Ireland Inc., FDI and Transfer Pricing
Finance Bill 2017
There are only a small number of corporate tax measures, and they have significance for Irish and inbound multinationals and large private groups.
Following the recommendation in the Coffey report, the law relating to the restriction of the intellectual property (IP) amortisation and related interest for IP purchased on or after 11 October 2017 is provided for in the Bill. In summary, 20% of the profits remain within the charge to Irish corporation tax thereby smoothing the claim for interest and tax amortisation over a longer period and ensuring that there is a minimum corporate tax take for the exchequer each year.
The provisions for adopting a new accounting standard within an existing accounting framework have been clarified such that any income and expenses are adjusted; taxed or allowed respectively over a 5 year period. The 5 year period is consistent with the law introduced in 2005 and updated more recently. This will deal inter-alia with the adoption of the new revenue recognition standard in Irish company accounts, which some companies are early adopting this year and which results in amounts being categorised in reserves rather than the profit and loss account and also has impact on the computation of and deductibility of expenses. This applies as respects accounting periods beginning on or after the date of the passing of the Act which is effectively towards mid to end of December 2017.
Interest on financing has been the subject of much discussion over the last 12 months and the law is updated to formally recognise that groups have complex structures. Such structures typically involve multiple intermediary holding companies, either due to a requirement or practice in various countries where an M&A deal is taking place or indeed due to varying degrees of security being taken by different lenders on different tranches of financing. In tandem with this recognition, which is helpful, the anti-avoidance measures relating to recovery and deemed recovery of capital are extended to apply through the group. There is a proviso that if certain recoveries of capital is for bona-fide commercial reasons and does not have a purpose to avoid Irish tax, interest in the borrowing company will not be disallowed. There is a requirement to maintain appropriate records to support positions where strictly a recovery of capital could occur but the taxpayer is claiming non-applicability of this law. The law is effective for loans made or after 19 October 2017. Ireland has formally requested that the EU accept its current rules on interest deductibility as equally effective to those proposed in the EU ATAD for the transitional period until 2024 (or whenever the OECD BEPS Action 4 becomes a minimum standard, whichever occurs the earliest) thereby allowing a retention of these rules for the foreseeable future.
The Bill commenced the legislative procedure required to give effect in Irish law to the Multilateral Instrument (MLI) to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS). The MLI provides a mechanism for countries to transpose recommendations made by the OECD BEPS project into existing bilateral tax treaties. The BEPS project made a series of recommendations for international tax changes to address aggressive tax planning, including specific recommendations for changes that should be incorporated into existing bilateral tax treaties. Each of Ireland’s tax treaties will be modified where Ireland and the relevant treaty partner country have signed and ratified the MLI. Ireland signed the MLI on 7 June 2017 along with over 60 other countries.
The Bill further brings about changes to deal with certain provisions outlined in Companies Act 2014. It will be recalled that Companies Act 2014 was enacted on 1 June 2015. The amendments deal with the transfer of assets and liabilities of a ‘transferor company’ to a ‘successor company’ pursuant to a merger or division. The Bill’s amendment ensures that the tax payment, filing and reporting obligations and liabilities of a transferor company will transfer to a successor company or companies following a merger or division undertaken in accordance with Part 9 of the Companies Act 2014.
The Bill also brings about a new provision that will also enable an appeal made by a transferor company to be treated as an appeal made by a successor company and any right of appeal in relation to an appealable matter conferred on a transferor company to be treated as conferred on the successor company. Technical amendments are made to update references to previous Companies Acts in tax legislation to the appropriate references in the Companies Act 2014. In addition certain substantive provisions were amended; for example a debt which is held by an original creditor and not regarded as a “debt on a security” is not a chargeable asset for Capital Gains Tax Acts purposes. The Bill ensures that a successor company shall be deemed to be the original creditor in respect of a debt where that debt is transferred from a transferor company as a result of a merger or division where the transferor company was the original creditor in respect of that debt. The amendment has effect from 1 June 2015 being the date on which the Companies Act 2014 was enacted. The stamp duty provisions to deal with the above are set out in the Real Estate section of this brochure.
Lastly, the Bill brings about an anti-avoidance measure into the Capital Gains Tax exemption on the disposal of certain shareholdings (s626B Taxes Consolidation Acts 1997). The amendment ensures that money or other assets which are transferred to a company prior to a disposal of shares in that company in order that the value of shares will be derived mainly from those assets will not be taken into account in determining whether the value of the shares disposed of is derived from those assets. This applies to disposals made on or after 19 October 2017
Whilst the Finance Bill did not contain any specific transfer pricing measures, the Minister had published an update on Ireland’s international tax strategy as part of the Budget earlier this month. A significant aspect of the update related to the announcement of a consultation period to run to the end of January 2018 which will review how the recommendations in the Coffey Report will be implemented into Irish tax law. A number of the recommendations related to transfer pricing, including:
- Implementing Action 8 to 10 and the remaining parts of Action 13 of the OECD BEPS reports;
- Extending transfer pricing rules to non-trading and capital transactions;
- Removal of the current exemption (SME exemption) for certain small and medium sized enterprises; and
- Repealing pre 1 July 2010 grandfathered arrangements and bringing them within the scope of transfer pricing law.
If implemented in future tax law changes, the transfer pricing recommendations represent a significant refinement of Ireland’s existing transfer pricing laws. The implementation of Action 8 to 10 will have a significant impact for groups that hold intellectual property assets in Ireland or who are considering on-shoring such assets in Ireland. Ensuring the appropriate level of substance in Ireland in terms of key decision-makers and personnel who have the capability to manage and control the risks of exploiting such activities is key. Other business activities such as centralised procurement and treasury operations in Ireland will also need to be aware of the impact of Action 8 to 10 on current transfer prices.
The recommendation relating to updating Ireland’s transfer pricing documentation rules to the new OECD two-tier Master File and Local File approach presents a new compliance requirement for groups operating in Ireland. The level of detail which needs to be included in the new OECD two-tier documentation goes far beyond what groups currently include in documentation and is likely to mean significant resources will need to be devoted to align to the new documentation approach. Consideration should be given to introducing an exemption for groups under a certain monetary threshold from having to prepare full OECD documentation. A number of other jurisdictions have already adopted this approach.
Some of the other recommendations, including removal of the SME exemption and bringing pre 1 July 2010 arrangements within the scope of Ireland’s transfer pricing regime, are likely to have a disproportionate impact on smaller corporate groups. On that basis, the impact on smaller taxpayers should be considered in terms of cost and time needed to implement such changes and balance any final decision on potential tax revenues that could be expected to be generated for the Exchequer.
With respect to the expansion of Ireland’s transfer pricing laws to non-trading and capital transactions, it is noteworthy that other parts of Ireland’s tax laws already include measures with comparable concepts to the arm’s length principle which deal with such transactions, in particular capital transactions, and therefore any consideration of whether additional measures are needed should form part of the review process.
Aside from law on transfer pricing and other OECD and EU measures that are to be introduced in the coming years within the various timetabled deadlines and subject to the form as indicated by the outcome of consultation on The Coffey report, there is likely to be more tightening and clarification of past practice codified into law such that we are likely to see a more comprehensive and codified act.