Feedback Statement on the Implementation of Ireland’s Anti-Hybrid Rules
On 22 July the Department of Finance issued “ATAD Implementation Anti-Hybrid Rules Feedback Statement” which contains draft legislation to introduce anti-hybrid rules from 1 January 2020 as required under the EU’s Anti-Tax Avoidance Directive (“ATAD”).
The feedback statement was issued in response to a public consultation on the proposed rules earlier in the year and the closing date for responding to same was 6 September, with the final legislation set to be introduced as part of Finance Act 2019. The anti-hybrid provisions are aimed at preventing taxpayers from engaging in cross border arbitrage arising through differences in the characterisation of certain instruments or entities for tax purposes. Where a hybrid mismatch arises, it can result in a “double deduction” mismatch outcome whereby an expense is deducted twice or a “deduction without inclusion” mismatch where there is no tax pick up in respect of a payment in one jurisdiction that is tax deductible in the hands of the payer in another jurisdiction. The new rules are intended to address such mismatches and effectively correct them either through a denial of the deduction or the application of a tax charge.
Deloitte submitted a detailed response to the feedback statement last week and below is a summary of the key points made in regards to same:
- The anti-hybrid rules form part of the OECD multilateral approach to base erosion and profit shifting (“BEPS”) such that, for them to be effective, they must be introduced in a consistent manner. In this regard, it is crucial that they be implemented in line with the requirements of the Directive, but they should not extend beyond same.
- The anti-hybrid rules, as currently drafted in the feedback statement, provide no safe harbour or boundary conditions when dealing with countries who have also implemented anti-hybrid legislation. In our view, the requirement that an Irish taxpayer understand a foreign tax regime to the extent that they can make the assessment that it is similar in application to Irish legislation poses an unduly onerous burden. We believe that the taxpayer should be able to rely on the fact that the relevant jurisdiction under review has implemented anti-hybrid rules to meet its requirements under the ATAD such that no further analysis should be required of the taxpayer.
- In determining the existence or not of an “associated entity”, the activities performed by third party service providers for entities (e.g. fund managers) should not constitute a “significant influence” over the entity. In this regard, we would recommend that either a carve out be provided for certain financial services entities or that the definition of “significant influence” be expanded to require a reference to control in section 11 of the Taxes Consolidation Act 1997 or at least, requiring a minimum shareholding before any such significant influence can be considered.
- The mechanics of the carry forward provisions should be clarified such that the denial of a deduction should only occur where it is clear that there is a permanent or quasi-permanent hybrid effect and not one arising due to minor temporal differences which may undermine the claiming of group relief or non-trade charges. Furthermore, consideration should be given to the interaction between these carry forward provisions and the interest restriction rules to be implemented in line with ATAD.
- In determining the treatment of foreign entities for the purpose of these rules, such determination should be ring-fenced to the application of the anti-hybrid rules and not for the purpose of the Tax Acts. To allow the latter may change the nature of existing entities which have relied on decisions of the courts in determining their status as a company or otherwise from an Irish perspective.
- Consideration should be given to providing guidance on the scope of application of the ‘reasonable to consider’ test in “imported mismatches” to avoid unnecessary burdens being placed on Irish taxpayer companies.
As mentioned above, the final legislation is expected to be included as part of Finance Act 2019 and it is therefore unclear whether the next iteration of the legislation will be made available for comment before then. However, we would hope that the above feedback will be reflected in the final wording of same to provide some level of clarity for Irish taxpayers, given the complex nature of these rules.