In this month’s roundtable the proposed EU-wide withholding tax regime is assessed, with the introduction of bloc-wide rules having the potential to remove a barrier of capital movement between Member States. The Department of Finance’s consultation on new tax measures on outbound payments is also analysed as is the Commission on Taxation’s public consultation on the future of Ireland’s taxation and welfare systems. M&A tax due diligence features as do areas of FS focus in the Finance Bill. BEPS STTR and Ireland’s R&D regime in light of BEPS also are discussed by the Panel.

Outbound payments

The Department of Finance recently opened a public consultation on New Taxation Measures to apply to Outbound Payments. The consultation, amongst other topics, asks for feedback on measures in relation to outbound interest, royalties and dividends payments to no-tax or zero tax jurisdictions, or jurisdictions included on the EU list of non-cooperative jurisdictions for tax purposes to prevent double non-taxation. Can you comment on which of the two approaches outlined, denial of deduction or the imposition of withholding taxes, would be most appropriate for each type of outbound payment outlined in the consultation?

Nora Cosgrove, Director, Corporate Tax, Deloitte: By way of background, this consultation comes from the EU Council’s Implementing Decision on the approval of the assessment of the recovery and resilience plan for Ireland.
The consultation requires consideration on who may pay the tax on cross border payments (i.e. should it be the person making the payment by way of a denial of a deduction in the payor’s hands or should it be the recipient of the payment by reducing the amount received through a withholding tax).

Our view, generally, is that the intention and object of any proposed amendment to the existing tax treatment of outbound payments should be rooted in the prevention of base erosion and aggressive tax planning structures. While the requirement to assess payments to countries listed on the EU list of non-cooperative jurisdictions would appear well founded, we would question why there is not a proposed carve-out for payments made to no or zero tax jurisdictions, where there are bona fide commercial arrangements in place. Indeed, we would recommend that any proposed amendments should not operate to limit payments made pursuant to bona fide commercial arrangements where the main purpose or one of the main purposes is not the avoidance of tax. The consultation document makes reference to statistics on the relative quantum of royalty payments out of Ireland as a percentage of GDP vis-a-vis other jurisdictions. This is not, necessarily, arising as a result of aggressive tax planning structures according to research carried out by Seamus Coffey entitled ‘The changing nature of outbound royalties from Ireland and their impact on the taxation of the profits of US multinationals’. Therefore, it is vital for consideration to be given to whether the measures proposed in respect to outbound payments (i.e. a denial of a deduction or withholding tax rules) will, indeed, act to counter aggressive tax planning structures as intended.

A second key consideration that should be borne in mind is that while outbound payments may not be subject to tax in the country of the recipient, due to the nature of CFC regimes worldwide (including the US GILTI regime), there is a high degree of possibility that payments made will be taken into account in the tax calculations of the ultimate parent. Therefore, to the extent that amendments are made to the existing treatment of outbound payments, such amendments should reflect the operation of a foreign company charge equivalent to the CFC rules contained in Irish law. Absent such consideration, there is an increased risk that an amendment to the existing tax treatment of such payments would put Ireland at a competitive disadvantage relative to other EU Member States in terms of inward investment.

Withholding tax

The EU is aiming to introduce a common EU-wide system for withholding tax on dividend or interest payments (with the industry consultation having closed on 26th October). Can you comment on this and the merits, or otherwise, of introducing a common EU-wide withholding tax system?

Peter Boyle, Assistant Manager, Corporate Tax, Deloitte: In July 2020, the EU Commission released ‘An Action Plan For Fair and Simple Taxation Supporting the Recovery Strategy’ wherein it was announced the Commission would be proposing a standardized EU wide system for administering withholding tax relief at source. In their impact assessment for the proposed common system, the Commission note that a standardized approach to the operation of withholding tax relief at source would make the EU capital market more efficient and increase the productivity of the EU economy. Such reforms would likely be well received and appreciated by EU investors given the current administrative and financial burdens that the current system, or lack thereof, imposes.

