Michael D'Arcy (Wexford, Fine Gael) | Oireachtas source

This matter was discussed extensively in the Dáil and Seanad during last year's Finance Bill 2017. As part of the reintroduction of the 80% cap for assets onshored on 11 October 2017 it has again been discussed extensively on Committee and Report Stages in the Dáil and the Seanad in this year’s Finance Bill. It has been noted in those debates that, for the purposes of certainty, changes to tax law are generally made on a prospective basis such that they apply only from the date on which they have legal effect. Therefore, the 80% cap introduced last year did not apply retrospectively – it applies to claims relating to capital expenditure incurred from budget night last year 11 October 2017.

Capital allowances for intangible assets were introduced in the Finance Act 2009 to support the development of the knowledge economy and the provision of high-quality employment. When the capital allowances were introduced, in order to ensure that a measure of tax remained in charge annually, an 80% cap was placed on the amount of relevant trading income that the allowances could be offset against in any year.

In the Finance Act 2014, the cap of 80% was increased to 100%, effective for accounting periods commencing on or after 1 January 2015. The rationale for increasing the cap was to bring the tax treatment of intangible assets into line with the tax treatment of similar assets in other jurisdictions and to make Ireland an attractive location for companies to develop intellectual property. This was in recognition of the fact that investment and growth in OECD economies is increasingly driven by investment in intangible assets.

Noting a significant increase in the use of the capital allowances in 2015, the Coffey review recommended that, to ensure some smoothing of corporation tax revenue over time, the 80% cap should be restored, and this recommendation was acted on in the Finance Act 2017. It is important to note that the operation of the cap is simply a timing matter. The measure has no effect on the overall quantum of capital allowances for intangible assets available to use against the relevant trading income. Any amounts restricted in one accounting period as a result of a cap are available for carry forward and use in a subsequent accounting period, subject to the application of the cap in that period. To present the cap as a long-term source of additional tax for the Exchequer would not be correct.

Furthermore, the allowances can be used only against qualifying trading income generated by those assets. They cannot be offset against the company's income from other sources. While I cannot accept this recommendation, I can assure the Senators that these allowances are kept under review by the Department of Finance on an ongoing basis, to ensure that they are delivering overall value for the economy.