Ireland Inc. and Foreign Direct Investment
As expected, developments in the international tax landscape have continued steadfastly over the last year. These developments range from the continued ratification and entry into force in many jurisdictions of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (“MLI”) to ongoing implementation of additional changes arising from the OECD’s Base Erosion and Profit Shifting (“BEPS”) project and various EU Directives. We have also seen reform continue at a national level, which includes entry into force in a number of jurisdictions of a digital services tax, despite ongoing discussions at OECD level. In addition, various regulations have been published in the US as the implementation of US tax reform continues.
From an Irish context, the implementation of certain regimes outlined in Ireland’s Corporation Tax Roadmap (“the Roadmap”), which was published by Finance Minister, Mr. Paschal Donohoe, on 5 September 2018, took place over the last year. Ireland’s updated Exit Tax provisions took effect from 10 October 2018, a Controlled Foreign Company (“CFC”) regime became effective in Ireland from 1 January 2019, with the MLI becoming effective in Ireland from 1 May 2019.
These changes are some of the first of many expected to our Irish taxation legislation in the coming years. With the deadline looming for implementing into Irish taxation legislation of additional changes arising from OECD and EU proposals, it is with no surprise that changes in the area of international tax are expected in Budget 2020.
With this in mind, the Department of Finance launched a number of consultations over the last year, most notably the consultation on interest deductibility and anti-hybrid provisions and a consultation on Ireland’s transfer pricing provisions. Such consultations assist in providing clarity and certainty for taxpayers in terms of ongoing tax developments, factors that are critical for investment decisions.
Ireland’s corporation tax regime has played a significant role in attracting foreign direct investment (“FDI”) to Ireland. Given the importance of FDI to the Irish economy it is vital therefore that the Government ensures Ireland responds to the international tax developments in a way that is not only compatible with the developments but in a way that protects and enhances Ireland’s competitiveness as a location for FDI. This will be key in terms of any developments announced as part of Budget 2020.
FDI competitor locations have continued to introduce changes to their national tax regimes, like lower corporation tax rates. Along with changes to other key factors relevant to investment decisions such as access to a highly skilled labour force, cost competitiveness and sufficient infrastructure, it is with no surprise that the FDI landscape has become a lot more competitive in recent years. It is vital that the Government therefore reaffirm their commitment to the 12.5% corporate tax rate as part of Budget 2020.
ATAD, BEPS and Brexit
The EU’s Anti-Tax Avoidance Directives (“ATAD”) require domestic law changes effective from 1 January 2020 in relation to certain hybrid mismatches. This covers the situation where one jurisdiction sees an instrument or entity different to the way we see it here such that it results in a tax advantage. For example where a group gets a double deduction for an expense or where a group gets a deduction for an expense but the corresponding income is not taxed anywhere. Following the aforementioned consultation earlier in the year, which dealt with hybrid mismatches, the Department of Finance has recently issued an updated feedback paper in relation to the implementation of these changes. The closing date for submitting a response in relation to same is 6 September 2019 and we certainly expect to see more on this in Budget 2020.
The EU’s Mandatory Disclosure Regime is expected to be addressed in Budget 2020. The EU Tax Intermediaries Directive (“the Directive”) was published in the Official Journal of the European Union and became effective from 25 June 2018. The Directive requires EU Member States to enact domestic legislation to require taxpayers/intermediaries to disclose certain “reportable cross border arrangements” to their local tax authority. The Directive also provides that these details can then be shared by that tax authority with their European counterparts. The Directive must be enacted into Irish domestic law by 31 December 2019 but due to its retroactivity, the Directive is relevant immediately. Therefore, details of disclosable arrangements taking place from 25 June 2018 need to be maintained between now and August 2020 so they can be disclosed to the tax authorities at that time.
The ATAD also requires the introduction of an ATAD-compliant interest limitation rule. The general implementation date for this was 1 January 2019. However, based on the ATAD provisions, Member States that have national targeted rules that are equally effective as Article 4 of the ATAD could be granted a transitional period for implementation until 1 January 2024 or until such time that it becomes a minimum standard, if earlier.
The Irish Government were of the view that our existing rules in relation to interest deductibility were equally as effective as those in the ATAD and therefore filed a notification with the European Commission (“EC”) in this regard. The Roadmap acknowledged that initial responses from the EC was that it has indicated a stringent ratio-based approach is required to have equally effective rules, which Ireland does not have. In the absence of a formal response from the EC during 2018, the interest limitation rules did not take effect in Ireland from 1 January 2019.
However, the EC have recently served formal notice on Ireland with regards the implementation of the interest limitation rules. Ireland have two months to act and if not the EC may issue a reasoned opinion outlining its case and could in turn decide to bring a case before the European courts.
