Corporation Tax Roadmap outlines potential speedbumps on the road ahead
Doc Brown said in “Back to the Future” (1985) that “where we’re going we don’t need roads”. Over 30 years later and we’re not there yet, we still need roads and we need the appropriate direction. That came in the Department of Finance’s recently published “Ireland’s Corporation Tax Roadmap”. Much has been written on this document since publication but one thing is clear there will be a whole lot of public consultations going on over the near future.
Regular readers of this column will know my view that consultation with us decreases consternation amongst us so it’s good to talk! Right now, we’re in the middle of a public consultation on the forthcoming Controlled Foreign Company (CFC) rules where the Irish Exchequer can pull certain foreign income back home. This is due to come into our law in this year’s Finance Act. I wrote about this in my previous column concluding with the maxim “first do no harm” in implementing legislation which can impact our competitiveness. That applies equally to any of the legislative changes which are subject to the many public consultations coming our way.
There will be a consultation later this year on interest deductibility in companies. This is a huge area in that how many companies do you know that pay interest on their borrowings? It’s probably easier to ask how many don’t you know. The EU’s anti-tax avoidance directive (ATAD) wants to bring an interest limitation rule into our law (i.e. we don’t have a choice) but we may be able to argue when this comes in, preferably later rather than sooner.
As an aside, the EU Commission’s president Jean Claude Juncker said recently as part of his State of the Union Address that “we should be able to decide on certain tax matters by qualified majority”. Au contraire mon ami! Right now tax matters are decided on a unanimous basis. We have our say, which we could effectively lose if we were to follow the lead of monsieur le president. Our stance on various initiatives such as the infamous Common Consolidated Corporate Tax Base (CCCTB) is clear. We will constructively engage, as we did in ATAD discussions, but don’t tell us what we have to do unless we all agree to it.
Back to the ATAD. The Department’s Roadmap explains that this interest limitation rule confines the tax deduction for, in broad terms, net interest costs in a tax period to 30% of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA). Bottom line a company may not be able to deduct its full annual interest expense on borrowings in one year and may pay more tax than it does currently.
We have very complex rules for interest deductibility and a company has to go through many legislative hoops in order to secure that interest deduction. These hoops are anti-avoidance measures designed to ensure that the right interest reduces a company’s income at the right time. The EU now wants to restrict that deduction, which has been difficult to secure in the first place and may require a review of the whole tax code on interest deductions. Take it from a man who has edited the Direct Tax Acts publication for over a decade, that’s no easy job.
The ATAD tackles interest but not as we know it. It uses the term “borrowing costs” which is broadly defined. For example, it includes interest expenses on all forms of debt as well as expenses incurred in connection with the raising of finance. Some examples listed in the directive comprise the interest element in finance lease payments, certain foreign exchange gains and losses on borrowings and instruments connected with the raising of finance, guarantee fees for financing arrangements, arrangement fees and similar costs related to the borrowing of funds. So it’s quite wide and the company may have to identify these and restrict the deduction to 30% of its EBITDA when enacted.
The general implementation date for this rule is 1 January 2019. However Member States that have national targeted rules which are equally as effective at preventing Base Erosion and Profit Sharing (BEPS) risks may defer implementation until certain OECD minimum standards are agreed but in any event no later than 1 January 2024. Ireland had previously taken that view so that we were good to go for a while yet.
The Roadmap explains that Ireland will continue to engage with the European Commission on the implementation date but it does point out that work had “commenced to examine options to bring forward the process of transposition from the original planned deadline of end-2023. In view of the complexity of our existing interest limitation rules, it is anticipated that transposition could potentially advance, at the earliest, to Finance Bill 2019”. The roadmap clarifies Ireland will introduce an ATAD-compliant interest limitation rule but the timing of that legislation will be determined following further engagement with the European Commission.
Separately, we’ll also see consultations on Transfer Pricing (TP) next year. This deals with the price required to be charged between related companies for goods and services provided between them. TP requires an arm’s length price be charged and its justification documented. Seamus Coffey’s report on Ireland’s Corporation Tax system recommended that consideration be given to potentially applying TP rules to SMEs, having regard to whether the resulting administrative burden would be proportionate to the risks of transfer mispricing occurring in SMEs.
The Roadmap says that a substantial number of consultation responses on Coffey’s report said that TP rules should not be extended to SMEs, suggesting that this would impose a disproportionate burden in view of the lower BEPS risk in SME companies. It continued that the broad consensus from the stakeholders was that, should TP rules be extended to SMEs, then measures should be taken to reduce the resulting administrative burden. I would argue that the simpler we can make any tax initiative the better.
The Rolling Stones famously sang that “you can’t always get what you want” but as we know: don’t ask, don’t get. There will be a lot of asking in the forthcoming consultations. That said, in my view the mantra “first do now harm” should apply to any corporate tax change. We compete on tax because we’re a contender and there is no need to unnecessarily encumber ourselves. We got this.
Tom Maguire is a tax partner with Deloitte and his fortnightly columns on tax matters appear in the Sunday Independent. The above article was first published on 23rd September 2018.