Department of Finance publish Tax strategy group (TSG) papers
International Tax aspects
Ten TSG papers were published recently on the Department of Finance website covering topics such as Corporation Tax, Income Tax and Capital Taxes. The TSG is chaired by the Department of Finance with membership comprising of senior officials and political advisers from a number of Civil Service Departments and Offices. The TSG is not a decision making body and the papers produced by the Department are simply a list of options and issues to be considered in the Budgetary process.
In line with the Government’s commitment to Budgetary reform including greater engagement with the Oireachtas, the TSG papers are now published in advance of the Budget to facilitate informed discussion.
You can access the full TSG papers on the Department of Finance website by clicking here.
This alert focusses on the international tax aspects contained in TSG 18-01 on Corporation Tax.
TSG on CFC rules
Under the Anti-Tax Avoidance Directive (ATAD), Ireland will need to adopt CFC rules into domestic law by 1 January 2019. The ATAD requires Ireland to choose between what we now know to be Option A and Option B which outline different ways of charging income and exemptions therefrom. TSG 18-01 on Corporation Tax explains that following consideration of the Coffey/ATAD consultation submissions received from interested stakeholders that it is intended that Ireland will elect for the Option B approach when introducing CFC rules in Finance Bill 2018. Consideration is being given to additional elements of optionality consequent on the Option B approach. The following issues were specifically raised by the TSG for consideration:
A. Whether to include the de-minimus derogations allowed under ATAD for:
i. entities with accounting profits of no more than €750,000, and non-trading income of no more than €75,000;
ii. entities of which the accounting profits amount to no more than 10 percent of its operating costs for the tax period.
B. ATAD allows for the use of white, grey or black lists of third countries in determining the application of CFC rules to subsidiaries in those locations. Should Ireland consider using such lists, and if so what criteria could be used?
C. ATAD CFC rules are not sufficient to target ‘cash box’ subsidiaries, i.e. cash/capital rich companies with few or no employees in low tax jurisdictions where there are no significant people functions in the State relating to the management of those assets and risks. Should Ireland’s transposition exceed the ATAD standard and develop measures to address such ‘cash box’ companies?
D. Many established CFC regimes allow an exemption to provide a parent company an exempt ‘grace period’ in respect of newly acquired CFCs (for example subsidiaries acquired following the acquisition of another company or corporate group) during which the parent can reorganise its business to eliminate the CFC if desired. Should such a ‘grace period’ be allowed, and if so for what period?
It should be noted that the above includes various issues to be considered but it is expected that the Department of Finance will further engage with stakeholders regarding the implementation of CFC rules and will seek feedback on the proposed measures over the coming months. Option A may have benefits over option B for domestic companies with substantial foreign operations and this is something which in our view should be discussed as part of the abovementioned consultation process. In our view the CFC regime is a significant change in our Corporate Tax code. We note Ireland has made strong advances to be seen globally as engaging in ‘best practice’. While engaging in ‘best practice’, it’s essential to maintain our international reputation as Ireland is a small open economy which is heavily reliant on FDI. Ireland does not operate in isolation and must be conscious of the positions being adopted by competitor nations. It is necessary that a desire to engage in ‘best practice’ does not lead to Ireland agreeing to non-mandatory or more onerous provisions which are contrary to its competitive offering and position going forward.
TSG on Exit tax
The exit tax measures outlined in the ATAD are required to be adopted and implemented into domestic law by each Member State by 1 January 2020. The TSG paper notes that while the structure of the exit tax is prescribed by ATAD, the rate of that exit tax is a matter for each individual Member State. Responses to the Coffey/ATAD consultation focussed primarily on the rate to be applied in calculating the exit tax, with the majority favouring a 12.5% rate for assets in use for the purposes of a trade. In view of this, stakeholders had proposed that Ireland should consider making an early announcement of the intended exit tax rate to allow companies to factor this into their strategic planning.
While the 12.5% rate is favoured, the TSG is not a decision making body. It will be ultimately the Department of Finance’s decision to determine what rate will apply and indeed whether the rate should be announced in advance of it taking effect. In our view both suggestions remain valid.
TSG on hybrids
The ATAD/ATAD 2 requires anti-hybrid rules to be implemented into Irish domestic law by 1 January 2020 and a later implementation date of 1 January 2022 for ‘reverse hybrids’. The TSG paper stated that it is planned to launch a consultation paper considering both general and detailed technical issues relating to the interlinked issues of hybrid entities/instruments and interest in Q3 2018. It continued that given the complexity of these issues the consultation will be open for a period of c. 12 weeks, with a view to the consideration of submissions beginning post-Finance Bill 2018. As the deadline for anti-reverse-hybrid rules is 1 January 2022, it is likely that further consultation will also be held in advance of this later deadline.
TSG on ATAD interest restriction
Ireland has previously notified the European Commission of the view that our existing interest limitation rules are at least equally effective to the rules contained in the Directive and therefore it is anticipated that Ireland would not implement the ATAD mandated interest limitation rules until 1 January 2024 or when the OECD makes these rules a minimum standard if earlier. This was reiterated in the TSG paper as follows: it is our opinion, supported by case study data that Ireland’s existing interest rules are at least equally effective to the rules contained in the Directive, and a notification in this regard has been filed with the European Commission.
