Ireland Inc. and Foreign Direct Investment
Attracting and retaining talent is vital to Ireland’s competitiveness as a location for FDI.
Substantial developments in the international tax landscape in recent times have resulted in many jurisdictions and companies alike, reassessing their status in the area of foreign direct investment (“FDI”).
Due to the importance of FDI to the Irish economy, in responding to these changes, the Irish Government needs to do so in a way that is not only compatible with the developments in the international tax landscape, and in particular with the developments arising as a result of the OECD’s Base Erosion and Profit Shifting (“BEPS”) project and the EU’s Anti-Tax Avoidance Directive (“EU ATAD”), but in a way that ensures Ireland remains competitive and well placed when compared to other competitor locations.
Major changes are not expected in Budget 2018 in the area of FDI. However, in this continuously changing international tax landscape, the Irish Government needs to apply a robust approach to ensure we refine our offering so that the future of FDI in Ireland remains bright. Ireland’s tax regime is only one element of Ireland’s offering in terms of attracting FDI and as such it will also be important that the Irish Government also addresses the wider aspects of Ireland’s offering and in particular in relation to housing, education and infrastructure.
Ireland’s low corporate tax regime has been a vital part of Ireland’s industrial policy. But in recent times, many other FDI competitor locations have committed to reducing their corporate tax rates. This makes the landscape more competitive for Ireland, placing emphasis on the need to ensure not only do we have a competitive tax regime, but also that other key factors relevant to investment and reinvestment decisions are attractive in an Irish context. At a minimum Budget 2018 should reaffirm Ireland’s commitment to the 12.5% corporate tax rate - certainty is a critical factor in investment decisions - while also enhancing (where relevant) the overall tax regime, in particular to ensure competitive R&D and IP tax treatments, as well as a particular focus on the taxation of work and talent.
Attracting and retaining talent is vital to Ireland’s competitiveness as a location for FDI, and particularly at a time where there is an increased focus on substance in light of BEPS and transfer pricing developments. Many of our competitor FDI locations have more attractive personal tax regimes – combine this with falling corporate tax rates - Ireland will need to be prepared to respond (within the confines of BEPS/EU rules). The Irish Government should look to reducing the marginal tax rate for all taxpayers in Ireland whilst also improving current incentives or introducing additional incentives to not only attract but also to retain talent in Ireland.
BEPS, EU ATAD and Brexit
Developments in the international tax landscape as a result of the BEPS project continue. As recently as 7 June 2017, over 68 jurisdictions, including Ireland, signed up to the OECD Multilateral Instrument (“MLI”) designed to implement a number of changes to double taxation treaties (“DTT”) in response to recommendations from the BEPS project. Some areas of the MLI are likely to add uncertainly in relation to the access to DTT benefits. Whilst the MLI is not anticipated to take effect until 2019, the Irish Government needs to carefully consider the tax policy aspects in relation to implementation of the MLI given that Ireland has an extensive and vital DTT network.
In July 2016, the EU ATAD was formally adopted and amendments to the EU ATAD (ATAD 2) were approved by the European Parliament in April 2017. Under the EU ATAD, the required introduction of CFC legislation, exit taxes and interest deductibility restrictions from 2019/2020 will clearly have a significant impact on our existing Irish tax regime. While it is anticipated that the interest restriction rules will not be applicable until 2024, clearly there will be a change agenda to be managed in relation to BEPS/ATAD measures in near term. Budget 2018 should provide Government with an opportunity to set outs its vision for consultation/engagement on the introduction of these measures and overall corporate tax framework.
From an FDI perspective, no direct changes to the Irish corporate tax regime are expected in Budget 2018 as a result of Brexit. However, it would be good to see a commitment from the Irish Government to review Irish tax law to ensure that there are no unintended negative impacts on taxpayers once the UK leaves the EU (e.g. clawback of capital gains tax group relief). Although the UK remains committed to the BEPS agenda, it will likely have greater autonomy outside the EU in relation to its tax strategies post Brexit. In light of this, and the pre-existing commitment by the UK to reduce their corporation tax rate to 17%, it further highlights the importance of the response of the Irish Government to ensure we are seen as an attractive and competitive location for FDI investment.
