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The European Agenda
The EU’s Anti-Tax Avoidance Directive (“ATAD”) continues to be legislated for in Ireland. In particular, this year’s Finance Bill is expected to focus on a number of critical areas of change to our domestic law.
In line with the Corporation Tax Roadmap issued by the Irish Government in September 2018, Finance Bill 2019 will see the introduction of Irish anti-hybrid legislation for the first time as required by the Directive. The anti-hybrid provisions are aimed at preventing taxpayers from engaging in cross border arbitrage through differences in the characterization 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 charge for a payment in one jurisdiction that is 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.
Understandably, such new rules are complex in nature and will represent a critical change to existing Irish tax law. Public consultations on the matter have identified the complexity and highly technical nature of such rules, but also the need for new rules to be no more restrictive than those required by the Directive.
The rules are intended to apply to transactions between associated entities, where a mismatch outcome has arisen due to a difference in the characterisation of either the payment, the entity in question or the instrument in question.
In particular, the Department of Finance’s feedback statement as drafted suggests that Ireland may be leaning towards adopting a stringent set of rules with regard to hybrid mismatches. Based on current feedback from the Department, such new rules would likely require Irish taxpayers to have a level of knowledge as to foreign tax systems to determine whether a hybrid mismatch has been neutralised by provisions “similar” to Irish domestic law. In our view, and in order to maintain tax competitiveness, Ireland should not agree to non-mandatory or more onerous provisions than that required by the Directive.
Where certain conditions are met the Department’s feedback statement provides for rules to allow the carry forward of previously denied deductions. While such a carry forward is welcome and in line with the wording of the Directive, we are of the view that current wording outlined by the Department may be insufficient to ensure conditions for the applications of reliefs (such as group relief for current year trading losses or non-trade charges) are met when carried forward. It must be recalled that the feedback statement cannot outline the full legislative basis for hybrids and therefore this may have already been considered but in the absence of same, in our view, additional consideration is required to provide for an effective mechanism to carry forward previously denied deductions.
In addition, the Department of Finance’s feedback statement suggests that the anti-hybrid rules will essentially codify how an entity is treated for tax purposes by being “transparent”, for instance similar to a partnership, or “opaque” like a body corporate. Further clarity is required in this regard to ensure that this codification takes account of existing precedent in this area.
As noted in this document, the Directive requires the introduction of an ATAD compliant interest limitation rule. Should such interest limitation rules be introduced as part of Finance Bill 2019, we would suggest additional Revenue guidance supplement such law to ensure that clarity applies to its implementation and impact.
Lastly, and as discussed elsewhere in this document, the EU Mandatory Disclosure Regime (“DAC6”) is expected to be introduced in Finance Bill 2019. This disclosure regime requires tax practitioners, intermediaries and certain taxpayers to report certain cross border arrangements where specific hallmarks are met. Such rules must be introduced into Irish law by 31 December 2019, and will cover a broader range of transactions than those outlined in our current domestic disclosure rules.
The continued implementation of the above directive will introduce substantial change to Irish tax law, particularly with respect to anti hybrid legislation. In our view, the anti-hybrid rules carry with them a risk to Ireland’s tax competitiveness where they go beyond the requirements of the ATAD.
It is hoped that revisions to the anti-hybrid rules will take account of comments submitted to the Department given the need to maintain Ireland’s ability to compete for investment on the world stage. ATAD implementation matters will continue to dominate the tax agenda going forward, together with an increased focus on tax transparency through the introduction of EU Mandatory Disclosure rules.