Foreign Direct Investment & Transfer Pricing
Finance Bill 2019
As expected, Finance Bill 2019 included a number of corporation tax measures. These measures will have significance for Irish and inbound multinationals and some private groups.
The deadline is looming for implementing into Irish taxation legislation additional changes arising from OECD and EU proposals. Over the last year, the Department of Finance have continued to engage with stakeholders and taxpayers on these developments by way of consultations and feedback statements. Thus, it is with no surprise that we see details of measures such as the updated transfer pricing provisions and the introduction of anti-hybrid rules in Finance Bill 2019.
Budget 2019 saw the introduction of exit tax rules effective from 10 October 2018. In light of the financial resolutions published following Budget 2020, technical amendments to our exit tax provisions were effective from 9 October 2019. The first amendment extends the charge to Irish exit tax to the transfer of business / business assets of Irish permanent establishments of companies resident in any jurisdiction, not just EU Member States. The second amendment relates to the charge to exit tax where a company migrates tax residence from Ireland. It clarifies that the time of the deemed disposal for exit tax purposes is the time immediately before the company ceased to be Irish tax resident to avoid any arguments that the deemed disposal occurs once the company has left the Irish tax net. These provisions were, as expected, also included in the Finance Bill.
The EU’s Anti-Tax Avoidance Directives (ATAD) require domestic law changes effective from 1 January 2020 in relation to certain hybrid mismatches. Following a consultation earlier in the year and the recent release of an additional feedback paper by the Department of Finance, it is with no surprise that the anti-hybrid rules have been included in the Finance Bill. In summary, these rules cover situations such as those where one jurisdiction sees an instrument or entity different to the way we see it such that it results in a tax advantage. For example where a group gets a double deduction for an expense or where a group gets a deduction for an expense but the corresponding amount is not taxed anywhere. If not already started to date, taxpayers will need to carefully consider the impact of these anti-hybrid rules on their groups.
The EU Tax Intermediaries Directive (the Directive) is effective from 25 June 2018 and is required to be enacted into Irish domestic law by 31 December 2019. Thus, it is welcome to see these provisions as part of the Finance Bill. In line with the Directive, the Finance Bill requires intermediaries, or taxpayers in certain circumstances, to disclose certain “reportable cross border arrangements” with characteristics referred to as “hallmarks” to Revenue. Details of disclosable arrangements taking place from 25 June 2018 need to be maintained between now and August 2020 so they can be disclosed to Revenue at that time.
With the current date for the UK to leave the EU being 31 October 2019 and given that outcome of the UK’s withdrawal still unclear, it is with no surprise there were some measures to do with Brexit announced. In summary a number of measures were included in the Finance Bill to ensure that certain provisions of our taxation legislation will continue to apply post Brexit and in particular in the event of a disorderly exit of the UK from the EU.
Given that many jurisdictions have similar R&D tax credit regimes to our Irish regime, further enhancements to our R&D tax credit regime are important from a competitiveness perspective. As was expected following announcements in Budget 2020, the Finance Bill also includes certain enhancements to our R&D tax credit regime. Many of the enhancements apply to small and micro companies. However, there are additional changes to the R&D tax credit regime that apply to all companies including that the allowable limit on R&D expenditure outsourced to universities or institutes of higher education has increased from 5% to 15%.
As was signalled in the Budget, the increase in dividend withholding tax from the current rate of 20% to a new rate of 25% was included in the Finance Bill. With a range of exemptions at both domestic, EU and treaty level available for dividends paid to corporate shareholders, it is expected that the improved cash flow expected because of this will be driven from dividends paid to individuals.
Some other measures announced include confirmation that there will be amendments to our tax legislation such that taxes on income are not deductible in computing the amount of profits or gains chargeable to tax under Case I or II of Schedule D. In addition, there are also new measures to take account of accounting developments such that the provisions define the term “doubtful debts to the extent that they are respectively estimated to be bad” for corporation tax purposes. Finally, there are also measures included in relation to certain pension payments paid pursuant to a scheme of reconstruction, under a merger, division or joint venture.
Significant update to transfer pricing rules
Finance Bill 2019 includes the legislation to update Ireland’s transfer pricing rules. The changes represent a significant broadening of the scope of the rules and also align them with the latest OECD principles.
The new rules include the formal adoption of the latest (2017) version of the OECD Transfer Pricing Guidelines and broadens the scope of transfer pricing in Ireland to cover the following:
- Non-trading transactions (exemption for Irish domestic transactions, subject to certain anti-avoidance rules);
- Arrangements that had previously been considered grandfathered (i.e., pre- 1 July 2010 arrangements when Ireland first introduced specific transfer pricing rules);
- Capital transactions for computations of capital allowances and chargeable gains (where the market value is over €25 million); and
- Transactions within SME groups (with transfer pricing documentation requirements for SMEs subject to ministerial order).
The updated transfer pricing rules apply for chargeable periods commencing on or after 1 January 2020 and, in respect of claims for capital allowances, where the related capital expenditure is incurred on or after 1 January 2020.
The new rules introduce more prescriptive transfer pricing documentation requirements, namely the need to prepare a Local file (revenue threshold of €50 million) and a Master file (revenue threshold of €250 million) in line with Annex I and II of Chapter V of the 2017 OECD Transfer Pricing Guidelines. These documents may be requested by Irish Revenue in the course of an audit and the taxpayer has 30 days to provide. There is higher rate of penalty for taxpayers who fail to comply with a request to provide transfer pricing documentation to Irish Revenue. In particular, failure to provide a Local File within 30 days of request will incur a penalty of €25,000 plus €100 per day thereafter. Failure to provide other information on transfer pricing arrangements to a Revenue officer when requested, will incur a penalty of €4,000.
The Irish tax landscape continues to change as a result of the OECD and EU proposals. As multinational companies manage the adoption of these changes across multiple jurisdictions, obtaining certainty is key. In relation to the adoption of the new measure, including the anti-hybrid and mandatory disclosure rules, it is important that taxpayers continue to assess the potential implications of such rules on their groups in particular given the provisions included in Finance Bill 2019.
What is clear is that the Irish tax landscape will continue to change at an unprecedented pace. For other measures that will be implemented in the coming years, such as the interest limitation rules, we would welcome continued engagement with the Department of Finance in the coming months. We would also encourage taxpayers to continue to participate in these processes.
As a consequence of the transfer pricing changes, a number of transactions that were outside the rules are now caught and groups will have to ensure the pricing is consistent with the arm’s length principle. Further, a review of historic pricing arrangements is highly recommended to ensure the arrangements are consistent with the latest OECD guidance. Finally, group companies will be required to prepare formal Irish transfer pricing documentation for the first time.