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Beyond Brexit – ‘Day 2’ Tax Considerations

As the Brexit paralysis in Westminster continues unabated the timing and nature of the withdrawal of the UK from the EU remains as unclear now as it did following the referendum in June 2016. Given the fundamental uncertainties this political paralysis has caused for companies operating in the UK, many have already implemented changes in order to ‘Brexit proof’ their corporate structures. In particular many of those companies operating on a cross border freedom of services (‘FOS’) basis and also those operating on a freedom of establishment (‘FOE’) basis have implemented changes to their operating models to centralise their EU business, with many choosing Ireland as a location of choice.

New entrants or those increasing scale in the Irish market would have considered the tax implications in relation to the transfer of business to Ireland both from a UK and Irish tax perspective, including potential for UK exit charges, transfer tax and VAT issues. However companies should also bear in mind that there are also ongoing or ‘Day 2’ tax considerations to be cognisant of following the transfer of business to, or the commencement of operations in Ireland. Some of these key areas encompass:

VAT on Cross Border Services

It is important that the VAT treatment of intra-group provision of services or administrative support arrangements going forward should be reviewed to determine whether any VAT “leakage” should be expected. In particular, it should be considered if ongoing services will be provided on a cross border basis on which reverse charge VAT is due in Ireland with potential limited right of recoverability. Ideally contracts covering the provision of intra-group services should be reviewed prior to finalising them to mitigate the risk of unnecessary VAT charges arising or of applying an incorrect VAT treatment to the services. In addition, current structures should be reviewed to determine if they are optimal from a VAT perspective and are minimising VAT leakage.

Transfer Pricing

Irish companies and branches within scope of the Irish transfer pricing rules must bear in mind the documentation requirements associated with the pricing of arrangements with connected companies. Transfer pricing implications are important not only in respect of the initial transfer of business into Ireland but also equally in respect of transactions/services provided between connected parties on an ongoing basis. For example services provided by the UK to the Irish group entity (and vice versa) will be subject to transfer pricing regulations both in the UK and Ireland. As such the pricing of such services and transactions should be considered and appropriately documented particularly in light of Irish Revenue’s increased scrutiny in this area, and given the current review of Ireland’s transfer pricing rules to ensure they are in line with new international best practice and the most recent OECD guidance. The updated transfer pricing rules are expected to be incorporated into Irish law in Finance Act 2019.

Employment Tax

There are many employment tax issues to consider where employees relocate, or are seconded between jurisdictions. Two particularly significant areas which employers should be aware of include recent changes to the Irish PAYE system and claiming relief for key individuals coming into Ireland to commence employment.

PAYE Modernatisaion

For those companies who have transferred staff to Ireland or have commenced operating an Irish payroll the timing coincides with one of the most fundamental changes in the application of Irish payroll taxes since the introduction of the PAYE system in the 1960’s. PAYE Modernisation is a real-time payroll reporting system which came into operation on 1 January 2019. From this date employers are required to report all employee remuneration, together with the corresponding PAYE, USC and PRSI, to Revenue on or before the date their employee’s remuneration is paid, on a real time basis. It is anticipated that there will be greater scrutiny of data and potential enquires by Revenue where material adjustments or differences arise month to month. It is important for companies to review payroll procedures to ensure that accurate information is provided on a timely basis. This is particularly important given the draconian penalties regime for instances of non-compliance.

Special Assignee Relief Programme

Companies relocating key senior staff to Ireland should also be particularly aware of the Special Assignee Relief Programme (SARP) which is broadly a tax relief designed to boost the relocation of key talent to Ireland. The incentive, which provides relief from income tax for certain people who are assigned to work in Ireland from abroad has been extended to individuals arriving in Ireland up to 2020. There are various conditions attaching to SARP which must be met by both the employer and employee. Broadly, where the conditions of the relief are satisfied, 30% of taxable employment income over €75,000 will be disregarded for income tax (i.e. not PRSI or USC) purposes. Of importance however for employers is that where conditions for the relief are satisfied, an employer must file a Form SARP 1A for each employee availing of SARP relief. The form must be submitted to Irish Revenue within 90 days (previously 30 days) of the employee’s arrival in Ireland to perform the duties of his or her employment in Ireland.

As can be seen there are many tax considerations which new entrants and those increasing operations in Ireland should be aware of as they seek to consolidate and transact EU cross border service business from Ireland. In a Brexit climate which is characterised by uncertainty, one thing that can be recommended with certainty is taking the time to ensure that such ongoing tax considerations are adequately factored in and assessed in order to arrive at the most tax efficient solution into the future.

This article was written by Ronan Connaughton, Senior Manager, Corporate Tax, Financial Services, Deloitte and was  first published in Finance Dublin.

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