There’s a lot heading our way on the tax agenda

Tom Maguire discusses the upcoming tax agenda in his Business Post article

There’s a busy few months ahead in terms of tax policy which will determine how we live with tax into the future. Much has been written recently on the US tax proposals and the OECD Inclusive Framework’s recent agreement on tax and the 15% rate and all that. There’s a lot to deal with there. This is the subject of a public consultation on that stuff which was announced earlier this week where everybody can make their views known on the subject. That one is due to conclude on 10 September next.

You’d really think all that was enough for any policymaker’s plate. However, the Department of Finance had already issued two public consultations relating to how a company finances its activities and the sci-fi sounding “reverse hybrids” regime. Both have official closing dates in August being a month earlier than the OECD one. In addition, there’s another Covid Act bringing about extensions and further reliefs to deal with the economic effects of the virus.

The two “August” public consultations I mentioned earlier deal with the last bits of the EU Anti-Tax Avoidance Directive (ATAD) that we have to put into our law. The first consultation deals with how much interest on borrowings a company can deduct when adding up the profits it ends up paying tax on. The directive requires EU Member States to bring about a fixed ratio rule that connects a company’s activity with its net interest deductions (the amount of deductible interest expenses over and above taxable interest income; put another way, interest out less interest in). In numbers terms, it seeks to limit the maximum interest deduction to be taken in computing taxable profits to 30% of earnings before tax and before deductions for net interest expense, depreciation and amortisation (EBITDA).

If all of that sounds familiar, then you’ll know that this is a follow-up to one we saw earlier this year on the same issue. The earlier one looked at the operation of the Interest Limitation Rule (ILR) on a company basis. The latest one looks to respond to certain observations of stakeholders from the last one and outlines proposed draft legislative approaches to the ILR provision as a whole including the various exclusion options for corporate groups. The consultation explains that “the views of stakeholders are important in ensuring that Ireland’s ILR will, when introduced, be clearly understood and operable in practice, while also meeting the standards required under ATAD”. In addition, the Department of Finance hosted an online consultation discussion on the ILR Feedback Statement during this week to chat through what was intended by the draft legislation in the Feedback Statement. In short, it’s good to talk.

But why has there been so much talking, rightly in my view, about this new-fangled ILR. When this law kicks in it may, depending on how the numbers crunch, have significant effect on the amount of financing costs that a corporate group will be able to take into account in computing taxable profits. In short, it could increase a group’s cost of borrowing because previous levels of available tax relief might not be there. My accounting lecturer in college had a mantra “cash is the lifeblood of business”. When you start restricting blood supply then the Hippocratic Oath of “first do no harm” comes to mind. That’s why it’s good to talk and why all these consultations are necessary to ensure that the appropriate exclusions and reliefs available apply and that we can adhere to the application of EU law.

The second consultation deals with the “reverse hybrid” issue. There was a previous public consultation on hybrids but now we have to deal with reverse hybrids. The hybrids legislation was enacted in 2020 and that, as the consultation document itself explains, seeks “to neutralise tax advantages, or mismatch outcomes, that arise due to arrangements that exploit differences in the tax treatment of an instrument or entity arising from the way in which that instrument or entity is characterised under the tax laws of two or more territories”. In other words, one country could look at an entity one way e.g. as through it was a partnership and another country looks at the same entity another way e.g. as though it was company. Both countries would then treat the entity differently for tax purposes. Put another way, it’s a “you say potayto I say potahto” application of law. The rules outlined in the public consultation document look at reverse hybrid mismatches and set out possible approaches to some of the technical aspects of the ATAD rule which must be implemented by 1 January 2022.

In addition, the Finance (Covid19 and miscellaneous provisions) Act 2021 was signed into law by the President this week. It seeks to extend the Employment Wage Subsidy Scheme (EWSS), the Covid Restrictions Support Scheme (CRSS) as well as the 9% rate of VAT on supplies of restaurant and catering services.

In addition, it proposes a new Business Resumption Support Scheme (BRSS). That’s open to self-employed individuals and companies who carry on a trade or trading activities and have experienced a significant reduction in turnover as a result of Covid19. To qualify under the scheme, a business must be able to demonstrate that the turnover derived by the business during the defined specified period of 1 September 2020 to 31 August 2021 will be no more than 25% of the derived turnover when compared to a defined reference period (which is dependent on the date that the business commenced its relevant business activity). Qualifying taxpayers will be able to make a claim for an amount equal to three times the amount as derived by 10% of their average weekly turnover for the reference period up to €20,000 and 5% thereafter, subject to a maximum payment amount of €15,000. Payments made under the scheme will be treated as an advance credit for trading expenses.

So as you can see there’s a whole lot going on in tax, so buckle up mes amis for a busy few months! The results of these consultations will affect how we will live with Corporation Tax and more into the future.

Please note this article first featured in the Business Post on Sunday 25 July 2021 and was re-published kindly with their permission on our website.

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