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Department of Finance publishes the Update to Ireland’s Corporation Tax Roadmap 

The Department of Finance published its Update to Roadmap in respect of Ireland’s Corporation Tax regime.   As Minister Donohoe explains in his foreword, he published the Corporation Tax Roadmap in 2018 to provide a clear indication of the actions that Ireland would take to ensure that our corporation tax system remained competitive, fair and sustainable.

The Minister recognises the significant uncertainty in the global tax landscape at the time of writing. The OECD/G20 Inclusive Framework on BEPS in October 2020 published two “blueprints” intended to address the tax challenges arising from the digitalisation of the economy, but there is more work to do before agreement can be reached. Given the inter- connectivity of the global economy, achieving an appropriate global consensus on some of the key issues being addressed by the OECD would prevent the alternative of unilateral measures and potentially heightened tax controversy. However, this is underpinned by a significant amount of technical and implementation detail yet to be worked through to move from blueprints to practical tax policies that can be implemented. It will also be important to consider the proposals in the context of smaller open economies, such as Ireland, and ensuring that the final design of new international tax policies are fair and equitable.

We would share his view that the new International Tax Framework, if appropriately designed, could act as an enabler, and not an inhibiter, of growth and investment. 

We welcome the Minister’s commitment that Ireland’s corporation tax regime will remain competitive, fair and sustainable with the 12.5% rate at its core.

The Update to the roadmap is a welcome document and we look forward to further dialogue with the Department of Finance in the future.

You can access the roadmap document on the Department of Finance’s website by clicking here.

The Roadmap details various elements of International tax reform in recent years , the actions Ireland has taken on corporate tax thus far including its work on EU Anti-Tax Avoidance Directives and outlines the commitment to further action. 

The Roadmap serves to remphasise Ireland’s ongoing commitment to implementing effective tax measures, while providing greater certainty to business on imminent changes to the Irish tax code in the future. It is also clear that the Department of Finance is committed to taking on the views of all stakeholders given the forthcoming consultations, while also continuing its commitment to a certain and stable tax regime. We would note in particular Commitment 12’s reference to a formal annual stakeholder engagement process, to facilitate engagement on broader matters of interest.

It is clear from the Roadmap that Ireland is fully committed to implementing effective tax measures that promotes transparency and combats tax avoidance and evasion.  While working to achieve these aims, there will undoubtedly be various policy and design aspects to be addressed in meeting international commitments. While policy decisions must achieve their aims, they should also be viewed in light of broader macro considerations to ensure that the tax environment in Ireland remains competitive and supports business, innovation and foreign direct investment. There is also a need to reflect on the existing Irish tax code holistically in light of imminent changes to identify areas that may be simplified or changed (for example, simplification of Ireland’s interest relief rules, and foreign tax credit relief rules) to ensure it is fit for purpose.  

Deloitte are working closely with business to address these impacts, and will be engaging actively with the Department of Finance as part of forthcoming consultations

International Tax reform

The 2018 Roadmap acknowledged that tax reform was needed on a global level with respect to all forms of tax avoidance and evasion following the onset of the financial crisis. That Roadmap outlined 11 commitments following Seamus Coffey’s review of the Irish Corporation tax system as well as our obligations in implement the EU’s Anti-Tax Avoidance Directive (ATAD). There were three remaining commitments that are to be addressed in 2021. They comprise the transposition of Interest Limitation Rules as required by the ATAD, the consideration of a territorial regime and to finalise drafting International Mutual Assistance Bill. It will be seen that these are now reflected in the commitments made in the Update to the Roadmap.

The Update recognises the international tax landscape remains in flux with significant work underway at the OECD and also at EU level and explains that consideration of what actions are appropriate for Ireland to take on tax reform issues are heavily influenced by the progress of this international work. Ireland’s desire is for a multilateral agreement.

On the Tax Challenges of Digitalisation, the Update explains that in October last year, the OECD Inclusive Framework published a series of reports on its ongoing work to address the tax challenges arising from the digitalisation of the economy. This work consists of proposals under two Pillars. The work under Pillar One focuses on the distribution of taxing rights in respect of highly digitalised and consumer facing activities. Under the current international tax framework, corporation tax is paid where a company has a tangible nexus, which typically requires some physical presence in a country. Pillar One seeks to review these rules with the primary objective of increasing the profits allocated to, and therefore tax paid in, jurisdictions where users or customers are located (even if the taxpayer doesn’t have a physical presence in that country). Pillar Two is focused on the concept of minimum effective taxation. The proposal contains a series of rules that could apply in situations where a company pays an effective rate of tax below a set level.

