Revenue Releases Guidance Notes on Irish Anti Hybrid Rules
On Wednesday 8 July, the Irish Revenue released guidance on the Irish Anti Hybrid Rules which were introduced into law by Finance Act 2019, enacted on 22 December 2019 (For previous comments and an overview of the regime, please click here).
The guidance released provides further insight into the operation of the rules, effective for payments made or arising on or after 1 January 2020. The guidance notes follow a period of engagement with the Irish Revenue, and in particular a feedback statement issued in response to a public consultation on the rules in 2019. For our comments on this feedback statement, please click here.
Background to the rules
The anti-hybrid provisions are aimed at preventing taxpayers from engaging in tax system arbitrage. Such arbitrage effectively identifies differences in the tax systems of countries which can give rise to either double deduction mismatch outcomes (where an expense is deductible for tax purposes twice) or deduction without inclusion mismatch outcomes (where a payment is deductible but the person who receives the payment does not ”include” it with its taxable income).
The guidance makes it clear that the rules apply to all corporate taxpayers, with no de minimis threshold below which the rules do not relate. Five types of hybridity are classified as giving rise to a mismatch outcome, being:
a) A double deduction (Chapter 2 of Part 35C);
b) A permanent establishment deduction without inclusion (Chapter 3 of Part 35C);
c) A financial instrument deduction without inclusion (Chapter 4 of Part 35C);
d) A payment to a hybrid entity deduction without inclusion (Chapter 5 of Part 35C); and
e) A payment by a hybrid entity deduction without inclusion (Chapter 5 of Part 35C).
Key concepts and definitions
Central to an understanding of the anti- hybrid rules is the question of whether a payment has been “included” as defined. The term is specifically defined and essentially refers to an amount of profits or gains arising from the payment that is:
a) taken into account in the taxable income under the laws of the payee territory or
b) that is subject to a controlled foreign company charge or a foreign company
charge the inclusion of a CFC regime).
Importantly, the legislation refer to the inclusion of a “corresponding amount” as opposed to the same or equal amount in taxable income. The guidance in this regard expands on the concept noting that account may need to be taken of variations that may arise due to differences in value ascribed to different territories, for example due to transfer pricing or foreign exchange movements.
In addition to the above, the guidance further expands on what will be considered to be an inclusion in cases where payments are made to “remittance” regimes and as such are only chargeable to tax when they are in fact remitted into the payee territory. The guidance in this regard confirms that “deemed remittances” should be treated as included; in this regard the guidance refers to “provisions similar in effect to section 72 TCA 1997” and thus could include the use of funds held offshore to settle certain expenses. Importantly, the guidance outlines that where an amount is later remitted but tax relief for the payment was previously denied it is open to the Irish taxpayer to make a claim for repayment of tax (where available) within the normal time limits outlined in legislation.
The definition of “included” also refers to amounts that are subject to a controlled foreign company charge or a foreign company charge. In this regard, the guidance clarifies that CFC rules implemented by any other Member State under Article 7 of the EU’s Anti-Tax Avoidance Directive (“ATAD”) should be regarded as meeting the definition of a CFC rule for the purposes of the anti-hybrid rules. Similarly, on the Global Intangible Low Taxed Income (GILTI) regime in US law, the guidance explains that where a company can illustrate that a payment gives rise to an amount that is included in the GILTI calculation for the purposes of the groups US taxable income, that income should be regarded as included for the purposes of the definition. Such an approach is helpful in the context of US headquartered multinational groups with Irish subsidiaries (to the extent that payments can be shown to subject to the GILTI rules).
ii. Worldwide system of taxation - Section 835AB
The guidance provides further clarity on the above legislation dealing with Ireland’s worldwide system of taxation. The provisions in legislation recognise that Ireland’s worldwide system of tax and our lack of tax consolidation rules can interact with other regimes to produce outcomes which are not strictly “hybrid” mismatches envisioned by ATAD but for all intents and purposes meet the conditions set out elsewhere in legislation. In this regard, the guidance gives a number of practical examples including otherwise “disregarded” payments between an Irish company and a foreign branch, or between two foreign branches of an Irish company.
Further guidance on the use of this provision is welcome as it has potentially far reaching applications in particular to US headed corporate groups in which “checked” (i.e. disregarded) entities may be commonplace.
Such rules, while helpful, are nevertheless subject to a principle based test which obliges the company to look at the substance of a transaction to identify whether a mismatch arises within the context of ATAD. It is therefore not sufficient to merely meet the mechanical requirement but for a principle test to be met initially to show that the structure has not resulted in “double non taxation”. In this regard, the guidance outlines outcome number of examples.
Despite this welcome guidance, we continue to encounter real-life situations where, despite the absence of an actual hybrid outcome, one is deemed to exist for Irish tax purposes which could result in a substantial disallowance of genuinely incurred expenses. This highlights the necessity for an early review of intragroup transactions and structures to identify other areas which would benefit from future guidance from Irish Revenue.
iii. Similar provisions
The legislation at various points refers to provisions which are similar to the Irish anti-hybrid rules for the purposes of identifying how a mismatch is to be neutralised and whether this has already been achieved. An understanding of what such “similar provisions” may encompass is therefore important in applying the Irish anti-hybrid rules. The guidance in this regard refers to a non-exhaustive list of provisions that are similar in effect, including:
- Provisions akin to Section 817;
- EU Parent Subsidy Directive;
- German switch over clauses; and
- US dual consolidated loss rules.
It is important to note that the above list is described by the guidance as non- exhaustive; taxpayers will be required to assess whether foreign anti hybrid or other rules are similar to the Irish provisions through a principled approach. In particular, the guidance refers to rules designed to give effect to ATAD or the OECD BEPS Action 2 report recommendations or to otherwise address a mismatch outcome. Some measure of understanding may therefore be expected of taxpayers with regard to foreign jurisdiction anti hybrid rules.
Further Considerations and next steps
The guidance released is a welcome addition to understanding and applying the Irish anti-hybrid legislation, given its potentially wide reaching consequences not only for domestic headquartered groups but also for Irish subsidiaries of foreign parents, particularly those with a US focus. However, the guidance released does not address a number of key provisions including the specific anti-hybrid rules themselves and the mechanics behind the carryforward of previously disallowed deductions for payments. We expect to see further guidance in due course.
At this stage, groups with significant cross border payments either to or from Ireland should be proactive in determining how the anti-hybrid rules affect the obtaining of a deduction or equivalent relief for same.