Ireland Inc. and Foreign Direct Investment
In commencing his Budget 2019 speech Minister Paschal Donohoe commented that the international tax landscape is changing rapidly. Ireland’s plan for adoption of changes arising from the OECD Action Plan to address BEPS and the EU’s Anti-Tax Avoidance Directives I and II was presented in Ireland’s Corporation Tax Roadmap as published by the Minister last month.
The Minister referred to the Roadmap in his speech and stated that his focus is on maintaining a competitive, outward-facing business environment whilst ensuring that the tax regime is transparent, sustainable and legitimate, wording which was also included in the Roadmap itself. The Minister also reaffirmed a strong commitment to the 12.5% rate.
The Minister did deliver an announcement on changes to Irish exit tax, in line with ATAD Article 5. The change to the exit tax provisions are to take effect from 10 October 2018. In line with ATAD Article 5, the exit tax will seek to tax unrealised gains arising where a company migrates or transfers assets offshore, such that they leave the scope of Irish taxation. The gain will be calculated by reference to the market value of the chargeable asset on the date of transfer/migration. The Minister confirmed that the 12.5% rate will apply to any chargeable gain arising. However, there is an anti-avoidance provision that seeks to apply the CGT rate (currently 33%) rather than the 12.5% rate where the transfer/migration forms part of a transaction to dispose of the asset and the purpose of the transaction is to benefit from the 12.5% rate rather than the CGT rate.
Irish tax legislation currently includes provision for an exit tax charge on unrealised gains as outlined above. However there is an exclusion from this exit tax charge for companies which are foreign owned in certain circumstances, which has now been removed. In the main it is expected that the change could impact multi-national companies who may have been engaged in group restructuring on the back of last year’s US tax reform, the adoption of ATAD measures across the EU as well as preparing for Brexit.
Since the Roadmap and the CFC Feedback Statement were published last month taxpayers have been aware that CFC rules in line with Option B under Article 4 of ATAD will take effect from 1 January 2019. The Minister confirmed that the CFC rules will be included in Finance Bill 2018 which will be published on 18 October. However, today’s speech did include the additional detail that the CFC rules will apply for accounting periods beginning on or after 1 January 2019, therefore providing companies with non-calendar year ends some additional time to assess the impact of the new CFC regime and take action accordingly
The extension of the start-up relief regime until the end of 2021 is welcome as it is often of benefit to MNCs setting up operations in Ireland for the first time.
Ireland as a location of choice for FDI continues of course to be dependent on wider economic factors including the required infrastructure for investment and education and skills essential to operations. The investment announced in today’s budget for education, housing and transport are welcome and they evidence the Government’s commitment to investment in infrastructure.
Over the next few years the Irish tax landscape will be aligned with all European Member States in respect of CFC rules, anti-hybrid rules, exit tax, interest limitation rules and GAAR. Multinational companies are managing the adoption of these changes often across multiple jurisdictions and obtaining certainty is key.
With regard to the exit tax announcement, confirmation of the application of the 12.5% rate is welcome and provides certainty to groups for future investment. However, under ATAD the provisions on exit tax were due to be introduced no later than 1 January 2020 and from a review of September’s Roadmap it would not have been expected that it would be introduced with effect from midnight in Budget 2019. Therefore, it is disappointing that the exit tax has been brought forward with immediate effect.
In relation to the adoption of CFC rules, we await the publication of the Finance Bill for the full details on application of those rules and hope that our comments made as part of last month’s consultation process will be taken on board. With regard to interest limitation rules and hybrid rules, we welcome the consultation process outlined in the Roadmap and look forward to engaging with the Department in this process in the coming months and urge taxpayers to continue to participate in the process through ourselves or industry groups.