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Finance Act 2005

Chapter 5

Corporation Tax

Generally accepted accounting standards.

48.—(1) The Principal Act is amended—

(a) in section 4—

(i) in subsection (1)—

(I) by inserting the following after the definition of “franked investment income”:

“ ‘generally accepted accounting practice’ means—

(a) in relation to the affairs of a company or other entity that prepares accounts (in this section referred to as ‘IAS accounts’) in accordance with international accounting standards, generally accepted accounting practice with respect to such accounts;

(b) in any other case, Irish generally accepted accounting practice;”,

and

(II) by inserting the following after the definition of “interest”:

“ ‘international accounting standards’ means the international accounting standards, within the meaning of Regulation (EC) No. 1606/2002 of the European Parliament and the Council of 19 July 2002 on the application of international accounting standards (in this section referred to as ‘the Regulation’);

‘Irish generally accepted accounting practice’ means generally accepted accounting practice with respect to accounts (other than IAS accounts) of companies incorporated or formed under the laws of the State, being accounts that are intended to give a true and fair view;”,

and

(ii) by inserting the following after subsection (6):

“(7) For the purposes of this section, where the European Commission in accordance with the Regulation adopts an international accounting standard with modifications, then as regards matters covered by that standard—

(a) generally accepted accounting practice with respect to IAS accounts shall be regarded as permitting the use of the standard either with or without the modifications, and

(b) accounts prepared on either basis shall be regarded as prepared in accordance with international accounting standards.”,

(b) in Chapter 5 of Part 4, by inserting the following after section 76:

“Computation of profits or gains of a company - accounting standards.

76A.—(1) For the purposes of Case I or II of Schedule D the profits or gains of a trade or profession carried on by a company shall be computed in accordance with generally accepted accounting practice subject to any adjustment required or authorised by law in computing such profits or gains for those purposes.

(2) Schedule 17A shall apply to a company where—

(a) for an accounting period profits or gains of a trade or profession carried on by the company are computed in accordance with relevant accounting standards (within the meaning of that Schedule), and

(b) for preceding accounting periods profits or gains of a trade or profession carried on by the company are computed in accordance with standards other than relevant accounting standards (within the meaning of that Schedule).

Treatment of unrealised gains and losses in certain cases.

76B.—(1) (a) In this section and paragraph 4 of Schedule 17A, ‘fair value’, ‘financial asset’ and ‘financial liability’ have the meanings assigned to them by international accounting standards.

(b) For the purposes of this section, section 76A and paragraph 4 of Schedule 17A—

(i) references to profits or gains include references to losses, and

(ii) the amount of a loss incurred in a trade or profession in an accounting period shall be computed in like manner as profits or gains from the trade or profession in the accounting period would have been computed.

(2) A profit or gain from a financial asset or a financial liability of a company that, in accordance with relevant accounting standards (within the meaning of Schedule 17A) is—

(a) calculated on the basis of fair values of the asset or the liability in an accounting period, and

(b) included in the profit or loss of the company for the accounting period,

shall be taken into account on that basis in computing profits or gains of the company for that accounting period for the purposes of Case I or II of Schedule D.

Use of different accounting policies within a group of companies.

76C.—(1)(a) In this section ‘tax advantage’ means—

(i) a reduction, avoidance or deferral of any charge or assessment to tax, including any potential or prospective charge or assessment, or

(ii) a refund of or a payment of an amount of tax, or an increase in an amount of tax refundable or otherwise payable to a person, including any potential or prospective amount so refundable or payable.

(b) For the purposes of this section, a series of transactions is not prevented from being a series of transactions in relation to companies by reason only of the fact that one or more of the following is the case—

(i) there is no transaction in the series to which both those companies are parties;

(ii) that parties to any arrangement in pursuance of which the transactions in the series are entered into do not include one or both of those companies;

(iii) there are one or more transactions in the series to which neither of those companies is a party.

