European Commission opens formal enquiry on state aid
While the announcement by the European Commission that it is launching a formal investigation into potential state aid provided by Ireland, The Netherlands and Luxembourg with respect to corporate tax arrangements agreed with the three particular multinationals has been widely publicised, what is potentially of greater interest is how such arrangements sit in the context of the Base Erosion Profit Shifting (BEPS) framework.
State aid enquiry
The issue across the three cases is the basis of allocation of taxable profits to the taxable entities at the time that the particular arrangements were put in place. What underlies any allocation of profits is the domestic law and practice of the time in relation to the pricing of the transactions and activities in question. While the OECD has had long published guidelines on transfer pricing and countries have enacted transfer pricing law to protect their economies, the implementation of such guidelines has varied from country to country, with certain countries adopting many years earlier than others. Ireland implemented transfer pricing effective 1 January 2011
This enquiry is focused on one company only and is limited to a review of opinions given by Irish Revenue related to the calculation of the taxable profits allocated to two Irish branches of Apple. It focuses on the application of the rules by the Revenue in this one particular instance. The Commission’s statement notes that tax rulings, or comfort letters, are not an issue of themselves but may constitute state aid where they confer selective advantages to particular companies. Rulings given by the Dutch and Luxembourg tax authorities in connection with Starbucks and Fiat respectively are also the focus of the enquiry.
Ireland intends to cooperate fully with the Commission’s enquiry. The Department of Finance has issued a statement in response to the Commission’s announcement asserting that it is very confident that Ireland will successfully defend its position on the basis that “Ireland does not have a statutorily binding tax ruling system” and is not in breach of the state aid rules. The statement also notes that Apple did not receive any selective treatment, which was recently clarified by the company itself. This enquiry has no impact or relevance for double Irish companies used by US multinationals.
Ireland changed the tax law under Finance (No2) Act 2013 to remove the benefits for stateless companies, effective 2015. Furthermore at the time, the Minister for Finance in an International Tax Strategy Statement confirmed the importance of the 12.5% corporate tax rate which is provided for in statute, committed to ensuring that Ireland will support the BEPS process while remaining competitive in a global economy for mobile investment.
The focus of the enquiry will be overshadowed and overtaken by the OECD BEPS process and its impact on domestic law and administrative practice. Ireland has over the past two months announced two measures, the first on it system for providing tax opinions, and the second on consultation on the law.
The Irish Revenue addressed its system for providing tax opinions in detail and announced new guidelines on 9 May 2014. On 28 May 2014, Ireland initiated the BEPS Consultation Process to facilitate obtaining views on changes in international tax provisions in Irish tax law and existing structures, in addition to views on new provisions for a competitive onshore Irish IP regime. This consultation process is open until 22 July 2014.
Tax opinion process – new guidelines
Requests for opinions should be channelled to the relevant Inspector of Taxes for each company in the Large Cases division. Where new greenfield foreign direct investments projects give rise to queries and have not yet been established, then there is a facility for making submissions directly to the Corporate and International Business Division.
The current prevailing Revenue view is that as the body of Revenue Tax Briefings and eBriefings are so numerous, there should be a very limited set of circumstances in which opinions are required and, furthermore, they will only opine where the circumstances are unusual, complex or genuine uncertainty exists in relation to application or interpretation of the law.
There are two further issues that are particularly pertinent to corporates. The first relates to the situation where a company fact pattern does not align with the facts on which the opinion was granted and the second issue focuses on a situation where Irish Revenue in later years takes a different view on the law and practice based on the set of facts as presented and as continue to pertain.
Irish Revenue has confirmed that they will follow opinions provided all information was disclosed both at the time the application was made and following any further request from Revenue for further information. Where companies materially deviate from the facts as presented to Irish Revenue the opinion will cease to be valid from the date of the change in facts. It is possible for companies to bring a change of facts to the attention of the Inspector of Taxes for a reconfirmation that the opinion already granted continues to prevail.
A new feature is that Revenue is detailing as to what happens where it subsequently revises its view of its own opinion. Where Revenue revises its opinion, the tax payer will be given notice and Revenue will not seek retrospectively to apply any tax. This provides certainty that in what is now a fast moving tax environment impacted by both OECD and EU, there is no retrospective tax cost to the taxpayer should Revenue subsequently take a different view of the opinion it has granted.