For these reasons, a common EU-wide system for administering withholding tax relief at source (whereby the correct withholding tax rate as set out in the relevant Double Tax Agreement would be applied) which removes or reduces the current burdensome withholding tax reclaim procedures would be welcomed by investors, advisors, and tax authorities alike. Any common system implemented should leverage available digital technologies and have a well-defined clear process to reduce uncertainty. The recent Cum-Ex scandal shows the necessity for a common system to be secure, and modern technologies such as blockchain could be effectively used to trace beneficial ownership in complex structures, for example. It will be interesting to see if the proposed EU system for common withholding tax administration will extend to royalty payments at some point in the future.

Commission on Taxation

On October 20th 2021 the Commission on Taxation and Welfare launched a Public Consultation ‘Your Vision, Our Future’. The Commission’s goal is to ‘independently consider how best the taxation and welfare system can support economic activity, whilst promoting increased employment and prosperity while ensuring that there are sufficient resources available to meet the costs of public services and supports in the medium and longer term.’ From a corporate taxation perspective what issues do you believe could be addressed to achieve this goal?

Damien Kiniry, Assistant Manager, Corporate Tax, Deloitte: The Commission on Taxation and Welfare has been set up to consider whether the Tax and Welfare systems are likely to be fit for purpose over the medium and long term. This agenda is undoubtedly a challenging one. The State is endeavouring to emerge from the Covid-19 pandemic and to deliver on strategic priorities such as increasing the supply of new homes, improving access to healthcare and childcare and meeting its climate change commitments. In addition, there remains significant uncertainty in the global tax landscape in relation to digitalisation of the economy and International Tax reform. As the Commission describes, the State is at an ‘inflection’ point and the public consultation is designed to ensure that as many stakeholders as possible get the opportunity to shape the future of taxation and welfare systems.

The value of foreign direct investment (FDI) to Ireland is well recognised and the very large increase in Corporate Tax receipts from multinational companies in the last decade is one of the key determinants of Ireland’s recent tax revenue developments. As highlighted by the Department of Finance ‘Annual Taxation Report’, over half of the total Corporation Tax revenues of approximately €12bn last year, was accounted for by the top 10 multinationals operating here.

These multinationals have a wider contribution to the economy in terms of job creation, employment taxes and economic activity. The 12.5 per cent rate has been a cornerstone of Ireland’s strategy to attract these multinationals and has served us very well over the years. Certainty and stability of a competitive Corporation Taxation rate and maintaining FDI attractiveness should still be a key feature of our Corporation Tax policy going forward. This, together with the many other benefits of investing in Ireland other than our Corporation Tax rate which should help ensure that the case for Multinationals remains compelling.

The overdependence on multinational Corporate Tax receipts is not ideal. We need to build greater innovation, resilience and productivity from entrepreneurs and our indigenous SME sector. Just as Corporation Tax has played an effective (and legitimate) role in attracting FDI to Ireland – it can also be utilised as a tool to help improve and scale up our SME sector. There have been some positive developments in recent measures introduced in Finance Bill 2021 such as the introduction of digital gaming relief and extensions / enhancements to the reliefs from corporation tax for start-ups, the Employment Investment Incentive Scheme (EIIS) and Start-up relief for entrepreneurs (SURE). However, there is certainly scope for further improvement in these areas. A review of the Corporation Tax measures for entrepreneurs such as the R&D tax credit and the continued introduction of innovative new Corporation Tax incentives is critical to continue to attract FDI and create a vibrant and entrepreneurial domestic economy. The new GloBE rules under the OECD Pillar 2 rules would need to be considered as part of any change to Corporation Tax incentives. In addition, the current Capital Gains Tax rate of 33% should also be reviewed to determine if improvements can be made that supports the re-investment of entrepreneurial capital in Irish enterprises to grow Ireland’s SME sector. If these were successful, Ireland could distinguish itself and create a new reputation as a global centre of excellence for research and innovation.

