The EU Commission requires Finance bill changes on debt-financing which you shouldn’t ignore

Is your company a standalone entity, part of an interest group or a single worldwide group? Does its (or its corporate group’s) net borrowing costs exceed €3 million? These are new-fangled terms and questions that have to be answered (based on new law coming our way) to see whether net borrowing costs are tax deductible. This is on top of all the usual Ts and Cs that have to be adhered to in order to secure such a tax deduction for those costs in the first place. Depending on your answers then the effective cost of financing may increase for accounting periods beginning on or after New Year’s Day. A denial of a deduction can be carried forward to future years but that’s only of use if it can reduce taxable profits in those years.

All of this comes from changes brought about in this year’s Finance Bill which I’ve previously mentioned in these pages. However, we’ve now seen that devil in all twenty something pages of detail in the Finance Bill which is currently winding its way through the various stages at the Oireachtas. Minister Donohoe gave a brief overview of the matter at the Bill’s Committee stage. He referred to it being of a “highly technical nature” introducing “highly complex new requirements to the corporation tax code”. To paraphrase a Marvel dictum; with great complexity comes great responsibility. Why? Because cash is the lifeblood of any business and any law change must be carefully reviewed while complying with the requirements of EU law. As a result, the proposed legislation contains certain exemptions from its application.

Minister Donohoe summed up its application succinctly. It’s required by the EU’s anti-tax avoidance directive (ATAD), and following the Bill’s enactment, Ireland will have completed its transposition into law. He explained that it’s intended to limit base erosion through the use of excessive interest deductions. The Department held an initial public consultation on these rules in November 2018. This was followed by two feedback statements which serves to demonstrate the significant level of work done by the officials concerned in arriving at the twenty something pages of highly detailed rules.

The Minister continued that Ireland has pre-existing rules “to prevent excessive interest deductions that operate in a different manner from the ATAD rule. The current Irish approach can best be summarised as one which limits interest deductions to be available only in specific scenarios largely based on the purpose of the borrowing. This is combined with targeted anti-avoidance rules which have evolved over time to combat abusive arrangements. The new ATAD rule will impose a new additional limit which links a taxpayer's allowable net interest deductions directly to its earnings”.

The provision in this year’s Finance Bill limits the maximum net borrowing cost tax deduction to 30% of earnings before tax and before deductions for net interest expense, depreciation and amortisation (EBITDA) subject to adjustments. When the relevant threshold is breached, interest deductibility is deferred until subsequent accounting periods with sufficient interest capacity to allow a deduction. Critically, “interest” is just the term used here for a wider expense category which includes foreign exchange gains and losses on interest, amounts incurred directly in connection with raising finance including guarantee fees, arrangement fees and commitment fees. In addition, it is net interest expenses of companies and corporate groups (in a nutshell, interest expense reduced by interest income) that is restricted so if more interest comes in than goes out then the restriction won’t apply.

Minister Donohoe explained that the interest limitation rules apply to all corporation taxpayers but with certain reliefs as provided for in ATAD where the risk of base erosion and profit sharing (BEPS) is thought to be minimal. There is a de minimis exemption for companies (or groups) with interest of not more than €3 million in a year. Stand-alone companies (companies with no associates, group companies or certain establishments outside Ireland), are outside the scope of the rule. Interest on borrowings in respect of long-term public infrastructure projects are outside the scope. The Minister explained that it’s likely that public private partnerships would be exempt from this but would have to be evaluated on a case-by-case basis depending on the funding arrangement for the public private partnership in question. He noted that interest on debt, the terms of which were agreed before 17 June 2016, are also outside the scope.

He continued that a group of Irish companies may, where certain conditions are met, be treated as a single taxpayer for the purposes of the restriction. The rules can also take into account the debt provision of a multinational group when assessing whether interest deductions are being taken. Finally, disallowed interest may be carried forward to succeeding accounting periods.

That’s a lot and basically sums up over twenty pages of legislation. However, the point is when you’re in, then the restriction applies and you may see interest deductions deferred until future accounting periods. But our laws are already complex. Readers will recall, as did the Minister, that the ATAD says that interest deductibility rules that were equally effective at preventing BEPS risks could continue up to 1 January 2024. His view was that our current interest deductibility rules are at least as effective as the interest limitation rule set out in Article 4 of ATAD in terms of preventing BEPS and that EU infringement proceedings were paused pending the transposition. Our rules just got more complex as a result of this year’s Finance Bill.

Bottom line, if you think you’re within these rules then it’s necessary that you model their impact and take stock on your situation. Cash is the lifeblood of business and anything that makes that lifeblood more expensive in any given year needs to be monitored and the necessary action taken. Let’s be clear this may be a brace for impact moment depending on your company’s or corporate group’s circumstances.

Please note this article first featured in the Business Post on 28 November 2021 and was re-published kindly with their permission on our website.