Release of Feedback Statement on Ireland’s Interest Limitation Rules

On 23 December 2020, the Department of Finance issued “ATAD Implementation Article 4 Interest Limitation Feedback Statement December 2020”, which contains a range of initial proposals regarding Ireland’s adoption of the Interest Limitation Rules under the Anti-Tax Avoidance Directive (“ATAD”). It
is envisaged that the Interest Limitation Rules will be included in Finance
Bill 2021, and likely effective from 1 January 2022. 

ATAD Article 4 requires the introduction of a fixed ratio rule that links a company’s allowable net interest deductions (i.e. deductible interest expenses in excess of taxable interest income) directly to its level of economic activity, based on taxable earnings before deducting net interest expense, depreciation and amortisation (EBITDA). Article 4 requires domestic provisions implemented in Member States to place a limit on deductible interest equal to 30% of EBITDA. The limitation on interest deduction may be subject to certain exemptions and group ratios, the latter of which may allow higher interest deductions to an individual company by reference to the position of the wider group.

The Feedback Statement of 23 December 2020 outlines a range of policy and technical considerations, including proposed definitions and a suggested mechanism for the operation of the Interest Limitation Rule (ILR) in Ireland. The consultation period closed on 8 March 2021, with a further Feedback Statement expected to issue in summer 2021 for further stakeholder input.

Feedback Statement Details

The Feedback Statement contains 32 questions ranging in focus from broad policy considerations to technical and practical considerations associated with the application of the ILR.

The relevant EBITDA for the purposes of applying the 30% restriction is calculated by identifying the relevant profits of the entity in question, and adjusting for an amount referable to deductible interest equivalent and any allowances in respect of capital expenditure. As the quantum of EBITDA is central to the operation of the ILR, and the “relevant profits” form the basis for such a calculation, it is imperative that such profits be well defined in law and are easily identifiable. Such clarity may be forthcoming in the second phase of the consultation.

The Feedback Statement outlines a seven step method for the application of the ILR. In particular, the actual operation of the restriction itself does not take the form of a disallowance for interest relief (whether by way of expenses, a charge on income or value based relief). Instead, the operation of the ILR takes the form of deeming income to be taxed at a rate of 25%. The deeming of income in this manner is intended to achieve the same effect as if the interest deduction or relief had in fact been disallowed, but takes into account the complexities which would arise on such a disallowance due to the differing rate of corporation tax in Ireland (being 25% on passive income and 12.5% for trading and certain dividend

Overall comments

By its nature, the Feedback Statement does not contain the full proposed legislation but is the first step in the process of transposing the ILR required by ATAD into Irish law. Based on the initial proposed approach outlined in the Feedback Statement, we would note the following key points:

• As a general matter, the interest limitation rules need to take account of international best practice on the adoption of the OECD BEPS Action 4 report. However, and as noted in our previous consultation response in 2019, broad reform to the current domestic interest deductibility provisions to align with and facilitate the introduction of these new restrictions is in our view an imperative. Ireland’s existing tax regime in relation to interest deductibility is highly complex, particularly the s.247 TCA 1997 regime. Ireland views that its current interest deductibility rules are equally effective to the ATAD interest limitation rule. Accordingly, in terms of Ireland’s tax and general business competitiveness, and taking into account a comparative analysis of many other EU and OECD countries, layering the ATAD interest limitation rule onto the existing Irish interest deductibility provisions would in our view be a missed opportunity and impact negatively from a competitiveness viewpoint.
• We recommend as an urgent priority the simplification of the interest deductibility rules which could be achieved in a reasonably short timeframe. Providing certainty of approach and timelines on this issue is a critical consideration.
• We would recommend that clarity be provided as early as possible on the policy options, as permitted under the ATAD to permit specific industries sufficient time to consider the ramifications for their businesses; for example, the implications for restricted interest deductibility for non-bank financial institutions. If possible, early announcements should be communicated regarding specific exclusions being adopted e.g. the long-term public infrastructure and grandfathering exclusions.
• In relation to the deductibility of interest generally, we would like to highlight that the purpose of the changes is to limit base erosion through artificial means rather than to necessarily limit the overall deductibility of genuine finance costs. This can be seen through the provisions allowing consideration of the overall net debt or net finance cost of the parent group when deciding what limitation should be placed on an individual entity. Equally, we note the suggestion to exclude banks and other regulated financial institutions from the ambit of the rules but suggest further consideration of the position of subsidiary companies of bank and certain other non-bank financial institutions. We have also highlighted a range of specific considerations that must be considered in order to ensure Ireland’s securitisation regime is not adversely impacted.
• It is important that measures taken in the enacting of these complete rules do not go beyond what is necessary to implement the Directive in that this has the capability to interfere with our competitiveness vis-à-vis other countries. Their enactment should avoid complexity and additional administrative burdens as much as possible. We have highlighted in our response certain proposals in the consultation document which suggest broadening the scope and implementation of the interest limitation rule beyond what is required in the ATAD. In our view, it is critical that such measures and proposals are realigned to what is required by the directive and does not go further.
• The potential use of a Case IV charging mechanism to effectively restrict interest deductions is complex and may give rise to unintended consequences and we would suggest that consideration be given to restricting interest expense rather than the deemed income approach. Indeed, we have also highlighted broader policy considerations in relation to Ireland’s group relief and loss carry forward/utilisation rules, which should be considered more generally in order to evolve and ensure Ireland’s corporate tax regime is competitive taking into account the significant changes which have occurred in recent years following the OECD BEPS process and in adoption of the ATAD.
• Finally, Ireland as an open economy needs to be cognisant of the tax policies of other nations which seek foreign direct investment. In this regard, it is clear that countries such as the UK and Germany which have had EBITDA-related interest restrictions in place for some time, each make provision for regard to be had to the global debt position of relevant corporate groups and not just the position of local subsidiaries. This is recognised in recital 7 of the Directive and this is developed throughout this submission. We would strongly recommend that similar provisions and approach is incorporated into Ireland’s adoption of the interest limitation rules.

We welcome the point made in the Feedback statement that the next consultation in this process will be published mid-2021 “containing draft legislative approaches to the ILR provision as a whole, including all the group and exemption options”. In the interests of ensuring clarity, we would strongly recommend that this consultation period be as early as possible to allow for sufficient time for a considered discussion and stakeholder input prior to Finance Bill 2021.