(2) Where—

(a) a company within the charge to tax under Case I or II of Schedule D prepares accounts in accordance with international accounting standards,

(b) another company within the charge to tax under Case I or II of Schedule D, being a company which is an associated company (within the meaning of section 432) of the company referred to in paragraph (a), prepares accounts in accordance with Irish generally accepted accounting practice,

(c) there is a transaction between, or a series of transactions involving, those companies, and

(d) a tax advantage would, apart from this section, accrue to the company which prepares its accounts in accordance with international accounting standards compared with its position if it had prepared its accounts in accordance with Irish generally accepted accounting practice in relation to the transaction or series of transactions,

then the Corporation Tax Acts shall apply for the purposes of computing profits or gains of that company from that transaction or series of transactions as if that company prepared its accounts in accordance with Irish generally accepted accounting practice.”,

(c) in section 81—

(i) in subsection (2) by substituting “patent;” for “patent.” in paragraph (m) and by inserting the following after that paragraph:

“(n) without prejudice to the preceding paragraphs any consideration given for goods or services, or to an employee or director of a company, which consists, directly or indirectly, of shares in the company, or a connected company (within the meaning of section 10), or a right to receive such shares, except to the extent—

(i) of expenditure incurred by the company on the acquisition of the shares at a price which does not exceed the price which would have been payable, if the shares were acquired by way of a bargain made at arm's length, or

(ii) where the shares are shares in a connected company, of any payment by the company to the connected company for the issue or transfer by that company of the shares, being a payment which does not exceed the amount which would have been payable in a transaction between independent persons acting at arm's length.”,

and

(ii) by inserting the following after subsection (2):

“(3)(a) In respect of a company—

(i) interest payable by the company, and

(ii) expenditure on research and development incurred by the company,

shall not be prevented from being regarded for tax purposes as deductible in computing profits or gains of the company for the purposes of Case I or II of Schedule D by virtue only of the fact that for accounting purposes they are brought into account in determining the value of an asset.

 (b) Any amount shall not be regarded by virtue of paragraph (a) as deductible in computing profits or gains of a company for the purposes of Case I or II of Schedule D for an accounting period to the extent that—

(i) a deduction has been made in respect of that amount in computing such profits or gains for a previous accounting period, or

(ii) the company has benefited from a tax relief under any provision in respect of that amount for a previous accounting period.”,

(d) in section 110, by adding the following after subsection (5):

“(6) (a) Subject to paragraph (b), section 76A shall have effect in relation to a qualifying company as it would if, in section 4, the following were substituted for the definition of generally accepted accounting practice:

‘ “generally accepted accounting practice” means Irish generally accepted accounting practice as it applied for a period of account ending on 31 December 2004.’.

(b) A qualifying company may, as respect any accounting period, by notice in writing given to the inspector by the specified return date (within the meaning of section 950) for the accounting period, elect that this subsection shall not apply as respects that or any subsequent accounting period; and any election under this paragraph shall be irrevocable.

(c) Schedule 17A shall apply with any necessary modifications to a company which makes an election under paragraph (b).”,

(e) in section 321 by inserting the following after subsection (2):

“(2A) Subject to section 316, references to expenditure in relation to an asset—

(a) include expenditure on labour costs including emoluments paid to employees of the company, and

(b) do not include interest payable,

which for accounting purposes is taken into account by the company in determining the value of the asset.”,

(f) in section 766(1)(a) in the definition of “expenditure on research and development”—

(i) by substituting the following for subparagraph (i):

“(i) which—

(I) is allowable for the purposes of tax in the State as a deduction in computing income from a trade (otherwise than by virtue of section 307), or would be so allowable but for the fact that for accounting purposes it is brought into account in determining the value of an intangible asset, or

(II) is relieved under Part 8,”,

and

(ii) by deleting “and” where it last occurs in clause (I) and by inserting the following after that clause:

“(IA) expenditure by a company on research and development shall not include any amount of interest notwithstanding that such interest is brought into account by the company in determining the value of an asset, and”,

and

(g) by inserting the following after Schedule 17:

“Section 76A.

SCHEDULE 17A

Accounting Standards

Interpretation

1. In this Schedule ‘relevant accounting standards’ means—

(a) international accounting standards, or

(b) as regards the matters covered by those published standards, Irish generally accepted accounting practice which is based on published standards—

(i) which are stated so as to embody, in whole or in part, international accounting standards, and

(ii) the application of which would produce results which are substantially the same as results produced by the application of international accounting standards.

