Tom Maguire looks at public consultations and the Corporation Tax roadmap in his Business Post column

More consultations but we can see that the changes are having the required effect

Minister Donohoe ended the second stage of this year’s finance bill discussions noting that the bill “…is within a context that is very different from the one introduced a year ago. While we are correct to continue to have a sense of anxiety and a focus on the current level of Covid and how we can reduce it further, this is also a health context that is fundamentally different from a year ago due to a vaccination programme that was implemented exceptionally by our public health professionals… While we still stand in an uncertain place, the economy is nonetheless in a very different place from where it was a year ago. …We introduced economic supports a year ago, knowing that they were going to be tested. A year later, we can say that they have worked. …”. You can see his point.

But the tax work goes on. We’ve seen developments in connection with a move to an effective 15% rate and the technical discussions on that will go on until the necessary EU directive and the required domestic law is put in place. About a week ago, the Department of Finance launched its public consultation on outbound payments of interest, royalties and dividends. This continues until 20th December and the key issues behind that surround two commitments contained in January’s Update to Ireland's Corporation Tax Roadmap. They were (1) to consider additional defensive measures in respect of countries on the EU list of non-cooperative jurisdictions and (2) to consider broader actions that may be needed in respect of outbound payments.

The background to this consultation comes from the EU Council’s Implementing Decision on the approval of the assessment of the recovery and resilience plan for Ireland. In order to avail of funding from the Recovery and Resilience Facility each Member State must prepare a National Recovery and Resilience Plan and one of its measures was to bring about “preventative measures to limit opportunities for aggressive tax planning and in particular double non-taxation by means of outbound payments”. This document suggested “…a public consultation on the possibility of introducing measures on outbound payments; and… the entry into force of legislation to prevent double non-taxation applying to outbound payments towards jurisdictions on the EU list of non-cooperative jurisdictions, no-tax, and zero-tax jurisdictions.”

And so here we are in consultation mode considering who may pay the tax on these cross border payments, the person making the payment by denying a deduction in the payor’s hands and thereby increasing its tax bill, or the foreign recipient by reducing the amount received through a withholding tax.

The consultation makes reference to Seamus Coffey’s research, entitled ‘The changing nature of outbound royalties from Ireland and their impact on the taxation of the profits of US multinationals’. It points out that in 2019, the outbound royalties from Ireland were €84.3 billion with 45% of those to offshore financial centres. By 2020, the quantum of outbound royalties from Ireland was similar at €83.6 billion but the destination had changed from around 10% going directly to the United States in 2019, to 60% in 2020. Further, a corresponding decrease was seen for payments to other EU Member States, and to offshore financial centres. The analysis concludes that this trend of payments going directly to the United States can be expected to continue in coming years. The consultation document notes that the “…research demonstrates that recent reforms of corporation tax rules, in Ireland, the United States and internationally, are having the desired effect and outbound payments are increasingly going directly to the US where they are taxed”. No double non-taxation.

The consultation will continue for over a month but it’s timely to look at what has been done thus far in dealing with this whole issue. As the consultation notes the above commitments build on the recently introduced enhancements to Controlled Foreign Company (CFC) rules applying to corporate taxpayers with a subsidiary in a jurisdiction included on the EU list of non-cooperative jurisdictions for tax matters. The CFC rules allow certain exemptions, but they won’t apply for CFCs in the EU’s list of non-cooperative jurisdictions and that’s contained in the Finance Bill. In short, a CFC rule is based on what I call the “reach out and pull effect”. In short where an Irish company has a subsidiary in a foreign jurisdiction, and where certain conditions are met, then the Irish Exchequer can “reach out” to that company and “pull” those profits back to Ireland and subject them to tax here.

But that’s not all. The Corporate tax roadmap was updated in January of this year and it outlined twelve commitments for further action. A quick scan of those reveal some significant changes have been made as part of this year’s finance bill to include the CFC measure I mentioned earlier, the bringing about of interest limitation rules, completing the sci-fi sounding hybrids legislation and adopting the Authorised OECD approach on transfer pricing (while amending or own domestic exemption). These changes sound technical, and they are, but where they apply, the impact on the respective taxpayers can be significant.

One of the commitments mentioned in the updated roadmap was that the government would “Proactively respond to the outcomes of international reform efforts. As the future direction of the global tax framework becomes clearer, the Department will continue to take a proactive, consultative approach in ensuring Ireland’s corporation tax system is well placed for the changing environment.” Given what we’ve seen regarding the effective 15% rate, the removal of “at least 15%” from the agreement and being able to maintain a 12.5% rate for companies which do not breach the €750 million threshold, I think we can say we’ve proactively responded and now we wait for the detail.

I mention all the above because it’s clear that tax has moved so quickly and so far from when that roadmap was put together. By the time our President signs the current Finance Bill into law we will have enacted all of the Anti-Tax Avoidance Directive into our legislation in a very short space of time. And we can see from the Coffey review, a lot has been done, but more coming our way.

Please note this article first featured in the Business Post on 14 November 2021 and was re-published kindly with their permission on our website.

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