On the 10th of July 2017, the OECD issued a cumulative update to the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration. Ireland’s exiting transfer pricing laws specifically refer to the 2010 version of the Transfer Pricing Guidelines. In 2015, legislation to introduce the Country-By-Country Reporting (“CbCR”) aspects of Action 13 of BEPS were enacted. However, the remaining changes arising from the BEPS projects in Action 13 and Action 8-10 were not formally legislated for. It would be helpful for Budget 2018 to signal the potential timing for adoption of these measures, to ensure that there is a transparent roadmap in terms of implementation of the BEPS and ATAD measures in the period up to 2020, and we note a similar recommendation in the Coffey review that Ireland incorporate BEPS Action 8-10 into domestic legislation.
Ireland needs to continue to foster an innovative mindset and to enhance development in this area. Ireland’s BEPS compliant Knowledge Development Box (6.25% tax rate) only applies for accounting periods on or after 1 January 2016. Therefore, the KDB regime is still in its infancy.
It is important that the Irish Government continues to monitor the take up and effectiveness of the KDB, while also ensuring that it is monitoring the evolution of other countries’ IP tax offerings. At present the KDB is due to expire at the end of 2020. As such we would like to see that the Irish Government confirm its commitment to the regime by extending this expiration date beyond 2020, or removing the sunset provision altogether.
Given that many jurisdictions have similar R&D tax credit regimes, the Irish Government should consider further enhancements to our R&D tax credit regime. For example, increased flexibility for qualifying outsourcing regimes, together with increased cash refunds in the first year following the claim (as opposed to over three years) would help in improving the attractiveness of this regime.
Ireland’s current IP amortisation regime (s.291A TCA 1997) is a critical feature of Ireland’s tax regime, particularly given our knowledge economy. In our view, further amendments could be made to enhance Ireland’s IP offering and simplify the operation of the tax amortisation regime. Equally, any measures, such as those outlined in the Coffey review, that might restrict/amend the current regime should be carefully considered, particularly in light of comparator jurisdictions – it is important to ensure that Ireland can compete effectively for mobile IP related investment.
On a related IP theme, the forthcoming end of the grandfathering provisions in December 2020 for non-resident Irish companies (“NRI”) incorporated pre 1 January 2015, means that many companies are considering their future IP ownership model. However, our existing grandfathering rules are presenting challenges in certain situations, where clarity or legislative reform would be welcome. Under the grandfathering provisions, the grandfathering period will end earlier than 2020 if there is both a change of ownership of the company, and a major change in the nature or conduct of the company’s business. This can present concerns on how the operation of grandfathering and the cessation of grandfathering will operate in situations where there has been a change of ownership, and subsequently the NRI is collapsed (prior to 2020).
As the international tax landscape continues to change, in our view it is imperative that Budget 2018 seeks to ensure Ireland’s competitive tax regime is retained and that Ireland continues to be a location of choice for FDI.
While it acknowledged that the fiscal space available is limited, it is important that Budget 2018 is used as an opportunity to provide certainty to the multinational community in relation to a low tax competitive corporate tax regime, particularly in providing a roadmap for consultation and implementation of BEPS/ATAD and other measures, where appropriate in the next number of years. We also note the findings and recommendations outlined in the Coffey review of the Corporation Tax Code, and welcome its suggestion to reduce uncertainty in tax matters by introducing pro—active consultation regarding proposed new measures.
Whilst significant changes are not expected in the Budget in the area of FDI, amendments to our taxation legislation are imminent due to the deadlines for implementing the EU ATAD actions and further BEPS actions in the coming years. As such we would expect to see some response, and potentially the announcement of a consultation process, in relation to the implementation of EU ATAD by the Irish Government.