Transitional Measures (amounts receivable and deductible)

2. (1) In this paragraph—

‘deductible amount’, in relation to a company, means the aggregate of the amounts of—

(a) so much of any amounts receivable by the company which falls to be taken into account as a trading receipt in computing the profits or gains for the purposes of Case I or II of Schedule D of the company for an accounting period computed in accordance with relevant accounting standards as was also taken into account as a trading receipt in computing such profits or gains of the company for any accounting period ending before the first accounting period in respect of which such profits or gains of the company were so computed, and

(b) so much of an expense incurred by the company, being an expense which would have been deductible in computing profits or gains for the purposes of Case I or II of Schedule D of the company if the expense had been incurred in an accounting period for which such profits or gains were computed in accordance with relevant accounting standards, as—

(i) was not deducted in computing the profits or gains for the purposes of Case I or II of Schedule D of the company for an accounting period ending before the first accounting period in respect of which such profits or gains of the company are computed in accordance with relevant accounting standards, and

(ii) is not deductible in computing the profits or gains for the purposes of Case I or II of Schedule D of the company for any accounting period for which such profits or gains of the company are so computed;

‘taxable amount’, in relation to a company, means the aggregate of the amounts of—

(a) so much of an amount receivable by the company, being an amount receivable which would have been taken into account as a trading receipt in computing the profits or gains for the purposes of Case I or II of Schedule D of the company if the amount had accrued in an accounting period for which such profits or gains were computed in accordance with relevant accounting standards, as is not so taken into account—

(i) for an accounting period for which such profits or gains of the company are computed in accordance with relevant accounting standards, or

(ii) for an accounting period ending before the first accounting period in respect of which such profits or gains are so computed,

and

(b) so much of an expense incurred by the company which is deductible in computing the profits or gains for the purposes of Case I or II of Schedule D of the company for an accounting period for which such profits or gains of the company are computed in accordance with relevant accounting standards as was deducted in computing such profits or gains of the company for any accounting period ending before the first accounting period of the company in respect of which such profits or gains were so computed.

(2) (a) An amount equal to the excess of the taxable amount in relation to a company over the deductible amount in relation to the company shall, subject to subparagraph (4), be treated as a trading receipt of the company for the first accounting period of the company in respect of which profits or gains for the purposes of Case I or II of Schedule D of the company are computed in accordance with relevant accounting standards.

(b) Notwithstanding clause (a), an amount which is treated under clause (a) as a trading receipt for an accounting period shall not be taken into account in computing the profits or gains for the purposes of Case I or II of Schedule D of the company for that accounting period but instead, subject to clause (c)—

(i) one-fifth of the amount shall be so taken into account for that accounting period, and

(ii) a further one-fifth shall be so taken into account for each succeeding accounting period until the whole amount has been accounted for.

(c) Where any accounting period referred to in subclause (i) or (ii) of clause (b) is the last accounting period in which a company carried on a trade or profession then such fraction, of the amount referred to in those subclauses, shall be taken into account for that accounting period as is required to ensure that the whole of that amount is accounted for.

(3) (a) An amount equal to the excess of the deductible amount in relation to a company over the taxable amount in relation to the company shall, subject to subparagraph (4), be treated as a deductible trading expense of the trade carried on by the company for the first accounting period of the company in respect of which profits or gains for the purposes of Case I or II of Schedule D of the company are computed in accordance with relevant accounting standards.

(b) Notwithstanding clause (a), an amount which is treated under clause (a) as a deductible trading expense for an accounting period shall not be taken into account in computing the profits or gains for the purposes of Case I or II of Schedule D of the company for that accounting period but instead, subject to clause (c)—

(i) one-fifth of the amount shall be so taken into account for that accounting period, and

(ii) a further one-fifth shall be so taken into account for each succeeding accounting period until the whole amount has been accounted for.

(c) Where any accounting period referred to in subclause (i) or (ii) of clause (b) is the last accounting period in which a company carried on a trade or profession then such fraction, of the amount referred to in those subclauses, shall be taken into account for that accounting period as is required to ensure that the whole of that amount is accounted for.

(4) This paragraph does not apply as respects any amount taken into account under paragraph 4.

