Financial Services

Perspectives

Financial Services

Pre-Budget 2020

Budget 2020 is a significant budgetary process from an Ireland Inc. perspective.  The decisions made by Government on the introduction of a raft of new tax measures, brought about by the OECD BEPS project as well as the EU Anti-Tax Avoidance Directive (“EU ATAD”), will have a significant impact on all Irish corporate taxpayers and Financial Services (“FS”) companies will not be immune to these changes.

Budget 2019 saw the introduction of Controlled Foreign Company (“CFC”) rules and an Exit Tax, the latter introduced somewhat earlier than anticipated. Arguably Budget 2020 could introduce even more significant tax changes – specifically in the areas of anti-hybrid rules and, potentially, changes to the rules governing the tax deductibility of interest.

While the Department of Finance has issued a Feedback Statement following the public consultation in the area of anti-hybrid rules there has yet to be, at the time of writing, an announcement as to the timing of the implementation of the interest limitation rules.  As a reminder, Ireland’s position was that the existing rules governing the deductibility of interest for tax purposes were equally effective to the rules proposed under the EU ATAD.  Where this was the case the EU ATAD provided for a derogation from the requirement to introduce the rules effective 1 January 2019, allowing a Member State to postpone such introduction to 2024.  However as Ireland does not operate a fixed ratio based approach to limiting interest deductibility it appears, to date at least, it has proven difficult to substantiate this position to a level deemed acceptable by the EU.  The result has been the issue of a formal notice from the EU to Ireland requesting that the interest limitation rules be introduced in accordance with the ATAD.  It remains unclear exactly what options this leaves the Department of Finance however the formal notice has clearly increased pressure on the government to introduce the rules sooner rather than later.

While many traditional FS companies, such as banks, regulated funds or insurance companies, may benefit from some form of exemptions from the interest limitation rules, the impact on the wider FS industry may still be profound.  In particular the impact on securitisation vehicles will need to be carefully considered. Vehicles who may not have interest income or income considered “economically equivalent” to interest may be at risk of increased taxation.  This could impact such vehicles holding equity investments or assets on lease.

As noted above, the Department of Finance released its Feedback Statement on anti-hybrid rules.  The complexity of such rules cannot be underestimated. The Feedback Statement recognises that anti-hybrid rules should target specific tax avoidance type structures as opposed to third party, arm’s length transactions and so the focus primarily on transactions between associated persons and between head office and permanent establishments.  In an FS context, it would be important that the taxation of investors into Irish securitisation vehicles is appropriately considered.  For example clarification on the timing of when a payment under a financial instrument would be considered “included” would be important.  Similarly for capital markets transactions a “knowledge based” test as to the treatment of the payments under, for example, listed financial instruments out of the State would be welcome. In many instances it may not be reasonable to expect knowledge of the tax treatment of ultimate investors. There are existing precedents for similar tests in current legislation.   

Read our pre-Budget document for more predictions

Our view

 

With the looming spectre of BEPS 2.0 on the horizon, Budget 2020 is the time in which Ireland should be looking to increase its competiveness across the international FS industry.  Brexit uncertainty remains but it is vital that Ireland is positioned to attract further business from the UK – this need not be in the form of tax initiatives targeted at FS companies but rather the usual budgetary suspects, namely enhancements to the SARP regime, specific measures in the areas of housing, education, international schools, and public infrastructure investment in line with the Project Ireland 2040 capital plan.

We must be aware of what the jurisdictions we compete with for investment are doing, what initiatives they are introducing and how they implement the various international tax changes so as to avoid a loss of competitiveness.  Consideration should be given to enhancing the KDB and existing R&D tax credit regime to continue to attract FinTech companies to Ireland and to benefit those already operating here.  Targeted initiatives such as accelerated capital allowances for robotics would be welcome.

Our prediction

From an FS perspective the focus will likely be on the introduction of anti-hybrid rules.  Last year the budgetary focus was on CFC rules and this year there is sure to be a focus on the anti-hybrid rules set to be introduced. As my colleague Deirdre Power noted in our Pre Budget 2019 review, with the volume and complexity of legislation that the authorities need to draft, they won’t want to be distracted by anything else. The same restrictive conditions are likely to be a factor in Budget 2020.  As such, unfortunately I am not anticipating anything innovative in this year’s budget from an FS perspective.  At the very least we should have certainty as to when the interest limitation rules are to be introduced. Unfortunately if it is introduced in Budget 2020 it is likely to be legislation drafted in a very short period of time – rushed legislation is invariably bad legislation. Most importantly it would also leave very little time for taxpayers to consider the impact to their business and to take remedial actions as needed.

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