the Exchequer, including deadweight costs. Special Assignee Relief Programme (SARP) Background Background 14. SARP was introduced in Budget 2012, with the aim of reducing the cost to companies of assigning skilled individuals and key decision makers from abroad to take up positions in the Irish based operations of their employer or an associated company. For example, such individuals could be transferred to head up new divisions of the company or take charge of new product development, and thus the relief has the potential to lead to additional investments and consequential job creation in Ireland. Nature of the incentive 15. The programme provides for a reduction in the income tax payable by an assignee for the ?rst ?ve years that they are assigned to Ireland and its main features are sas follows: An exemption from income tax on 30% of salary in excess of ?75,000 is provided for employees that are assigned for a minimum of 1 year. The exemption is available for a maximum of 5 years. The relief can be provided through the PAYE system as a deduction from income tax but assignees must complete a tax return also. There is no relief from USC on the amount exempted from Income Tax. Social Insurance is payable where the individual is not liable to it in their home country. (ii) The assignee must have been employed by the relevant employer in a country with which Ireland has a Double Taxation Agreement (DTA) or a Tax Information Exchange Agreement (TIEA) immediately prior to the assignment to Ireland, and must be tax resident in Ireland in the relevant tax year in order to qualify for SARP. lavouts/ .. 15/12/2017 Print Submission Page 7 of 11 The assignee must have been employed abroad by the relevant employer for a minimum of 6 months before being assigned to Ireland. (iv) One trip home per year is allowed tax free where paid for by the employer. No other day?to-day expenses are permitted free of income tax. In recognition of differences in curriculums taught and languages spoken by the assignee and/or their children being brought to Ireland, vouched school fees of up to ?5,000 per annum per child where paid for by the employer on behalf of an employee are allowed free of taxation. Share-based remuneration can also qualify for the exemption and there are no restrictions on where the income can be remitted. (vi) An assignee will be entitled to the relevant relief for a period of 5 years from the 1st year of their assignment regardless of the end date of the Incentive. 16. The main changes to FED since its introduction are outlined in the following table: Budget Actions Legislative Changes to SARP 2012 SARP introduced in Budget 2012. 2015 1 Full review of FED undertaken by and Revenue in October 2014, including public consultation. Subsequent changes enacted in Budget 2015 included: - Extension of SARP until end 2017. - Upper salary threshold of ?500,000 per annum removed to encourage senior decision makers to come to Ireland. - Requirement to have been employed abroad by the same employer was reduced from 12 months to 6 months to align with recent changes to employment permit legislation. 0 The residency requirement was amended to only require Irish residency. - The exclusion of work carried out abroad was removed in recognition that many assignees have to travel for work purposes. - Reporting obligations of employers were also strengthened. 2017 SARP extended until the end of 2020 to provide certainty for potential investors in Ireland following the UK vote to leave the European Union. SARP Changes Sought 15/12/2017 Print Submission Page 8 of 11 17. The Tanaiste has requested that the period for which an individual can claim relief under SARP be gradually extended from 5 to 10 years, in order to 'facilitate the attraction and embedding ofmobile investment and high calibre individuals". 18. The Tanaiste has also suggested that an exception be introduced to SARP whereby, in cases where it can be proven that the required key skills are not available within the Irish labour market, potential recipients need not have spent the required 6 month period working within the company outside of Ireland prior to their assignment to Ireland. 19. Additional suggestions have been made by other bodies, including the American Chamber of Commerce Ireland (AmCham) and the Irish Small and Medium Enterprises Association (ISME). AmCham have echoed the Minister's suggestion to examine extending the relief beyond ?ve years, as well as extending the relief to USC paid and extending the 30 day period by which an enterprise must register their employee for the scheme. ISME have proposed altering the scheme in order to allow SMES to avail of the programme, in that, in its current form, the enterprise must have a subsidiary abroad in order to transfer the employee to Ireland. SARP Considerations 20. SARP is time limited and re?ects the need to offer conditions in Ireland that are competitive with other countries with which we competing for foreign investment. Where an individual transfers from a jurisdiction with a lower effective tax rate than Ireland, the employer would often have to increase the salaiy payable in order to ensure that the relevant employee did not suffer a loss in net pay as a result of accepting the assignment. There may also be costs involved in temporarily moving a family to Ireland. In the absence of the incentive, it could be more cost ef?cient for a multinational to assign such individuals, and any associated jobs, to some of our competitor countries. 