It is of course open to the taxpayer to take a different view to Revenue on any revision to any opinion that they may make.
A further new feature is that opinions will apply for a fixed time period, most likely seven years, after which the taxpayer must reapply for the opinion to continue.
The International BEPS timeline for reporting is in September 2014 on a variety of measures such as transfer pricing of intangibles and country by country reporting. The output of such measures will focus on substance (e.g. assets, people, functions and risks), operations and beneficial ownership as criteria in assessing transfer pricing and allocation of profit in addition to contractual risk/reward parameters.
The EU is due to report on its view on IP regimes (including the UK, Dutch and Luxembourg regimes) by the end of June 2014. Currently the debate at EU level is focused on whether substance should be the measurement as the determining factor in allocating profits or whether expenditure (which is taken as a proxy for activity and by reference to which profit should be taxed at say, a low tax rate) should be used. Each of these alternatives has advantages and disadvantages, depending on the perspective of the country debating the issue.
At this stage it is not clear if agreement will be reached on the overarching EU criteria that need to be fulfilled by all IP regimes.
What is clear, however, is that the issue of substance has and will continue to permeate the debate at OECD, EU level and local country level and ultimately the application of tax law.
With a focus on substance and the introduction of country by country reporting, there will be greater information available to tax authorities in the future leading to increased revenue audits, tax controversy and litigation. In turn, this will lead to a desire for certainty by certain companies and a focus on the process for obtaining such certainty from tax authorities.
As mentioned, the Irish Government has given a lot of thought to its standing internationally through its publication of its International Tax Strategy in October 2013 focusing on Rate, Reputation and Risk and more granularly through its process for reform of the law and practice in 2014.
Once the consultation process on the existing law and on proposals for new law are concluded and the outcomes known, later in the summer, the totality of the change comprising the new practice and new law will form the basis for a post BEPS Irish tax system that is competitive for securing future mobile global investment.
Impact on Ireland
With the publication of this tax strategy, Revenue is clearly focused on ensuring that administrative practice which can be of importance to corporates and multinationals is up to date and aligned with BEPS. Through acknowledging that their view can change, for example in line with prevailing international law, be that OECD, EU or any other that they may wish to adopt as best practice, they are acknowledging the realities of tax in a global world where there is a deep and sustained focus on tax at both macro and micro level. Furthermore through building in a time period for the validity of an opinion, they are conscious that opinions that prevail without reference to a time limit run the risk of being overtaken by global business developments and the faster application of tax law and practice to such developments.
With ‘real substance’ being the new buzz word all competitor countries are recognising the new reality and are rapidly moving to strengthen/enhance their FDI offering. The UK is emerging as Ireland’s strongest competitor. We cannot afford to stand still. At a Deloitte EMEA client conference last week attended by over 400 Heads of Tax from leading MNCs a Head of Tax from an MNC with operations in over 150 countries referred to his new title as being ‘The Fair Share‘ manager. This neatly encapsulates the economic reality that the BEPS process is really about the sharing of the ‘cake’ between countries. Ireland needs to stand tall and continue to play to win otherwise we will be left with the ‘crumbs on the table’ that will not sustain our economy in the medium term.
Our own BEPS review process also gives us the opportunity to diversify our risk in an FDI context. The cluster effect has been very positive in a technology/life sciences/pharma/financial services/social media context. Arguably we are over dependant on too narrow a base. We need to use the BEPS review process to broaden our FDI appeal to consumer goods multinationals in particular. Switzerland and the Netherlands have been the traditional hub for these sectors. Ireland has an opportunity to become a real player in this jobs rich area if it enhances its regime appropriately.
Finally, we cannot forget entrepreneurship has to be at the heart of a thriving economy. Our home-grown entrepreneurs continue to be overtaxed and underappreciated. Equal vigour and attention needs to be given to this bedrock of our economy. We lag behind the UK in particular in terms of a supportive tax system for entrepreneurs.
Our 2015 Budget to be announced in October 2014 is critical in terms of emphasis and context