Ireland and International tax after Davos
Within days of the “lights, camera, action” of Davos, the Minister for Finance issued a press release outlining Ireland’s latest move against international tax avoidance. Although issued on a Wednesday the OECD’s tax team called it out as part of their latest developments’ webinar the day before. Either way the truth was out there.
That action was Ireland handing the OECD our ratification for what’s become known as the “MLI” or Multilateral Instrument. This is a Kryptonian-esque tax treaty. It has the power to transform many of Ireland’s treaties in one go. Without this super-treaty over a thousand of this planet’s double tax treaties would have had to be renegotiated and amended individually. Decades of work avoided and we’ve done our bit. The MLI comes into effect for Ireland’s tax treaties in line with the timelines set out in the Instrument.
A tax treaty allows lower withholding taxes between countries; it can also give taxing rights on certain income and gains to one country over another by adopting a “what’s mine is mine” basis. The MLI addresses concerns that double tax treaties could allow these benefits in unintended circumstances.
To deal with this the MLI brings about a principal purpose test (PPT) with the option of a form of limitation on benefits provision in each treaty. Most countries have gone with the PPT route. That effectively says if you do something with a principal purpose of benefitting from a tax treaty then no treaty benefits for you.
We have a similar provision within our domestic law known as the “General Anti-Avoidance Rule”. It removes a tax advantage where it is “reasonable to consider” (not even a “beyond a reasonable doubt” test) that a tax benefit was a primary purpose of the transaction. The MLI does the same thing for tax treaties.
Minister Donohoe said on the MLI that it was “…another example of the action Ireland is taking to tackle aggressive tax planning. Ireland has always believed that aggressive tax planning is best addressed through co-operative multilateral agreements and I am delighted that we are depositing our Instrument of Ratification with the OECD today. Once the Instrument is in force, it will significantly reduce opportunities for tax treaty abuse including bringing about the end of the so called “Single Malt” structure. This completes the delivery of another important commitment set out in Ireland’s Corporation Tax Roadmap.’
The MLI is the “good guy” with the dreary “multilateral instrument” name whereas the perceived “bad guys” get cool names e.g. double this, single that. The “Single Malt” was “taken out” before Christmas with the Irish and Maltese tax authorities coming together in a competent authority agreement. This gave notice that the Single Malt arrangement would not be tolerated when the MLI took effect.
Revenue published one of its newsflashes at the time and explained the science behind the Single Malt: A company is treated as resident for Maltese tax purposes where a company is managed and controlled in Malta. It doesn’t matter whether it’s incorporated there or not. Malta’s tax law provides that where a resident company has income that is not received in Malta then such income will not be taxable there. Therefore, a payment from Ireland under this arrangement would not be subject to tax in Malta.
This competent authority agreement was done last year but we and Malta still had to hand over our MLI ratifications to the OECD. Malta did its bit and then we did ours last week so our treaties will be at one when the MLI takes effect. But the MLI isn’t just about Malta; it affects most of our tax treaties and so this super-treaty’s power outlawing the Single Malt can be invoked by other treaty partners (and us) where Revenue authorities see legal reasons for not liking arrangements.
So let’s take stock of where Ireland is at in terms of dealing with international tax avoidance. We’ve signed up to both of the EU’s Anti-Tax Avoidance Directives. The first directive wanted a regime where we tax other countries’ income where companies there are used for avoidance: Done, see last Finance Act. It wanted a General Anti-Avoidance rule: Done, since 1989. It wanted interest restrictions from 2024 at the latest. My last column outlined how galactically complex ours already are and our authorities are chatting with the EU about whether the restrictions will be a 2019 or 2024 event. It wanted (by 2020) a tax on inherent gains within assets which arose while a company was resident here where that company leaves Ireland behind: Done, 12 months ahead of schedule, see last year’s Finance Act.
The second directive wanted to tackle the X-files sounding hybrid rules where one country sees entities and transctions differently to other countries resulting in tax mismatches: We’ve just had a public consultation so they can be brought about on schedule in this year’s Finance Act. I’m so looking forward to working my way through that one!
The most famous Kryptonian couldn’t see through lead and so on transparency, our tax system is based in legislation which anybody, anywhere can pick up and read. I know I’ve edited the Irish Tax Institute’s direct tax legislation for a decade and have been commenting on it for much longer, I’m getting old! Also, we were one of the first countries to implement Country by Country Reporting. These reports are exchanged with all relevant countries to ensure tax authorities have a clear picture of the activities of certain multinationals. We have tax treaties with over 70 countries containing “exchange of information” provisions and we have over 20 Tax Exchange of Information agreements with other countries.
In this year’s Finance Act, we will legislate for the European Tax Intermediaries Directive (the really catchy “DAC6”) where tax practitioners and/or departments will have to tell Revenue authorities about certain cross-border tax transctions. However, the law is effectively here in that the potentially disclosable transactions date back to mid-last year. The directive explains the criteria but the devil will be in the detail of the forthcoming law which isn’t written yet! Let that sink in for a second.
So when someone questions our tax laws let them look to what we’ve done. To paraphrase another DC Hero in “Batman begins”(2005) “It’s not who we are underneath, but what we do that defines us”.
Tom Maguire is a tax partner with Deloitte and his fortnightly columns on tax matters appear in the Sunday Independent. The above article was first published on 10th February 2019.