However, the TSG continued that initial responses from the Commission to affected Member States indicate that a stringent, ratio-based, approach is being taken to assessing whether national targeted rules are ‘equally effective’ to the ATAD Article 4 provision. As the Irish targeted national rules are structurally different to the ATAD EBITDA ratio rule and related reporting requirements are designed to capture data relevant to our existing regime, the TSG noted that it is unclear as yet if agreement will be secured in relation to the derogation.
The TSG continued that following recent US tax reform, the European Council recently proposed corresponding with the OECD with a view to accelerating work on reaching agreement for a minimum standard approach under BEPS Action 4, which would trigger an earlier implementation date for the ATAD interest limitation rule than 1 January 2024 (even where the derogation is availed of).
As we know the introduction of the ATAD interest limitation rule will be a complex process and this was noted by the TSG. The group explained that it will require consideration of how the new EBITDA ratio will interact with Ireland’s existing interest rules including whether they should be layered over, and/or replace parts of, Ireland’s existing extensive anti-avoidance rules relating to interest. It will also require careful integration with ATAD anti-hybrid rules which, inter alia, will relate to the debt or equity treatment of a transaction.
As a result of the above the TSG paper explained that it was proposed to incorporate detailed technical consultation on the introduction of the ATAD interest limitation rule with the hybrids consultation, to be launched in Q3 2018.
We look forward to taking part in this consultation on this complex issue as it is one of fundamental importance to the Irish corporate tax system.
TSG on loss reliefs
The current loss relieving provisions in Irish tax law allow a taxpayer company to carry-forward unused losses indefinitely against the future profits of the same trade. Recent reports called for a time-limit to be set on losses carried forward and to eliminate the ability to carry-forward losses indefinitely. The TSG paper highlighted that approximately 90% of the losses forward claimed on 2016 returns were by companies that had been claiming losses forward for five years or more. It continued that the Department of Finance’s analysis indicates that the reintroduction of a restriction focused on the banking sector would be likely to have a number of significant negative consequences including: (1) a weakened capital position for each of the banks that the State has an investment in; (2) the valuation of the State’s investments would be materially impacted and estimated this could be in excess of €400m; (3) damage to the State’s credibility in international markets.
The TSG referred more generally to the broader restriction on loss relief for all companies in that some other jurisdictions apply a ‘sunset clause’ to limit the carry forward of losses and/or a restriction on the amount of profits in any year that can be sheltered by losses. However the TSG explained that in most cases these countries do not limit the ‘sideways’ offset of losses carried forward against other sources of income and gains. Any proposal for a general restriction in loss relief carried forward would therefore also need to consider the current position with regard to sideways loss relief.
TSG on REITs and IREFs
The TSG note that as part of the Finance Act 2017 process, Minister Donohoe agreed that officials would consider the impact of both REITs and IREFs on the Irish property market in the 2018 TSG paper. However, the TSG explained that due to the lack of availability of data in relation to the recently-introduced IREF regime, it is not yet possible to carry out a detailed assessment. It was explained that the IREF regime is currently in its infancy and the first returns are due to be filed by 31 July 2018. In order to improve the quality of data available, the Revenue Commissioners have requested detailed information as part of the IREF return including classification of property held and location by region.
TSG on Multilateral instrument
The TSG paper notes that Ireland took the first steps towards ratifying the Multilateral Instrument (MLI) in Finance Act 2017 and will seek to complete the process before the end of this year. Therefore according to the TSG the Multilateral Instrument will then start to have effect for Ireland from the beginning of 2020. It is important to note that the MLI will need to be in effect in both contracting jurisdictions in order for the MLI to apply. Where the MLI is only in effect in one of the contracting jurisdictions, the MLI will not apply between those two jurisdictions.
TSG on Common Consolidated Corporate Tax Base and Digital tax
The paper notes that in line with the commitment in the Programme for Government, Ireland is engaging constructively with this proposed reform while critically analysing the proposals and considering whether it is in Ireland’s long term interests. Further, unanimity will be required before any proposal on CCTB or CCCTB is adopted. It went on to state that Ireland is committed to working with our international partners to reaching a fair and appropriate solution to the ongoing work on digital tax which ensures that tax is paid where real value creating activities take place. Further, the Department will seek input from various stakeholders as appropriate as part of this ongoing analysis.
TSG on US tax reform
The paper explained that the impact of US tax reform is significant given the strength of the Ireland/US economic relationship with many Irish headquartered businesses invested into the US, and with Ireland as a significant location for US foreign direct investment. The TSG explains that its initial analysis is that the anti-avoidance measures introduced should have “a major impact on the ability of US MNCs to engage in aggressive tax planning practices”. It pointed out that where a US MNC pays less than 13.125% of tax on its non-US profits, it will have to pay additional US tax on a current year basis and that change could significantly reduce the incentive for US companies to engage in aggressive tax planning practices. Therefore, in our view, it is important that future Finance Acts do what is necessary to ensure that Ireland remains competitive.
If you have any queries on the above please feel free to reach out to your usual Deloitte contact.