Ireland Inc. and Foreign Direct Investment
Over the last year developments in the international tax landscape have continued steadfastly. These developments range from the ratification by a number of jurisdictions of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), to the introduction in the EU of the Mandatory Disclosure regime, to reform at a national level such as US tax reform.
Given that the deadline is looming for implementing into Irish taxation legislation additional changes arising from projects such as the OECD’s Base Erosion and Profit Shifting (BEPS) project and the various EU Directives, it is with no surprise that changes in the area of international tax are expected in Budget 2019.
In anticipation of these significant changes to our Irish taxation legislation, and taking account of the recommendations set out in the Coffey review, Ireland’s Corporation Tax Roadmap (the Roadmap) was published by Finance Minister, Mr. Paschal Donohoe, on 5 September 2018. The Roadmap identifies a programme of action for implementing changes in relation to Ireland’s corporation tax regime, not only in Budget 2019, but over a number of years. It is a welcome document from which it is evident that the Department of Finance is committed to taking on the views of all stakeholders while also continuing its commitment to a certain and stable tax regime. The Roadmap references a number of additional consultation processes that will take place during the remainder of 2018 and during 2019. This will hopefully allow additional clarity and certainty for taxpayers in terms of ongoing tax developments, factors which are critical for investment decisions.
It is clear from the Roadmap that the Irish Government has remained fully engaged and committed not only to ongoing discussions and developments at an international level but also in relation to the implementation of these changes into our domestic taxation legislation.
Given the importance of foreign direct investment (FDI) to the Irish economy, it is vital 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 2019.
In recent years, the FDI landscape has become a lot more competitive. This is not only as a result of some FDI competitor locations introducing changes to their national tax regimes, like lower corporation tax rates, but also due to other key factors relevant to investment decisions such as access to a highly skilled labour force, cost competitiveness and sufficient infrastructure.
Ireland’s corporation tax regime has played a significant role in attracting FDI to Ireland. It was welcome that the Roadmap reaffirmed commitment to the 12.5% corporate tax rate. However, the overall tax regime and upcoming changes need to be monitored in the context of how various changes are implemented in EU Member States as well as any changes made in countries to take account of US tax reform.
ATAD, BEPS and Brexit
One of the key changes expected in Budget 2019 will be the introduction of Controlled Foreign Company (CFC) rules. As a result of the EU Anti-Tax Avoidance Directive (ATAD), Ireland is required to introduce CFC rules effective 1 January 2019.
CFC rules aim to deter companies from shifting profits into non-genuine low tax structures. The ATAD provides two alternatives to taxing the income of a CFC and the Department of Finance has confirmed that Ireland intends to implement “Option B”, as included in Article 7 of the ATAD. Option B has two required elements to be met being income arising from (i) non-genuine arrangements which (ii) have been put in place for the essential purpose of obtaining a tax advantage. As included in Article 7 of the ATAD, two carve out options exist for Option B.
The introduction of CFC rules will have a significant impact on our existing Irish tax regime and hence it is key that taxpayers have an opportunity to consider the impact of this complex matter for their businesses.
Acknowledging this and in line with their commitment to do so, on 7 September 2018 the Department of Finance published a CFC Feedback Statement which encourages stakeholders to provide feedback on the proposed CFC rules that will be included in Finance Act 2018. Responses are required to the Feedback Statement by 28 September 2018 and we would encourage stakeholders to engage with this process. A number of areas in the Feedback Statement go beyond ATAD. We are of the view that Ireland’s CFC regime should not extend beyond ATAD in order to maintain Ireland’s competitiveness as a location of choice and welcome responding to the Consultation. We expect further updates in relation to the CFC rules throughout Q3 2018.
It was hoped by many that when introducing the CFC regime, that the Irish Government might also take the opportunity to make changes around the existing regime for foreign tax credits. However, the Roadmap has indicated that a public consultation will be launched in early 2019, seeking further input on the alternative options of moving closer to a territorial regime and simplification of the double tax relief rules. As such no changes are expected in this area in Budget 2019.