Transitional Arrangements (bad debts)

3. (1) In this paragraph—

‘current bad debts provision’, in relation to a period of account of a company, means so much of the aggregate value of debts at the end of the period of account as represents the extent to which they are estimated to be impaired in accordance with relevant accounting standards;

‘first relevant period of account’, in relation to a company, means the first period of account in respect of which the company prepares its accounts in accordance with relevant accounting standards;

‘opening bad debts provision’, in relation to a company, means so much of the aggregate value of debts at the beginning of the first relevant period of account of the company as represents the extent to which they are estimated to be impaired in accordance with those standards;

‘specific bad debts provision’, in relation to a company, means the aggregate of the amounts of doubtful debts which were respectively estimated to be bad at the end of the period of account immediately preceding the first relevant period of account of the company.

(2) This paragraph applies as respects a period of account in respect of which a company prepares its accounts in accordance with relevant accounting standards.

(3) Where, as respects any period of account for which a company prepares its accounts in accordance with relevant accounting standards, the amount of the opening bad debts provision exceeds the higher of—

(a) the current bad debts provision, or

(b) the specific bad debts provision,

the excess, reduced by any amount treated under this section as a trading expense for any earlier period of account or, if there is more than one such amount, by the aggregate of such amounts, shall be treated as a trading expense of the company's trade for the period of account.

Transitional Measures (gains and losses in financial instruments)

4. (1) In this paragraph—

‘changeover day’, in relation to a company, means the last day of the accounting period immediately preceding the first accounting period of the company in respect of which profits or gains for the purposes of Case I or II of Schedule D of the company are computed in accordance with relevant accounting standards which are, or include, relevant accounting standards in relation to profits or gains or losses on financial assets and financial liabilities;

‘deductible amount’, in relation to a company, means the aggregate of—

(a) so much of any amount of loss accruing on or before the changeover day on a financial asset or financial liability of the company, being a loss which had not been realised on or before that day and which would have been taken into account in computing profits or gains for the purposes of Case I or II of Schedule D of the company if it had accrued in an accounting period commencing after the changeover day, as, apart from this paragraph, would not be so taken into account for any accounting period of the company, and

(b) so much of any amount of profits or gains, accruing and not realised in a period or periods (in this clause referred to as the “first-mentioned period or periods”) ending on or before the changeover day on a financial asset or financial liability of the company, which falls to be taken into account in computing the profits or gains for the purposes of Case I or II of Schedule D of the company for an accounting period or periods commencing before the changeover day as would, apart from this paragraph, be taken into account twice in computing profits or gains for the purposes of Case I or II of Schedule D of the company, by virtue of a profit, gain or loss, accruing in a period which includes the first-mentioned period or periods, being taken into account in computing profits or gains for the purposes of Case I or II of Schedule D of the company for an accounting period commencing after the changeover day;

‘taxable amount’, in relation to a company, means the aggregate of—

(a) so much of any amount of profits or gains accruing on or before the changeover day on a financial asset or financial liability of the company, being profits or gains which had not been realised on or before that day and which would have been taken into account in computing the profits or gains for the purposes of Case I or II of Schedule D of the company if they had accrued in an accounting period commencing after the changeover day, as apart from this paragraph, would not be so taken into account for any accounting period of the company, and

(b) so much of any amount of loss, accruing and not realised in a period or periods (in this clause referred to as the “first-mentioned period or periods”) ending on or before the changeover day on a financial asset or financial liability of the company, which falls to be taken into account in computing the profits or gains for the purposes of Case I or II of Schedule D of the company for an accounting period or periods commencing before the changeover day as would, apart from this paragraph, be taken into account twice in computing profits or gains for the purposes of Case I or II of Schedule D of the company, by virtue of a profit, gain or loss, accruing in a period which includes the first-mentioned period or periods, being taken into account in computing profits or gains for the purposes of Case I or II of Schedule D of the company for an accounting period commencing after the changeover day.

(2) (a) An amount equal to the excess of the taxable amount in relation to a company over the deductible amount in relation to the company shall be treated as a trading receipt of the company for the first accounting period of the company commencing after the changeover day.

(b) Notwithstanding clause (a), an amount which is treated under clause (a) as a trading receipt for an accounting period shall not be taken into account in computing the profits or gains for the purposes of Case I or II of Schedule D of the company for that accounting period but instead, subject to clause (c)—

(i) one-fifth of the amount shall be so taken into account for that accounting period, and

(ii) a further one-fifth shall be so taken into account for each succeeding accounting period until the whole amount has been accounted for.

