Finance Bill 2017: Financial services

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Financial Services

Finance Bill 2019

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Finance Bill 2019 contains the provisions to transpose the anti-hybrid rules that were largely contained in ATAD2 and that were required to be introduced by 1 January 2020. The transposition of these rules had been the subject of a public consultation launched by the Department of Finance in November 2018, as well as a feedback statement in July 2019 which responded to submissions made by interested parties.

Broadly, the anti-hybrid rules apply to transactions between “associated enterprises” and aim to prevent taxpayers from exploiting differences in countries’ tax systems by obtaining a double deduction for the same expense or by securing non-taxation of income that has been deducted for tax purposes elsewhere. The two key ways in which the anti-hybrid rules achieve this are by either disallowing the expense deduction by the payer or by imposing taxation of the income in the hands of the recipient. The anti-hybrid rules will apply to payments made or arising on or after 1 January 2020.

Similarly, while well flagged, the modernisation of Ireland’s transfer pricing rules is wide ranging and fundamental and will be of interest to all financial services groups (even those with solely Irish members). In the context of securitisation (S110) companies specifically, while the new rules and requirements will apply to such entities, there is an important exclusion in respect of profit participating notes issued by such entities. This prevents a direct conflict in legislation and instead, additional anti-avoidance provisions are being introduced in S110 to protect against abuse of the regime.

Section 845C has been updated to extend the definition of Additional Tier 1 instruments (“AT1”). This amendment seeks to extend the treatment afforded to AT1 instruments to comparable instruments (which have equivalent characteristics to AT1 instruments).

This follows a consultation earlier in the year on the matter and this amendment to the definition in Finance Bill is in line with expectations following the Tax Strategy papers released by the Department of Finance in July (i.e. Corporation Tax: Tax Strategy Group – 19/01). Extending the current tax treatment to all instruments with similar characteristics to AT1 instruments in the Irish system is unlikely to have a significant impact as it is expected that few entities would be in a position to issue such hybrid instruments. It was noted in the Tax Strategy papers in July that the general consensus of the submissions (from the consultations) is that contingent convertibles (“CoCos”) with similar features to AT1 instruments, but which are not issued as AT1 capital instruments, are unlikely to be a feature of the Irish market. As such, no potential negative consequences of the proposed amendments were identified as a result of the consultation.

A number of technical updates have also been made in the Finance Bill that may impact on investment funds and their investment managers. The existing “safe harbour” rules for regulated Irish managers of non-Irish resident investment funds have been updated to replace references to regulatory provisions that have been amended or superseded over recent years. The Bill also contains a technical update to the relevant tax legislation applicable to Investment Limited Partnerships to recognise the legal and commercial functioning of such partnerships.

Finance Bill has introduced legislation in respect of the Irish tax treatment of stock borrowing and repurchase agreements. Previously, the tax rules governing such transactions has been contained in Statements of Practice.

All financial services participants will note the transposition of EU mandatory reporting rules (known as DAC6) into Irish tax legislation. While the Finance Bill provisions largely mirror the Directive, Revenue guidance on the regime will be vital to the scope and responsibilities of industry stakeholders in the implementation of the regime.

Our View

The anti-hybrid rules and the modernisation of transfer pricing rules have both been well flagged for a number of years, although given their complexity, the way in which these rules have been transposed into Irish tax law will require detailed consideration by all financial services participants. The impact is likely to be different depending on the nature of a company’s activities and counterparties. In particular, the potential impact on “orphan” S110 companies that have issued profit participating notes of the new anti-avoidance provisions (including changes to the “specified person” definition) should be considered in detail.

While the extension of the definition of AT1 instruments is a welcome clarification, the amendment is unlikely to have a significant impact given the rarity of such instruments in the Irish market.

The investment management community will welcome the clarifications to the Investment Limited Partnership regime, the long-awaited updates to the “safe harbour” rules and the introduction of legislation on stock borrowing and repurchase transactions. As well as bringing welcome clarity in their own right, they are likely to help to avoid unintended consequences of the anti-hybrid rules.

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