Finance Bill 2018
The Irish economy continues to perform strongly with growth rates that are higher than elsewhere in the EU and a decreasing unemployment rate. However, there are many challenges including Brexit, US tax and many Irish domestic challenges including housing. Against that backdrop Ireland needs to vigilantly seek to maintain and enhance its international competitiveness while also cooperating with tax reform which is taking place internationally.
The Department of Finance published the Finance Bill today which includes a number of proposed changes which are important to the financial services industry. Some of those changes are addressing amendments required under the Anti-Tax Avoidance Directive (ATAD) and were flagged in our recent Budget. Those changes include:
(i) As was expected, the Finance Bill includes the detail in respect of the proposed Controlled Foreign Company (CFC) rules which will be effective from 1 January 2019, in line with requirements of the ATAD.
Broadly in order to be considered a CFC, an Irish resident company (or companies) must control more than 50% of the relevant foreign entity. Also the actual corporate tax paid by the relevant entity for an accounting period must be less than half the corporate tax that would have been paid by the relevant entity on its profits if they were taxed in accordance with the Irish corporation tax system. The proposed rules can attribute undistributed income arising from non genuine arrangements put in place for the essential purpose of obtaining a tax advantage. Broadly an arrangement is regarded as non genuine to the extent that a company would not own the assets or would not have undertaken the risks which generate its income if it were not for the controlling company undertaking the significant people functions or key entrepreneurial risk taking functions (KERTs) relevant to those assets and risks. The income to be included in the tax base of the taxpayer entity shall be limited to amounts generated though the assets and risks which are linked to significant people functions or KERTs carried out by the controlling company. The proposed rules provide for foreign tax credit relief in respect of the tax paid by the foreign entity on its chargeable income in its country of residence / location.
The proposed legislation includes a number of exemptions / exclusions, including (1) where the accounting profits of the controlled foreign company are less than 10% of its relevant operating costs, (2) (a) the accounting profits are less than €750,000 and non trading income is less than €75,000 or (b) the accounting profits are less than €75,000, (3) in certain instances there will a 12 month exempt period beginning when a company first becomes controlling in relation to the foreign company and (4) it is reasonable to consider that the arrangements would be entered into by persons dealing at arm’s length or the arrangements are subject to Ireland’s transfer pricing legislation.
In a number of respects the proposed rules go beyond ATAD for example, the broader definition of control and in our view it is important that the rules do not extend beyond the ATAD in order to maintain Ireland’s competitiveness.
(ii) As a result of the ATAD Ireland is required to introduce a more extensive exit tax. The ATAD requires Member States to introduce the exit tax no later than 1 January 2020. Given this, the decision to accelerate the introduction of the legislation to 10 October 2018 was a surprise, as taxpayers would have assumed that the exit tax would be introduced on 1 January 2020.
While Ireland has an existing exit tax regime, the introduction of the ATAD exit tax regime will see a significant widening of the application of exit tax. A 12.5% tax rate will apply to latent market value gains on asset transfers including, for example, where a taxpayer transfer assets from a permanent establishment to its head office (or vice versa) or to another foreign permanent establishment, or transfers the business carried on by a permanent establishment outside of Ireland or alternatively migrates its tax residence out of Ireland. While the timing of the introduction of this law will be a surprise, it was lobbied for that the rate of exit tax be set at 12.5% and therefore the proposed rate is in line with what industry would have hoped for.
The Finance Bill provides that where an asset is transferred into Ireland from another EU Member State and the ATAD exit tax has been charged in that country, the base cost of the asset for Irish tax purposes shall be the market value base cost as established under the laws of the other EU Member State.
The Bill also provides that the exit tax can be paid in 6 instalments over a 5 year period where certain conditions are satisfied. In addition provision is made so that the exit tax due from a company can be recovered from another Irish resident company within the same group or from a controlling director who is resident in Ireland for tax purposes.
As a result of ATAD, in this year’s Finance Bill we are seeing the introduction of CFC law in Ireland for the first time. CFC rules are traditionally a feature of territorial regimes. As Ireland currently has a worldwide tax regime, CFC law has not been introduced to date, however the corporation tax Roadmap has flagged up that a consultation period will be launched in early 2019 seeking input on the options of moving to a territorial regime or a simplification of our double tax relief rules. In a number of respects the proposed rules go beyond ATAD and in our view it is important that the rules do not extend beyond the ATAD in order to maintain Ireland’s competitiveness. The acceleration of the introduction of the ATAD exit tax to midnight on Budget night was certainly unexpected. Public consultations will be held on many of the other proposed changes as a result of ATAD over the coming months and it is important that all interested stakeholders actively contribute to the debate.