The Update recognises a number of open issues which will require agreement. On Pillar One, the report blueprints note areas where significant divergences of opinion remain to be resolved including on scope and the amount of tax to be re-allocated to the jurisdiction of the user or customer. As regards Pillar Two, the question of what rate may be an appropriate minimum tax rate has not yet been formally discussed by the Inclusive Framework. Issues may also arise in respect of the compatibility of existing country regimes with any Pillar Two outcome. The Update recognises that the ambition is to reach agreement by mid-2021 and implementation “will then take some time” depending on whether action is needed at national, EU, or international level.

From the EU perspective, the Update refers to the Communication on an Action plan for Fair and Simple Taxation Supporting the Recovery Strategy which contains 25 Actions or initiatives that the Commission will roll out and promote over the next three years. The Update explains that Ireland, like many Member States, “has grave concerns about any proposals which may seek to undermine the requirement for unanimity on tax issues”. It highlights that unanimity has not been an obstacle to very significant tax reform at European level, as demonstrated by the achievements under the last Commission and the number of Directives which have been agreed in recent years.

In this regard the Update commits to 12 commitments as follows:

1. Introduce ATAD-compliant Interest Limitation rules

ATAD requires the introduction of a rule to limit deductions for net borrowing costs to a maximum of 30% of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA). Work on transposition is ongoing and is a complex process in view of the nature and scope of the rule. It is of relevance to all taxpayers with borrowings, i.e. the vast majority of businesses.

This consideration has increased in relevance over the past year as businesses of all sizes face reduced earnings and increased borrowings as a result of public health measures in response to the COVID-19 pandemic, and for the conclusion of the Brexit transition period at end-December 2020.

Engagement with businesses and advisors during the drafting process is of particular importance to avoid undue complexity and unintended consequences with this measure.

 

Transposition of the ATAD rule is now planned for Finance Bill 2021, with the measure to take effect from 1 January 2022. There will be a number of stages to this transposition process to allow sufficient consultation and ensure a robust regime is developed. The first stage was the publication of an initial Feedback Statement in December 2020, which will be followed by an iterative consultation and feedback process in the first half of 2021, with transposition to take place in Finance Bill 2021

2. Legislate for reverse hybrids aspect of ATAD anti-hybrid rules

The concept of reverse hybrid mismatches was introduced in the second ATAD Directive and refers to a foreign-owned entity established or incorporated in a Member State which is treated as opaque (non-transparent) under the laws of the foreign jurisdiction but as transparent in the Member State where it is established or incorporated. The deadline for this rule to be in place is end-2021.

Transposition of the anti-reverse hybrid rule will take place in 2021. The first stage of this process will be the publication of a Consultation Paper in Q1 2021 followed by a Feedback Statement by mid-2021 with legislation to be introduced in Finance Bill 2021 with an effective date of 1 January 2022.

3: Consult on possibility of moving to a territorial regime

This was a commitment in the 2018 roadmap.  The outcome of work at the OECD, and in particular Pillar Two, has the potential to fundamentally alter the international tax framework. Consideration of a possible move to a territorial system must take into account the potential direction of this framework. A consultation on this issue will be launched in 2021. Any subsequent policy actions will need to take account of the outcome of the ongoing international discussions.

4. Progress the International Mutual Assistance Bill

This was a commitment in the 2018 roadmap.  Work is ongoing on finalising the drafting of this Bill with the objective of publishing the Bill in the coming weeks, with the Bill progressing through the Oireachtas in early 2021.

5: Apply defensive measures to countries on the EU Member States’ list of non-cooperative jurisdictions

In October 2019, Finance Ministers at ECOFIN agreed a soft law commitment to introduce national legislative defensive measures against listed jurisdictions. The Ministers agreed on a toolbox of four distinct measures, from which Member States would adopt one through national domestic legislation. These measures are: the non-deductibility of costs; withholding tax measures; enhancing controlled foreign company (CFC) rules; and the limitation of participation exemptions on distributions of profit.

Of the four options detailed, Ireland’s worldwide tax system already provides the protection that would be offered by the limitation of a participation exemption.

Delivering on this commitment to introduce new defensive measures, Finance Act 2020 delivered new measures to provide that Ireland’s CFC rules apply more stringently to companies with subsidiaries operating in jurisdictions that remain on the EU list.

6: Consider additional defensive measures in respect of countries on the EU list of non-cooperative jurisdictions

Following the introduction of more stringent provisions in CFC legislation in Finance Act 2020 linked to the EU list of non-cooperative jurisdictions, consideration will be given to introducing additional defensive measures, if required, including denial of tax deductions or the imposition of withholding taxes where material payments are made from 

 

Ireland to listed jurisdictions. The update explains that the design of such measures would need careful consideration, and consultation, to ensure profits which are generated from actual substantive activities in listed countries are not unfairly impacted.

It is proposed to launch a public consultation in early 2021, with the objective of considering the introduction of appropriate measures in Finance Bill 2021.