(c) Where any accounting period referred to in subclause (i) or (ii) of clause (b) is the last accounting period in which a company carried on a trade or profession then such fraction, of the amount referred to in those subclauses, shall be taken into account for that accounting period as is required to ensure that the whole of that amount is accounted for.

(3) (a) An amount equal to the excess of the deductible amount in relation to a company over the taxable amount in relation to the company shall be treated as a deductible trading expense of the trade carried on by the company for the first accounting period of the company commencing after the changeover day.

(b) Notwithstanding clause (a), an amount which is treated under clause (a) as a deductible trading expense for an accounting period shall not be taken into account in computing the profits or gains for the purposes of Case I or II of Schedule D of the company for that accounting period but instead, subject to clause (c)—

(i) one-fifth of the amount shall be so taken into account for that accounting period, and

(ii) a further one-fifth shall be so taken into account in each succeeding accounting period until the whole amount has been accounted for.

(c) Where any accounting period referred to in subclause (i) or (ii) of clause (b) is the last accounting period in which a company carried on a trade or profession then such fraction, of the amount referred to in those subclauses, shall be taken into account for that accounting period as is required to ensure that the whole of that amount is accounted for.

(4) (a) Subparagraph (5) applies to a loss incurred by a company on the disposal at any relevant time of any financial asset or financial liability where, within a period beginning 4 weeks before and ending 4 weeks after that disposal, the company acquired a financial asset or financial liability of the same class providing substantially the same access to economic benefits and exposure to risk as would have been provided by the reacquisition of the asset or liability disposed of.

(b) In this paragraph ‘relevant time’ means a time after 1 January 2005 which is in a period of 6 months ending on the changeover day.

(5) A loss to which this subparagraph applies, which would otherwise be taken into account in computing profits or gains or losses of a company for the purposes of Case I or II of Schedule D for an accounting period, shall not be so taken into account but instead—

(a) one-fifth of the loss shall be so taken into account for that accounting period,

(b) a further one-fifth shall be so taken into account for each succeeding accounting period until the whole amount has been accounted for, and

(c) notwithstanding clauses (a) and (b), where any accounting period referred to in those clauses is the last accounting period in which a company carried on a trade or profession then such fraction, of the amount referred to in those clauses, shall be taken into account for that accounting period as is required to ensure that the whole of that amount is accounted for.

(6) As respects the first accounting period of a company in respect of which profits or gains for the purposes of Case I or II of Schedule D of the company are computed in accordance with relevant accounting standards, which are, or include, relevant accounting standards in relation to profits or gains or losses on financial assets or liabilities, section 958 shall have effect as if—

(a) in subsection (4D)(b) the following were substituted for ‘no amount were included in the chargeable person's profits for the chargeable period in respect of chargeable gains on the disposal by the person of assets in the part of the chargeable period which is after the date by which the first instalment for the chargeable period is payable in accordance with subsection (2A)’:

‘no amount were included in the chargeable person's profits for the chargeable period in respect of—

(i) chargeable gains on the disposal by the person of assets in the part of the chargeable period which is after the date by which, or

(ii) profits or gains or losses accruing, and not realised, in the chargeable period on financial assets or financial liabilities as are attributable to changes in value of those assets or liabilities in the part of the chargeable period which is after the end of the month immediately preceding the month in which,

the first instalment for the chargeable period is payable in accordance with subsection (2A)’,

and

(b) in subsection (4E)(b) the following were substituted for ‘no amount were included in the chargeable person's profits for the chargeable period in respect of chargeable gains on the disposal by the person of assets in the part of the chargeable period which is after the date by which preliminary tax for the chargeable period is payable in accordance with subsection (2B)’:

‘no amount were included in the chargeable person's profits for the chargeable period in respect of—

(i) chargeable gains on the disposal by the person of assets in the part of the chargeable period which is after the date by which, or

(ii) profits or gains or losses accruing, and not realised, in the chargeable period on financial assets or financial liabilities as are attributable to changes in value of those assets or liabilities in the part of the chargeable period which is after the end of the month immediately preceding the month in which,

preliminary tax for the chargeable period is payable in accordance with subsection (2B)’.”.

(2) This section applies as respects any period of account beginning on or after 1 January 2005.