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Finance Bill 2020
Finance Bill 2020 contains some surprises for certain areas of the financial services sector that were not announced on Budget day.
Broadly, there is a fixed annual levy of €150 million imposed on certain financial institutions. For the year 2021, the levy is computed in reference to DIRT paid in 2019. To maintain the €150 million yield in 2021, the levy has been increased. Finance Bill 2020 increases the bank levy to 308% of the DIRT paid in the 2019 base year (from its current rate of 170%).
There has been some changes made in the area of encashment tax. Firstly, with effect from 1 January 2021, the rate of encashment tax is increased from 20% to 25%. This brings encashment tax in line with the rate of DIRT which was increased last year in Finance Act 2019.
In addition, Finance Bill 2020 provides an exemption to encashment tax for Irish tax resident companies who are beneficially entitled to that income and are (or will be) within the charge to corporation tax in respect of that income. This exemption also applies with effect from 1 January 2021.
Finally, Finance Bill makes provision for certain details that need to be included with the encashment tax return and the details to be retained by the chargeable person. However, these particular changes will only come into operation following a Ministerial Order.
Returns of certain payment card transactions by payment card providers
Finance Bill introduces a reporting obligation on “payment card providers” in relation to certain cross-border payment card transactions which are broadly returns in respect of online credit or debit card payments to non-resident businesses.
Payment Card Providers include licensed banks, payment institutions and the Post Office Savings Bank who broadly issue debit and credit cards. The reporting obligations are detailed and require regulations to be provided by the Revenue Commissioners.
Finance Act 2018 introduced Controlled Foreign Companies (CFC) rules into Irish tax law which applied for accounting periods commencing on or after 1 January 2019. Certain exemptions from CFC rules were available where certain conditions were satisfied.
However, for accounting periods commencing on or after 1 January 2021 some of these exemptions (effective tax rate exemption, low profit margin exemption and low accounting profit exemption) will not apply where that CFC is resident in a jurisdiction which is listed in the EU list of non-cooperative jurisdictions.
As at 22 October 2020, the countries on this list include American Samoa, Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, the US Virgin Islands and Vanuatu.
Finance Bill 2020 makes a number of amendments to ensure that the anti-hybrid rules operate as intended. These include revisions to the definition of “associated enterprises”, including provisions which consider the timing of the hybrid payments to avoid unintended consequences of existing legislation, and providing that certain anti-hybrid rules do not apply where there is no mismatch outcome due to the application of a CFC tax charge.
Finally, where payments to a hybrid entity arise in circumstances where there is a deduction without inclusion (D/NI) mismatch outcome, Finance Bill 2020 clarifies that a mismatch shall not arise where the participator is an entity that is exempt from tax on profits or gains in that territory.
Domestic Mandatory Disclosure Reporting
The domestic mandatory disclosure rules (“MDR”) are existing provisions which require the disclosure by "Promoters" of certain "Disclosable Transactions" which fall within certain classes of "Specified Transactions" which allow a person to obtain a "Tax Advantage". Disclosure must be made to Revenue of such transactions and penalties apply where there is failure to comply with these obligations.
Finance Bill 2020 seeks to clarify the date from which such penalties are calculated.
EU Mandatory Disclosure Reporting (DAC6)
DAC 6 was transposed into Irish tax law in Finance Act 2019 and has retroactive application in respect of arrangements entered into after 25 June 2018. Under DAC6 intermediaries and/or taxpayers are required to make a DAC6 disclosure return to Irish Revenue in relation to reportable cross border arrangements.
Finance Bill 2020 makes a number of welcome amendments to the legislation governing DAC6 including clarification on reporting exemptions for intermediaries and the production of a schedule of arrangements that may use standardised documentation but which are not reportable under Hallmark A.
Migration of shares to the EU Central Securities Depository (CSD)
A number of technical updates have also been made in the Finance Bill which relate to the post-Brexit migration of Irish shares and securities to the EU Central Securities Depository (CSD) following the move of the EU CSD from the United Kingdom to Belgium. The amendments have been made in respect of the migration of shares and securities in Irish registered companies to ensure tax-neutrality of the migration event and providing for the new CSD arrangements in relation to DWT and to maintain the status quo in relation to certain tax treatments following the migration. A Ministerial Order is required for the amendments to come into operation.
The amendments to encashment tax provisions were unexpected but provide some clarity. This is of particular interest where certain financial institutions, paying agents, custodians and brokers may be moving to Ireland as a consequence of Brexit and who are now within the remit of encashment tax. While the amendment provides some clarity for companies who are beneficially entitled to such dividends and are subject to tax on same, the amendment does not appear to clarify the position for an Irish resident custodian, stockbroker, investment firm who may receive payments from an Irish resident superior custodian in respect of their client funds. Further amendment is likely to be required such that the exemption is extended to persons who are in receipt of the income on behalf of others also.
Last year’s Finance Bill had introduced legislation in respect of the Irish tax treatment of stock borrowing and repurchase agreements. Previously, the tax rules governing such transactions had been contained in Statements of Practice. The rules introduced previously had unintended consequences and further amendment was expected by the industry in Finance Bill 2020. It is disappointing that clarifications sought by the industry have not been reflected in Finance Bill 2020.
While the DAC6 amendments provide some helpful clarifications further guidance is still required from Irish Revenue particularly as the first DAC6 filings are quickly approaching in early 2021.