The Tax Strategy Group says we should wait before making financing more expensive has been saved
The Tax Strategy Group says we should wait before making financing more expensive
The Tax Strategy Group (TSG) is a government think tank chaired by the Department of Finance. It’s Budget 2021 papers were published on the Department of Finance’s website since my last column. The website explains that the group “is not a decision making body and the papers produced are simply a list of options and issues to be considered in the Budgetary process”.
There were twelve papers in total covering various tax heads, so way too much to cover here, so we’ll just focus on one issue here and that’s cash. I’ve written previously in these pages about how a company finances its activities and how that may need to change in the future. The EU’s Anti-Tax Avoidance Directive (ATAD) requires Member States to implement an interest limitation rule, designed to limit companies’ ability to deduct net borrowing costs in a given year to a maximum of 30% of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA). There’s a whole heap of Ts and Cs but that’s the nutshell version.
Right now, our law on a company getting a tax deduction for interest on its borrowings is excruciatingly complex given the level of legal hoops companies have to jump through. For example, one form of interest deduction started life back in 1974 at just over three quarters of a page; now it weighs in at almost ten pages. That’s due to all the additional hoops added since then that taxpayers have to jump through.
The EU’s limitation rule was supposed to be implemented by 31 December 2018 to take effect from 1 January 2019. We didn’t do that because the ATAD allows countries to put this off until whichever comes first: the start of 2024 or the point when the OECD made these rules a “minimum standard”. This legal delay applied to countries that had “targeted” rules for preventing Base Erosion and Profit Shifting (BEPS), which were “equally effective to the interest limitation rule” set out in the Directive. The OECD hasn’t yet shifted position so we were looking at a 2024 kick off arguing our rules were “equally effective” to those in the directive.
The European Commission disagreed with that view and commenced infringement proceedings against Ireland in 2019 issuing a reasoned opinion in November 2019. According to the TSG, this is one of 19 infringement proceedings that the Commission has commenced against certain Member States relating to various aspects of ATAD transposition.
Bottom line the EU’s new-fangled approach would mean that a company’s cost of financing would increase at exactly the wrong time. As the TSG paper itself says “the effects of the COVID-19 pandemic and the expected end of the Brexit transition period at end-December 2020 must also be considered in progressing the transposition.” In other words, that’s a perfect storm.
The TSG’s paper explains that “while we remain of the view that the extended deadline of 1 January 2024 should apply, work has commenced to bring forward the transposition process”. The question then is how far forward are we talking about here, we’re now in 2020, we want 2024, so let’s split the difference and say to start this thing in 2022; that’s what the TSG paper is suggesting. Don’t get me wrong 2024 would be better but “you can’t always get what you want”.
It’s all grand saying that it will cost companies money but unfortunately that’s not enough of an argument. That’s where the TSG comes in. It says that the transposition of the ATAD Interest Limitation provision into our law by Finance Bill 2020 “would appear to pose significant risks”. When you see “risk” in a tax document then that’s the moment where you ask, risk for who? The answer here is all of us. The TSG explain that is “a significant risk of unintended consequences” from technical decisions taken in the drafting process. It continues that this is due to the significant limits on the ability of businesses and representative bodies to engage in consultation processes having regard to the pressing wider economic challenges.
When you are going to change something that has been in the law for decades or more, in this case a deduction for interest on borrowings, then tweaking it over time is one thing but metamorphosing it in one go, that’s something else. This is especially the case when that change will more than likely affect, as the TSG rightly recognises, “the vast majority of businesses”. In such moments, as well as having your Weetabix that morning, it’s good to talk.
The TSG also recognises that there would also be Exchequer risks. These would arise from any amendments to the pre-existing law during the transposition process but also from the wider consequences to businesses if an unduly or unintentionally restrictive limitation provision were to take effect in an already challenging trading environment. You can see their point.
Therefore, the TSG says “Taking these factors into account, it is proposed that it may be appropriate to continue to make progress on transposition in 2020, with a view to producing a detailed Feedback Statement for consultation with stakeholders by end-2020. This would allow for an iterative consultation process to take place in the first half of 2021, with the final legislation to be introduced in Finance Bill 2021, to take effect from 1 January 2022”.
In short let’s talk. We’ve seen such “feedback statements” in the past when substantial tax law change has been discussed. They work. It does mean that there can be some meeting of minds between taxpayers, tax professionals and government in relation to a taxing provision. Of course, there will always be disagreements between us all, it’s just that the number of disagreements may be reduced as a result of such discussion.
In the case of something so fundamental to a company’s operation i.e. “cash” then this is one of those times where the more we can talk the more we can bring in something appropriate. You have to remember here that the TSG refers to the ATAD’s nine initial policy choices in connection with this interest rule. Choosing from those policy alternatives should heed Bruce Lee’s dictum to adapt what is useful (in my view all possible exceptions to its application), reject what is useless, and add what is specifically our own. On Lee’s last point, I started by saying that our interest deduction rules are excruciatingly complex, so maybe we might see them simplified in the process.
Please note this article first featured in the Business Post on 27 September 2020 and was re-published kindly with their permission on our website