The Irish economy continues to perform strongly with growth rates that are higher than elsewhere in the EU and an unemployment rate that is now below 6%. However, there are many challenges such as Brexit, U.S. tax reform impact, and Irish domestic challenges including housing.
Against this backdrop Ireland needs to vigilantly seek to maintain and enhance its international competitiveness while also cooperating with tax reform which is taking place internationally. The Minister in his speech referred in particular to the Department of Finance’s recently announced corporation tax roadmap for Ireland which includes a number of proposed changes which are important to the financial services industry. Those changes include:
(i) As a result of the EU Anti-Tax Avoidance Directive (ATAD) Ireland is required to introduce a more extensive exit tax. The proposed exit tax is also discussed in the corporation tax roadmap. The ATAD requires Member States to introduce the exit tax no later than 1 January 2020. Given this, the decision to accelerate the introduction of the legislation to midnight tonight (9 October) is a surprise, as proposed transactions will have been planned on the assumption that the exit tax would be introduced on 1 January 2020.
While Ireland has an existing exit tax regime, the introduction of the ATAD exit tax regime will see a significant widening of the application of exit tax. A 12.5% tax rate will apply to latent market value gains on asset transfers including, for example, where a taxpayer transfer assets from a permanent establishment to its head office (or vice versa) or to another foreign permanent establishment, or transfers the business carried on by a permanent establishment outside of Ireland or alternatively migrates its tax residence out of Ireland. While the timing of the introduction of this law will be a surprise, it was lobbied for that the rate of exit tax be set at 12.5% and therefore the proposed rate is in line with what industry would have hoped for.
(ii) The Minister also acknowledged the ATAD requires Ireland to introduce Controlled Foreign Company (CFC) rules which will be effective from 1 January 2019. The proposed rules can attribute undistributed income arising from non-genuine arrangements put in place for the essential purpose of obtaining a tax advantage. Broadly an arrangement is regarded as non-genuine to the extent that a company would not own the assets or would not have undertaken the risks which generate its income if it were not for the parent company undertaking the significant people functions relevant to those assets and risks. The Department of Finance published a CFC feedback statement encouraging feedback on the proposed CFC rules. In a number of respects the proposed rules go beyond ATAD and in our view it is important that the rules do not extend beyond the ATAD in order to maintain Ireland’s competitiveness. Deloitte’s full response to the CFC feedback statement is available on our website.
(iii) The ATAD also provides for the introduction of interest limitation rules and while there are exclusions for certain financial undertakings, the introduction of the rules may have a significant impact for many financial services companies.
However, Member States that have national targeted rules that are equally as effective as the rules contained in the ATAD can defer the introduction of the rules to 2024 or until such time that it becomes an OECD minimum standard. The Irish government is of the view that our national targeted rules are equally effective to the interest limitation rules set out in Article 4 of the ATAD. However initial responses from the Commission indicate that a stringent ratio based approach is being taken to assess where national rules are “equally effective” to the ATAD Article 4 provision. As the Irish rules are structurally different to the ATAD EBITDA ratio rules it is unclear as yet if agreement will be secured in relation to the deferral to 2024.
(iv) The legislation governing hybrid mismatches will be introduced into law in Finance Bill 2019 for a 1 January 2020 start date, with the anti-reverse hybrid rules coming into effect on 1 January 2022. The rules on hybrids broadly means considering all arrangements to determine if you have a hybrid entity or instrument which fall within the scope of the new rules. The impact of being in scope can include for example the non-deductibility of payments on a hybrid instrument as well as changing the current treatment of a hybrid entity in the future.
(v) The corporation tax roadmap also states that a public consultation will be launched in early 2019 on the alternative options of moving to a territorial regime (or alternatively simplify Irelands existing rules for double taxation). A move to a territorial regime would see Ireland change its law with a focus more on the taxation of profits earned within Ireland with more exemption in place for foreign income (for example foreign dividend or foreign branch profits). Many existing OECD countries already use a territorial based tax system.
The acceleration of the introduction of the ATAD exit tax to midnight tonight (9 October) is certainly unexpected and many proposed transactions will have been planned on the assumption that the exit tax would not be introduced until 1 January 2020. Aside from the introduction of the ATAD exit tax, the budget does not include many changes which are directly aimed at the financial services sector. However, the corporation tax roadmap proposes a number of changes which could potentially have a significant impact for some financial services companies. We will see more detail on some of the proposed changes in the Finance Bill, when it is initially published later this month, for example the proposed CFC rules. Public consultations will be held on many of the other proposed changes over the coming months and it is important that all interested stakeholders actively contribute to the debate.