Public consultation on a review of Ireland’s corporation tax code - January 2018

The Minister for Finance launched a public consultation process on 10 October 2017 to run for a period of 16 weeks which ended on 30 January 2018. Deloitte were pleased to provide our insights to the Government on this important topic.

Key messages in our submission, which you can download on this page, include:

• Ireland’s GAAR goes beyond that outlined in the ATAD and its test regarding the existence of a tax avoidance transaction is more subjective than that contained in the directive. It is based on a “reasonable to consider” test as opposed to the more factual approach in Article 6(1) of the ATAD. We would argue that the test in TCA 1997 s811C creates additional uncertainty as a result and should be aligned more with the ATAD to ensure competiveness is maintained with EU partners.
• The ATAD’s CFC rules apply two options in article 7(2) for defining a CFC’s tax base with each option having its own exceptions. In our view it would be reasonable to adopt both options for our domestic law rather than to adopt an either/or type approach. This is to ensure a more equal treatment between domestic and foreign owned multinational groups and this approach could be supplemented by a whitelist of jurisdictions as permitted by the ATAD’s preamble to add certainty of application. To adopt one option over another may favour certain corporate groups over others and such discrimination could not have been the intent of the directive.
• In order to maintain Ireland’s competitiveness and from the perspective of the ATAD’s exit tax it would be preferable to keep the rate of exit tax on such gains to a maximum rate of 12.5%. This is because the regime is mechanistic in its application and a country’s tax rate is a sovereign question. Given companies would have previously invested in Ireland on the assumption that they could legitimately avail of the “excluded company” exemption from the exit tax then consideration should be given to ensuring that only increases in value of chargeable assets that occur post 1 January 2020 should be within the scope of the directive’s exit tax i.e. Ireland’s existing law should apply to latent gains accruing until 31 December 2019 with the ATAD’s exit tax applying to the balance thereafter.
• A mechanistic implementation of the anti-hybrid rules may meet ATAD minimum standards but will create uncertainty for Revenue and taxpayers. Effective anti-hybrid rules might easily add substantial pages of tax legislation which will require detailed scrutiny by fiscal authorities, taxpayers, representative bodies and advisers alike. Increased complexity can bring about increased uncertainty of application and therefore an early formal consultation on the draft legislation to be used will aid in delivering certainty for all parties. The limited permitted derogations contained in the ATAD should be taken.
• Indeed such level of consultation with draft legislation would be welcome on all aspects of the ATAD’s implementation.
• An effective review of the basis and limitations of the current deductibility of interest would be an opportunity to clarify complex, cumbersome rules, set the deductibility formulation in a modern business context, pave the way for a simpler introduction of the ATAD limitations, and reduce uncertainty for taxpayers, fiscal authorities and tax advisers.
• Ireland should adopt a foreign branch profit exemption and foreign source dividend exemption. A foreign source dividend exemption would replace what in practice is an effective exemption. A simplified and competitive system for foreign source dividends would be particularly beneficial for Ireland’s attractiveness as a holding company location.
• A broad simplification of TCA 1997 Schedule 24 would be welcome such that the distinction between different categories of income is eliminated (i.e. interest, royalties, etc.). Relief should also be available in respect of any form of foreign tax suffered, irrespective of the type of the foreign tax.
• The removal of “grandfathering” for Transfer Pricing purposes will have a disproportional effect on smaller groups and we recommend that consideration be given to retaining the current provisions until at least 2020. Alternatives to full formal transfer documentation such as the use of safe harbours and retention of the EU SME exemption should be adopted.
• To the extent that Ireland’s domestic transfer pricing law is amended as a result of this consultation, we would recommend that consideration be given to reducing the compliance burden placed on the SME sector.
• The changes contained in the 2017 OECD Transfer Pricing Guidelines arising from the OECD Base Erosion and Profit Shifting project are far reaching and are not merely clarification of the existing guidelines. Accordingly, it is imperative that any transfer pricing legislative amendments which may be forthcoming consider the overall impact for taxpayers in terms of dealing with such changes and other tax related changes that will be forthcoming in future Finance Bills. Such changes should also be implemented in a co-operative manner in consultation with industry with a defined roadmap of key changes and proposed implementation timeline in place.