The ATAD also requires the introduction of an ATAD-compliant interest limitation rule, the general implementation date for which is 1 January 2019. However, Member States that have national targeted rules that are equally effective as Article 4 in the ATAD are 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 are of the view that our existing rules in relation to interest deductibility are equally as effective as those in the ATAD and therefore filed a notification with the European Commission in this regard. The Roadmap acknowledges that initial responses from the European Commission 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 response from the European Commission at this point, it is not clear if the Irish Government will be required to implement the ATAD interest restrictions prior to 1 January 2024. This was confirmed in the Roadmap with the earliest transposition being flagged as Finance Bill 2019 (i.e. 1 January 2020). As a result of this a consultation process with taxpayers on this topic, and the ATAD anti-hybrid provision, is planned for Q3 2018.
The ATAD also requires the introduction of a general anti-abuse rule (GAAR) in Member States with effect from 1 January 2019. The general view is that Ireland’s current Irish GAAR provisions are in fact more stringent and broader in scope than that under ATAD. This was confirmed again in the Roadmap, such that no changes are expected in this area of Irish taxation legislation.
The MLI permits changes to the interpretation of tax treaties without individual renegotiation. While the MLI was signed by Ireland in June 2017, ratification commenced in Finance Act 2017 and it is expected that the final steps required to complete the ratification will be completed before the end of 2018. The Irish Government needs to carefully consider the tax policy aspects in relation to implementation of the MLI given that Ireland has an extensive double tax treaty network that is vital for our competitiveness as an FDI location. In our view, the Government should reconsider the introduction of areas that are not minimum standards e.g. anti-fragmentation provisions for permanent establishments.
While Brexit negotiations continue, from an FDI perspective, no direct changes are expected to the Irish corporate tax regime in Budget 2019 as a result of Brexit. However, given that March 2019 is impending, it would be good to see further commitment from the Irish Government in terms of reviewing Irish tax law to ensure that there are no unintended negative consequences as a result of Brexit.
While aspects of Action 13 of BEPS were enacted in 2015, the remaining changes arising from the BEPS projects in Action 13 and Action 8-10 were not formally legislated for in Ireland. As confirmed in the Roadmap, action in this area is not expected to happen in Budget 2019 but legislation will instead be introduced in next year’s Finance Bill so we can expect changes to the Transfer Pricing rules from 1 January 2020. The Roadmap also signalled a public consultation in early 2019 to allow for changes in Irish rules to be made in a careful and considered manner as one coherent package and to allow stakeholders an opportunity to input into same.
Separately, it is important that additional resources be provided to the Revenue’s competent authority division as companies value the ability to have a competent authority with adequate resources to be able to negotiate Advance Pricing Agreements especially in the context of an Irish company holding IP.
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) has had limited uptake to date but given it only applies for accounting periods on or after 1 January 2016, 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 to ensure it is achieving its objectives, 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.
The Roadmap has indicated a number of items that will be included in the upcoming Budget. The window of consultation in relation to the CFC rules is very short but we hope that the Department of Finance will take on board the comments provided in relation to the CFC Feedback Statement so that Ireland is not put at a competitive disadvantage compared to other EU Member States.
It would be helpful if the Budget provided certainty as to the rate of exit tax applicable following the changes to exit tax due to ATAD, although such changes would not need to be effective until 1 January 2020. However based on recent comments by Minister Pascal Donohue it would seem unlikely that this will be included in the Budget.
The Irish Government also need to ensure that Ireland continues to be a location of choice for FDI. It is therefore important that the Irish Government also addresses the wider aspects of Ireland’s offering and in particular in relation to housing, education and infrastructure in Budget 2019.
Amendments to legislation are imminent due to the deadlines for implementing the ATAD actions and further BEPS actions; the introduction of CFC rules will be the most significant change. While the Irish Government’s commitment to proactive consultation regarding proposed new taxation measures is welcome, given the complexity of many of these changes 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 transparent for taxpayers.