Foreign Direct Investment & Transfer Pricing has been saved
Foreign Direct Investment & Transfer Pricing
Finance Bill 2020
Ireland Inc. and Foreign Direct Investment
From a corporate tax perspective, Budget 2021 made it clear that international tax developments at EU and OECD level continue to dominate the corporate tax agenda. The Minister of Finance noted in his speech that further work is needed at international level and he expects that this work will reach a crucial stage next year, where decisions will be needed and the future direction of the global and European corporate tax landscape will be decided upon.
Although Budget 2021 did not provide for any new EU/OECD measures to be transposed into Irish tax legislation by way of Finance Bill 2020, the Minister did signal a number of updates to our existing legislation to ensure our existing rules are fully consistent with international best tax practice. As expected, these changes, which are of relevance to Ireland Inc., are now included in Finance Bill 2020.
IP Allowance Regime
The existing rules which provide tax relief on the acquisition of qualifying intellectual property (i.e. S291A Relief) have been amended in Finance Bill 2020 to ensure that Ireland’s tax regime for intellectual property, remains in line with international standards. Prior to this amendment, where a company disposed of, or ceased to use a qualifying intangible asset in the trade, more than 5 years after the beginning of the accounting period in which the asset was first provided for the trade, a balancing charge would not arise. Finance Bill 2020 provides for an amendment to these rules such that disposals of any assets, which were acquired on or after 14th October 2020, will now be subject to a balancing adjustment to effectively claw back relief previously given where the proceeds received exceed the tax written down value. Such a move aligns the IP allowance regime with other forms of relief for capital assets. In light of the financial resolutions published following Budget 2021, this amendment to our IP allowance regime is effective from 14th October 2020.
Finance Bill 2020 also provides for the extension of the Knowledge Development Box (KDB) in line with the announcement in Budget 2021. The KDB, an OECD-compliant intellectual property regime, which was introduced in 2016 will be extended for a further two years until 1 January 2023.
Other EU Anti-Tax Avoidance (ATAD)/OECD measures
A measure previously transposed into Irish tax law was the ATAD-compliant Exit Tax regime. This regime introduced by Finance Act 2018 provides for an Exit Tax to be imposed on capital gains arising on certain transfers of assets between jurisdictions and where a company ceases to be Irish resident for corporation tax purposes. In line with the announcement made in Budget 2021, Finance Bill 2020 includes a technical amendment to the Exit Tax legislation to ensure that provisions relating to the calculation of interest on instalment payments of Exit Tax operate as originally intended. In light of the financial resolutions published following Budget 2021, this technical amendment is effective from 14th October 2020 and applies in respect of Exit Tax which remains unpaid on or after 14th October 2020.
Finance Bill 2020 has also amended the Controlled Foreign Companies (CFC) rules introduced into Irish tax legislation by Finance Act 2018, by inserting a new section, which provides that certain exemptions (i.e. the effective tax rate exemption, the low profit margin exemption and the low accounting profit exemption) which can apply to exempt a charge arising under the CFC rules, will not apply for an accounting period of a CFC where that CFC is resident in a jurisdiction which is listed on the “EU list of non-cooperative jurisdictions for tax purposes”. This new section will take effect in respect of accounting periods of CFC’s beginning on or after 1 January 2021.
An amendment has also being made in Finance Bill 2020 to the anti-hybrid rules, which were introduced by Finance Act 2019 in line with Ireland’s commitments to implementing the EU ATAD. The amendments ensure that the anti-hybrid rules operate as intended by; amending a technical error in the definition of associated enterprises to ensure compliance with ATAD; amending provisions relating to the timing of the test of association to address unintended consequences of the current legislation; providing that certain anti-hybrid rules do not apply where there is no economic mismatch outcome because a charge to tax arises under a CFC regime, and clarifying the application of one of the anti-hybrid rules where the participator is a tax exempt entity.
Finally, the EU mandatory disclosure regime which was introduced into Irish tax legislation in Finance Act 2019 and which requires intermediaries and taxpayers in certain circumstances to make a return to Irish revenue of information regarding cross-border arrangements has been updated in Finance Bill 2020. This update is to provide clarification on a number of points, such as: the taxes which are within scope of the regime; the availability of a filing exemption where another intermediary files the same information in another member state; the circumstances in which a person who obtains or seeks to obtain a tax advantage from a reportable cross-border arrangement will be a chargeable person; and where the reporting obligations fall when an intermediary is exempt from filing due to legal professional privilege.
The main transfer pricing changes which impact taxpayers were introduced last year as part of the modernisation and broadening of the Irish TP rules, which applies for accounting periods commencing on or after January 2020.
Finance Bill 2020 does include some further updates to those rules, specifically dealing with the rules around how certain Irish domestic transactions may be exempt from the new TP rules. This has been an area of significant doubt for taxpayers (as to how the exemption would apply) and the new rules are the latest attempt to provide clarity. These amendments apply for chargeable periods commencing on or after 1 January 2021. In addition, separate guidance from Irish Revenue is also expected before the end of 2020.
While the impact of the new amendment to our IP allowance regime (i.e. S291A Relief) should not stand as a barrier to companies carrying on activities associated with the effective management of intellectual property, and puts intangible assets on an equal footing with plant and machinery assets, it does represent a tightening of the rules in comparison to previous years. Nevertheless, Ireland remains a competitive location for the carrying on of activities in connection with intellectual property and will likely continue to be able to compete on the world stage for foreign direct investment. It is also welcomed that the Finance Bill confirms that the new rules will only apply with respect to acquisitions of IP on or after 14th October 2020 as this gives certainty to taxpayers with respect to existing intangible assets.
With regard to the KDB, this regime supports businesses in retaining and exploiting qualifying assets developed through R&D activities, and will likely play a key role in further developing the knowledge economy as we move into a post COVID-19 world. While the uptake of the KDB since its introduction has been limited, we nevertheless welcome the extension of the relief, in part to give companies a greater opportunity to consider its usefulness and also in gathering data and feedback on the scheme for future consultation.
The technical amendments made in Finance Bill 2020 to Ireland’s Exit Tax regime, the CFC regime and the Anti-Hybrid Rules further demonstrate Ireland’s ongoing commitment to ensuring our existing rules are fully consistent with international best tax practice, whilst also ensuring that Ireland remains competitive.
The Irish transfer pricing continues to be a key focus area as a result of the new rules and updated guidance on the interpretation of the rules. It is important that taxpayers continue to assess the potential implications of these new rules and in particular given the provisions now included in Finance Bill 2020.
Finally, the postponement of the introduction of an interest limitation rule as well as reverse hybrid rules until Budget 2022/Finance Bill 2021 is welcomed as it should ensure a comprehensive consultation process with legislators and stakeholders on a complex issue. Continued consultation, dialogue and innovation with respect to the overall tax framework in Ireland will be critical in the years ahead, particularly if we are to compete on the world stage for foreign direct investment.