Finally, it is essential for both FDI and indigenous businesses that Ireland’s Corporation Tax system is simple, clear, and efficient to reduce administrative costs and burden of both the Revenue Commissioners and taxpayers and support its pro-business policy. For example, with the introduction of new Corporation Tax legislation prescribed under ATAD, there are several provisions which are now obsolete or unnecessarily complex which should also be reviewed.

Finance Bill for FS

Could you give an overview of the impact of the Finance Bill on the financial services industry?

Kate McKenna, Manager, Corporate Tax, Deloitte: Finance Bill 2021 introduced a number of provisions that will have a direct impact on the Financial Services industry, presenting a number of opportunities and challenges. While the key amendments had been well-flagged in advance, in particular those mandated by the EU Anti-Tax Avoidance Directive (ATAD), now that the detail of the legislation is available it is important that those within the sector consider how the rules will really impact on their business.

Some of the more notable provisions introduced are as follows –

Interest Limitation Rules

Finance Bill 2021 introduces Part 35D into the Taxes Consolidation Act 1997 to implement the interest limitation rules as required by the EU Anti-Tax Avoidance Directive (ATAD). These rules will act to limit corporation tax relief on net interest expenses of companies to 30% of EBITDA (subject to specific group and equity ratio provisions and other exclusions) and will come into effect with respect to accounting periods commencing on or after 1 January 2022.
An important point to note is that the financial undertaking exemption has not been adopted (which is understandable as these entities often generate net interest income, but this should be examined in detail).

Reverse Anti Hybrid Rules

In line with previous announcements, Finance Bill 2021 introduces reverse anti-hybrid rules which seek to address tax mismatches that arise where an Irish entity is a reverse hybrid entity. These rules shall apply to tax periods commencing on or after 1 January 2022.
The rule provides an exemption for Collective Investment Schemes that are subject to investor protection regulation, are widely held and hold a diversified portfolio of assets.

Certain Insurance and other levies on financial cards and cheques

A series of changes have been made to the Stamp Duties Consolidation Act 1999 (SDCA 1999) in an effort to streamline how, broadly, stamp duties on certain insurance policies, financial cards and cheques are collected by the Revenue Commissioners. The pay and file system for the collection of these stamp duties is to be modernised, replacing the current existing manual pay and file processes.

These changes should be carefully considered by the Insurance and Banking Sectors as they will require updates to processes and systems to capture the changes. However, it should also be noted that some of these changes are subject to a Commencement Order by the Minister.

BEPS STTR

Can you summarise the potential implications for Irish corporate taxpayers of the Subject to Tax Rule (STTR), which forms part of the OECD’s Pillar II?

Dan Morrissey, Manager, Corporate Tax, Deloitte: The STTR is a treaty-based rule, which may override treaty benefits in existing treaties in respect of certain related party payments where those payments are not subject to a minimum level of tax in the recipient jurisdiction. Some of the key points and potential implications for Irish corporate taxpayers of this rule are:

• The STTR may apply irrespective of the size of the group (i.e., the EUR 750 million threshold may not apply).
• The minimum rate for the Subject to Tax Rule (STTR) will be 9% i.e. it is triggered where the full amount of a payment will not be subject to tax at a nominal rate of least 9%. The taxing right will be limited to the difference between the STTR minimum rate of 9% and the tax rate on the payment.
• The rule applies only to cross-border payments between members of the same multinational group. Therefore, Irish entities that make cross-border payments such as royalties and interest should assess the impact of these rules.
• The STTR applies before the Income Inclusion Rule (IIR) and the Undertaxed Payments Rule (UTPR) and any tax collected under the STTR should be factored into the global minimum tax calculations used for the purposes of the IIR and UTPR.
• It is anticipated that the majority of jurisdictions requesting the introduction of the STTR will be developing countries. Accordingly, treaties entered into between larger economies are less likely to be affected by the STTR or may not be affected at all.
• The STTR will be creditable as a covered tax under the GloBE (Global anti-Base Erosion rules).

Many businesses are now starting to use the draft proposals to assess the impact of the STTR on their business. Early identification of risks means it may be possible to mitigate significant issues, as well as allowing effective advance communication with stakeholders.

