Ireland Inc., FDI and Transfer Pricing
Finance Bill 2018
As expected following the announcement of Budget 2019, there were a number of corporate tax measures included in Finance Bill 2018 that will have significance for Irish and inbound multinationals and large private groups.
As a result of the financial resolutions published following Budget 2019, changes to the exit tax provisions took effect from 10 October 2018. In line with ATAD Article 5, the exit tax will seek to tax unrealised gains arising where a company migrates or transfers assets offshore such that they leave the scope of Irish taxation. As confirmed in the financial resolutions the rate of the exit tax is 12.5%. However, the legislation also includes an anti-avoidance provision that seeks to apply the capital gains tax (CGT) rate (currently 33%) rather than the 12.5% rate where the transfer / migration forms part of a transaction to dispose of the asset and the purpose of the transaction is to benefit from the 12.5% rate rather than the CGT rate.
There were no amendments to the above provisions in the Finance Bill. However, in line with the ATAD provisions, the Finance Bill also provides that in cases where the exit is to an EU / EEA State, the payment of the exit tax may be deferred and paid in instalments over 5 years. This development is welcome.
In summary it is expected that the exit tax change could impact multinational groups who may have been engaged in group restructuring on the back of last year’s US tax reform, the adoption of ATAD measures across the EU as well as preparing for Brexit.
Finance Minister Paschal Donohoe published Ireland’s Corporation Tax Roadmap last month. Since the publication of the Roadmap and the subsequent CFC Feedback Statement taxpayers have been aware that CFC rules in line with Option B under ATAD Article 7 will take effect from 1 January 2019. The Minister confirmed as part of his Budget speech that the CFC rules will apply for accounting periods beginning on or after 1 January 2019, therefore providing companies with non-calendar year ends some additional time to assess the impact of the new CFC regime and take action accordingly.
As was expected, the CFC rules have been included in the Finance Bill. A number of areas in the CFC Feedback Statement went beyond ATAD and it was hoped that comments made by taxpayers and stakeholders as part of the subsequent consultation process last month would be taken on board and further clarification provided in Finance Bill 2018.
It is welcome that some updates to the draft legislation in the CFC Feedback Statement have been adopted into the Finance Bill.
In particular, the specific removal of reference to the CFC rules applying to ‘cash box’ companies is welcome, as this was not provided for in ATAD. The updated CFC legislation now provides for double tax relief and exemptions for CFC’s with low profits or a low profit margin. In addition the definition of accounting profit provides welcome clarification in terms of the charge not being applicable to capital gains / capital losses or certain distributions. Finance Bill 2018 also includes a grace period for the application of the CFC rules for newly-acquired CFC’s where specific conditions are met.
While all these measures, many of which are provided for in the ATAD provisions, are welcome, there are still certain aspects of the CFC legislation that go beyond what is in ATAD.
In particular, Finance Bill 2018 provides, like the draft legislation in the CFC Feedback Statement did, that the CFC rules will apply where not only a controlling company carries out significant people functions in the State, but where a controlling company or a ‘connected company’ carry out significant people functions in the State. Thus this is wider than the provisions of ATAD. In addition, the control test includes both a present and future right to direct the company’s affairs, unlike ATAD which only looks for a present right to control. While engaging in “best practice” is essential to maintain our international reputation, by agreeing to non-mandatory or more onerous provisions such as these may be seen as contrary to our competitive offering as a location for FDI.
In summary, and in particular given that there are still some deviations from the provisions of Article 7 of ATAD, multinational groups will need to carefully consider the impact of the CFC legislation.
The Bill also brought about the extension of the start-up relief regime until the end of 2021 which is welcome as it is often of benefit to MNCs setting up operations in Ireland for the first time.
In relation to the existing intellectual property amortisation provisions, additional clarifications have been provided for in Finance Bill 2018 in terms of the application of the 80% cap introduced in Finance Act 2017. In particular this is relevant where a company has incurred capital expenditure on a specified intangible asset or assets both before and on or after 11 October 2017.
While the Finance Bill did not contain specific transfer pricing measures, it had been flagged in advance that Ireland is committed to a review and update of its transfer pricing rules in line with international best practice. A public consultation will commence in early 2019 to allow stakeholder input into the proposed changes to Ireland’s transfer pricing law as proposed by The Coffey Review.
Aspects of transfer pricing regulations that are subject to review and potential updates in next year’s Finance Bill may include:
- Removal of grandfathering for transactions the terms of which were entered into before 1 July 2010.
- Removal of the SME exemption which allows certain companies to fall outside Ireland’s transfer pricing documentation requirement.
- Application of transfer pricing rules to non-trading and capital transactions.
- Aligning Ireland’s transfer pricing law to the latest version of the OECD Transfer Pricing Guidelines which were issued in July 2017 which include the principles in Action 8-10 of the BEPS project dealing with aligning transfer pricing outcomes where value is created and Action 13 enhanced transfer pricing documentation standards.
- Introduction of transfer pricing rules for the taxation of branches in Ireland in line with the Authorised OECD Approach (“AOA”).
Other aspects which may be dealt with in next year’s legislative changes include incorporating OECD guidance issued in 2018 relating to:
- The latest (and probably final) OECD discussion draft dealing with the application of the transactional profit split method which was issued in June 2018.
- Guidance for tax authorities dealing with hard to value intangibles issued in June 2018.
Both discussion drafts are intended to supplement the new OECD Transfer Pricing Guidelines and will be incorporated into the next consolidated update of the Guidelines.
The OECD issued a further non-consensus draft in September 2018 dealing with financial transactions. It is the first specific guidance provided by the OECD on the transfer pricing aspects of financial transactions including treasury activities, intra-group lending, hedging, cash-pooling, guarantees and captive insurance. Although this is a non-consensus draft, the principles contained therein provide insight on how the transfer pricing aspects of financial transactions will be dealt with within the framework of the 2017 OECD Transfer Pricing Guidelines going forward.
The Irish tax landscape is changing and aligning with all European Member States as a result of the EU ATADs and therefore in respect of CFC rules, anti-hybrid rules, exit tax, interest limitation rules and GAAR.
As multinational companies manage the adoption of these changes across multiple jurisdictions, obtaining certainty is key. In relation to the adoption of CFC rules, it is important that taxpayers continue to assess the potential implications of such rules on their groups and in particular given some of the provisions in Finance Bill 2018 go beyond ATAD.
For other measures that will be implemented in the coming years, we await further details of the consultation processes outlined in the Roadmap and look forward to engaging in this process in the coming months. We urge taxpayers to continue to participate in these processes through ourselves or industry groups.
Whilst the Finance Bill issued does not contain any specific transfer pricing changes, the introduction of the new CFC regime will apply transfer pricing principles to determine the charge to tax where significant people functions relating to underlying assets and income have a nexus in Ireland.
Next year’s Finance Bill will be the first fundamental change to Ireland’s domestic transfer pricing regime since the introduction of the law in 2010. Globally, transfer pricing is one of the main tax issues facing companies with new OECD guidance, local country practice and heightened controversy part of the day-to-day matters which stretch the resources of many companies. The public consultation, as discussed in the Roadmap will commence in early 2019. This will provide an opportunity for stakeholders to provide input before next year’s Finance Bill and also provide a sense of what changes are likely to happen. It is likely that most of the proposed changes in the Coffey Report will be implemented and therefore companies need to review their current arrangements and put in place a plan to identify risk areas in their businesses and deal with them accordingly.