21. An extension of SARP beyond the initial ?ve years of assignment would mean that any claimants that availed of the scheme in 2013, and who are still employed in the same role, would remain eligible for the generous tax relief under SARP in 2018, rather than falling out of its scope and becoming subject to the standard tax regime for all other employees. These individuals came to Ireland at the behest of their employer and on the understanding that the incentive would apply for no more than ?ve years. The extension of this beyond the ?fth year of eligibility would have no incentive effect for these individuals. Additionally, it is not clear that, for potential new assignees, a doubling of the period to ten years would deliver any more of an incentive effect than the current ?ve year period. 20. The evidence of the take-up of SARP to date indicates that it does not require any further expansion at the present time in order to be effective. The most recent report on SARP compiled and published by Revenue, in respect of the 2015 tax year, highlights the uptake and cost of the scheme on an amiual basis since its introduction, as set out below: gov.ie/apps/eSubmissions/ layouts/ 1 5/e Submissions/ Print. aspx?i . .. 15/12/2017 Print Submission Page 9 of 11 Year N0. of Employees 1 Tax Cost of Relief 2012 I I 11 ?01 million .2013 RI. 121 ?1.9 million 2014 302 ?59 million 2015 I 586 ?95 million 21. The consistent increase in the number of claimants and the associated cost of the scheme shows that it is being successful in attracting individuals to Ireland from others arms of MNEs. The report also indicates that the programme is reaching a broad range of industrial sectors, with assignees being spread across IT, Financial Services, Pharmaceutical and Medical, Consumer and Industrial, and Other services. 22. Regarding the proposal to provide a skills exemption to the 6 month requirement under the scheme, such an exemption would be very dif?cult to implement equitably and would result in an increased administrative burden. The relevant skills would need to be identi?ed and targeted and this would be subject to constant change. There would be extensive debate around which skills should be included and whether there is equivalence of quali?cations and experience between different jurisdictions. 23. As it stands, the policy intent of requiring a minimum salary of ?75,000 under SARP is to imply a certain level of skills inherent in this level of remuneration. In addition, opening SARP to new hires, or individuals that have not been employed by the enterprise in the period prior to their assignment to Ireland, has been a frequent request since the inception of the scheme. It is also the central change sought in the ISME proposal to make SARP accessible to SMEs. However, our consistent position has been that opening the scheme up to new hires in this manner this would result in displacement in the Irish labour market. If, for example, an Irish tax resident individual and a foreign based individual with similar skills were both to apply for the same job, it would be less costly for the employer to hire the foreign based individual if they qualified for tax relief under SARP. This would place the Irish tax resident individual at a considerable disadvantage. Recommendation: We do not recommend any progressive extension of the five year period for which claimants can qualify for SARP. When viewed in the context of the increasing take-up of SARP as noted above, we also remain opposed to any loosening of the requirement to have served abroad prior to assignment to Ireland. However, we remain open to further engagement with DBEI on a further review of SARP, speci?cally relating to operational aspects of the incentive as well as international comparisons of similar incentives. 15/12/2017 Print Submission Page 10 of 11 24. Of?cials are available to discuss. Related Submissions There are no related Submissions. ser Deta i i 5 Users with access to Submission Read receipt list Alan Alan Patrick Brennan Joe Cullen Patrick Brennan John Hogan Joe Cullen Sec Gens Office John Hogan Ministers Of?ce Niamh Murtagh Marie O'Leary Stephen Lynam Deirdre Galvin Helena Quane Minister Donohoe Act i Lo 9 5 Created: 26/09/2017 17:58:29: Submission created by Alan Sent For Review: 26/09/2017 18:03: 15: Submission sent to Patrick Brennan for review by Alan Ownership Taken: 27/09/2017 12: 17:19: Ownership of submission taken by Alan Reason: To incorporate EH to submission. Sent For Review: 27/09/2017 18:08:04: Submission sent to Patrick Brennan for review by Alan Sent For Review: 28/09/2017 13:04:08: Submission sent to Joe Cullen for review by Patrick Brennan Ownership Taken: 02/10/2017 17:07:06: Ownership of submission taken by Alan Reason: To include Joe's edits. Sent For Review: 03/10/2017 12:56:34: Submission sent to Joe Cullen Cullen for review by Alan Sent For Review: 05/10/2017 18:18:40: Submission sent to John Hogan for review by Joe Cullen Cullen Sent to the Secretary General: 06/10/2017 12:10:35: Submission sent to Secretary General for review by John Hogan Sent to the Minister: 06/ 10/2017 12:38:22: Submission sent to Minister for review by Niamh Murtagh on behalf of the Secretary General 15/12/2017 Print Submission Page 11 of 11 Completed: 07/10/2017 09:48:03: Submission completed by Minister Donohoe on behalf of the Minister Reason: I agree to this evaluation of FED and SARP and will not go ahead with these proposals. Grant Access: 09/10/2017 09:59:21: Alan granted access to Marie O'Leary, Deirdre Galvin Reason: FYI. ?nancecloud. gov.ie/apns/ Submis sions/ 15/ 1 2/201 7