R&D Tax Relief

In light of BEPS, in your opinion might Ireland’s R&D relief tax measures need to be amended to deal with new BEPS rules?

Enda O’Sullivan, Senior Manager, R&D, Deloitte: The current R&D tax credit compares strongly against other jurisdictions in terms of its effective rate and the breadth of costs that are eligible under the scheme. This tax credit enables Ireland to compete for and sustain R&D programs on a cost basis globally and compliments more discretionary and selective forms of direct funding such as R&D grants or capital grants. Expenditure-based R&D tax incentives aim to increase R&D activities by lowering their after-tax cost, given the uncertain nature and high cost of setting up and sustaining R&D operations.

On the 8th of October 2021, an agreement was reached between the OECD Inclusive Framework and 136 jurisdictions including Ireland, on a structured plan to reform the international tax rules, by means of a two-pillar approach. Pillar One proposes a re-allocation of a proportion of tax to market jurisdictions, along with the removal of all unilateral digital services taxes (DSTs), while Pillar Two seeks to apply a global minimum tax rate of 15%. With the target date of 2023 to implement most rules under BEPS it may be premature to suggest changes to the tax credit until the finer details are agreed.

Of relevance to the above question, is the protection of relief schemes that foster innovation measures, such as the R&D tax credit. Considerations have been built into the framework through the Global anti-Base Erosion Rules (GloBE rules) defining these as ‘qualified refundable tax credits’. In order for tax credits to be treated as a qualified refundable tax credit under the GloBE, the tax credit regime must be designed so that a credit becomes refundable within four years from when it is first provided. This may require amendments to the Irish scheme to protect credits carried forward by a company where they have limited tax liabilities four years post refund. Approaches to enable companies to utilise benefits earlier would help reduce carry forward amounts under this new four-year requirement. For example, extending the scope of tax liabilities that the tax credit can offset such as VAT or payroll taxes, would benefit all companies; reducing the labour and operating costs of SMEs and reducing the carry forward amounts that large international businesses may have due to their more intensive capital spend.

Tax Due Diligence

The rise of M&A activity has been a notable feature of 2021, involving considerable work on the part of tax due diligence professionals and advisors. Can you comment on some of the main features of the M&A landscape in 2021 in this regard?

Claire McCarrick, Senior Manager, Corporate Tax, Deloitte: M&A deal activity in the EMEA region has been strong in 2021. It has been reported that there has been double-digit and even triple-year digit year-on-year increases across the region. Dealmakers worked to make up ground that was lost in 2020 following the onset of the pandemic.

From an Irish perspective, over 100 deals were recorded in the first half of 2021. The Ireland Half Year M&A Review by Mergermarket and William Fry LLP reports that this reflects a 33% rise on the number of deals in the same period in 2020. The total value of deals in the first half of 2021 came to €19.6bn. This is a significant increase on the reported 2020 comparative figure of €2.4bn.

The increase in both the volume of activity and value of transactions have given rise to increased level of demand for M&A tax services in the Irish market, coming off the back of the relatively fallow period that was 2020.

The Irish market has proved attractive to international buyers with private equity funds particularly active in the market. Private equity backed buyers often pay to get priority or exclusive access to targets for a limited period, which can accelerate an already active market. Private equity funded transactions usually require a more detailed due diligence exercise, including tax due diligence work. Undertaking a more detailed tax due diligence exercise within that short exclusivity period has been a feature of tax due diligence work in 2021.

The move towards Warranties & Indemnities insurance by larger institutional and/or private equity backed investors is a relatively recent but increasingly common development in the Irish market. Where insurance is obtained there may be less intense negotiation of the Tax Deed and the tax warranties. However, there may be greater focus on the output of the diligence and presentation of the report as the insurers may have additional demands to the buyer.
The rise in M&A activity has seen an increased demand for M&A tax services and has given tax professionals the opportunity to work with their clients on transactions that are of real significance for those businesses.

This article first appeared in the Finance Dublin in December 2021.