While the Government continue to engage with the EC, at present it is not entirely clear if the interest limitation rules will be implemented in Ireland prior to 1 January 2024 and potentially effective from 1 January 2020. However, it is clear that we should hear more in relation to this sooner rather than later. Such rules could limit the corporation tax deduction allowed for “net borrowing costs” to 30% of the company’s EBITDA. However, companies have potential to get a deduction in excess of 30% where the overall group EBITDA ratio is higher.
While the Roadmap had signaled the launch of a consultation in relation to a move to a territorial regime, the papers published by the Tax Strategy Group in July stated that any decision in relation to such implementation would be postponed until there was greater certainty on the international tax landscape. Therefore we are not expecting to see any consultation this year or any changes in Budget 2020.
Given the original intended date of departure of the UK from the European Union (“EU”) in March 2019, the Government issued a Bill referred to as the Brexit Omnibus Bill in February 2019 in anticipation of a no deal Brexit. With the extension of the date for the UK to leave the EU to 31 October 2019 and given the outcome of the UK’s withdrawal still unclear, the introduction of this Bill remains uncertain. As the 31 October deadline is fast approaching, we expect that the potential measures the Government might take in response to Brexit should become a lot clearer in the coming weeks.
Ireland’s Department of Finance conducted a public consultation into updating Ireland’s transfer pricing regime to align with the most recent OECD guidance as contained in the 2017 OECD Transfer Pricing Guidelines. The consultation period ended in April 2019. In the recently published (18 July 2019) Tax Strategy Group Papers for Budget 2020 by Department of Finance, they have confirmed that a feedback statement on the upcoming transfer pricing changes will be published during the summer. It is expected that Budget 2020 will contain provisions to significantly update Ireland’s domestic transfer pricing laws from 1 January 2020.
Changes that are likely to be included in the forthcoming Finance Bill include:
- Updating Ireland’s domestic transfer pricing law to align with the 2017 OECD Transfer Pricing Guidelines, which include critical changes on how profits should be recognized, particularly non-routine profits. In the past, the allocation of profits followed contractual legal relationships. Under the revised guidelines, the actual conduct of the parties and personnel who manage and control key functions and risks take priority over contractual allocations of functions and risks for profit allocation purposes.
- New two-tier transfer pricing documentation in the form of a Master File and Local File will be required.
- Removal of the “grandfathering” exemption where certain related party transactions entered into before 1 July 2010 could fall outside Ireland’s transfer pricing regime to the extent the terms and conditions of such arrangements were not subsequently altered. From 1 January 2020, it is likely that all such transactions will be required to be priced at arm’s length.
- Extension of domestic transfer pricing rules to non-trading and capital transactions.
- Extension of transfer pricing rules to small and medium sized groups. At present, certain small and medium sized groups fall outside Ireland’s transfer pricing regime. Irish Revenue are considering replacing this EU based exemption with a transaction based threshold applicable for Master File and Local File preparation, similar to other jurisdictions.
The forthcoming changes represent the most fundamental changes in Ireland’s transfer pricing laws since 2011 and will have a significant impact on our existing Irish tax regime. Hence, it is key that taxpayers have an opportunity to consider and review their Irish operations to determine the potential impact of these changes on their business and asses readiness to deal with any changes in a timely manner.
While it is with no surprise that changes in the area of international tax are expected in Budget 2020, in light of the ongoing and recent consultations we hope that the Department of Finance will take on board the comments provided in response to the consultations so that Ireland is not put at a competitive disadvantage and the legislation together with any related guidelines provide clarity on the scope of any new rules. Certainty is vital for companies as they make investment decisions. We hope that there are no surprises in Budget 2020 such as the immediate introduction of the revised Exit Tax rules on Budget Day last year.
Given the recent correspondence from the EC, clarity in relation to Ireland’s status and response to the EC regarding implementation of the interest limitation rules would be helpful as part of Budget 2020, if not in advance of Budget 2020.
As the international tax landscape continues to change and with the uncertainly Brexit presents, in our view it is imperative that Budget 2020 seeks to ensure that the future of FDI in Ireland remains bright. It will be important that the Irish Government not only addresses tax in doing so but also addresses the wider aspects of Ireland’s offering and in particular in relation to housing and education.
Amendments to our tax legislation are imminent due to the deadlines for implementing changes such as the anti-hybrid mismatch provisions and the EU Mandatory Disclosure Regime. Furthermore, the reform of the transfer pricing rules will possibly be the most significant change for most Irish corporates. While we welcome the Government’s commitment to proactive consultation regarding proposed new taxation measures, given the significance and complexity of many of the changes expected and the short timeframe for implementing same, it will be important that the Irish Government does so in a manner that is clear, unambiguous and provides certainty for taxpayers.