7: Consider actions that may be needed in respect of outbound payments

While examining the appropriateness or necessity for further defensive measures to take against listed jurisdictions, the Update explains that it would be appropriate to also explore broader issues related to outbound payments from Ireland and withholding taxes. While it is anticipated that issues raised in respect of outbound payments relate primarily to historical issues which have largely been remedied by US tax reform, a consultation on the issue would provide an opportunity to consider whether further action by Ireland may be necessary or appropriate.

Any such action will be considered in the context of Finance Bill 2021, also taking account of developments at the Inclusive Framework.

8: Adopt the Authorised OECD Approach for transfer pricing of branches

Following the substantial modernisation and extension of our transfer pricing rules in Finance Act 2019, the next step in this modernisation process is to extend transfer pricing rules to the taxation of branches in Ireland in line with the Authorised OECD Approach. Work will commence in early 2021 on this matter and it is intended to bring forward the necessary legislation in Finance Bill 2021.

With regard to Ireland’s transfer pricing regime as a whole, it is also important to keep Ireland’s general transfer pricing rules in line with new and emerging international best practice. Ireland will be proactive in adopting any new emerging standards where appropriate.

9: Continue to meet international best practices on exchange of information and support efforts to further enhance information exchange

The update explains that in terms of policy developments, Ireland has been proactive at the OECD in shaping the Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy (MRDP) that were agreed July and will bring the sharing and gig economy within the scope of Automatic Exchange of Information (AEOI). This important work has paved the way for the 7th Directive on Administrative Cooperation (DAC7) which was agreed by Finance Ministers at ECOFIN on 1 December 2020.

Ireland is committed to contributing to the development of new reporting rules for crypto-assets and e-Money to complement the Common Reporting Standard. This will feed into a European Commission proposal in this area (DAC8) which is expected towards the end of 2021.

Ireland is committed to ensuring the best use of information received under the International EOI framework, and is actively working with other jurisdictions to this effect including through the EU Fiscalis Programme and the OECD Forum on Tax Administration.

10: Proactively respond to the outcomes of international reform efforts

The update notes that while governments will always need to be proactive in clamping down on any emerging aggressive tax planning schemes, it is hoped that successful agreement at the OECD and implementation of measures can lead to a 

 

period of stability after a decade of constant change. Such stability will be critical as we emerge from the COVID-19 pandemic.

As the future direction of global tax reform becomes clearer, the Department will continue to take a proactive, consultative approach in ensuring Ireland’s corporation tax system is well-placed for the changing environment. This may include consideration of any changes to existing tax incentives as well as any broader modernisation that may be appropriate in the relevant context.

11: Publish a tax treaty policy statement taking account of International developments

This treaty network development has been driven by the motivation that the broadest treaty network provides the optimum framework for increased investment, resulting in more economic activity, and therefore is best for Ireland’s economic growth.  

The Update explains that it is timely to consider our broader tax treaty policy in the context of outcomes of the discussions at the OECD/G20 Inclusive Framework on BEPS, and what actions may be necessary — whether regarding a new multilateral instrument or bilateral negotiations. It is intended to publish a Policy Statement before end-2021. The Policy Statement will have a particular emphasis on tax treaties with developing countries, having regard to Ireland’s development commitments and in consultation with the Department of Foreign Affairs and Irish Aid.

12: Continued engagement in international fora and develop a new framework for domestic stakeholder engagement

Appendix 2 to the Update outlines international tax for a in which Ireland is involved.  Engagement with domestic stakeholders is also an essential component of policy development. It ensures differing perspectives can be known and considered, and that factors important to investment and employment in the State can be highlighted.

The Department is also planning to establish a formal annual stakeholder engagement process, to facilitate engagement on broader matters of interest. Details of this process will be finalised in early 2021.

   

Key takeaways

It is clear from the update to roadmap that Ireland is fully committed to implementing effective tax measures that promotes transparency and combats tax avoidance and evasion.  It is also clear that the Department of Finance is committed to taking on the views of all stakeholders given the following forthcoming consultations, while also continuing its commitment to a certain and stable tax regime, in particular Commitment 12’s reference to a formal annual stakeholder engagement process, to facilitate engagement on broader matters of interest.

The Roadmap should provide business with more certainty on the changes that will be addressed as part of significant reforms to the Irish corporate tax code into the future. The Corporate Tax Roadmap highlights important developments which business are already considering, and which will require continued focus by business in assessing the future impact and identifying any changes, additional compliance obligations, and/or restructuring that may be required as the reforms are adopted. Deloitte are working closely with business to address these impacts, and will be engaging actively with the Department of Finance as part of forthcoming consultations.

If you have any questions on the above or would like to discuss further please do not hesitate to contact us or any member of the tax team

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