Corporation tax – where we’re going, we need roads

In this Business Post column, Tom Maguire discusses the corporate tax roadmap

It’s really hard to believe that the last corporation tax roadmap was only published in 2018. I say that because so much has changed since then. More importantly, the hit rate on the commitments made in that roadmap is pretty good and that then paints a vivid picture for the update to the roadmap which was recently published.

There were eleven commitments in the 2018 roadmap. Three remain outstanding. One of which was the interest restriction I mentioned in my last column. We were of the view at the time that it should have a 2024 kick off date so we were rightly leaving it to the right time. Turns out the EU disagreed and we’ll now see that next year. There was also supposed to be a consultation on a move to territorial regime, I’ll get to that in a second, but that was put on hold because of OECD proposals. The final leftover commitment was the drafting of the International Mutual Assistance Bill and that is ongoing.

To put the old roadmap into some perspective, since 2018 we’ve seen a controlled foreign companies regime, a metamorphosed exit tax regime, a reworking of our transfer pricing legislation and much more. These are not small changes and that’s before we get near the complexity that is hybrid legislation and the cross border disclosure regime. I mention all this because the new roadmap, which is technically an update to the old roadmap, contains a dozen commitments. If past performance is anything to go by then we can expect a high hit rate there also. That doesn’t mean that all that we know will be at an end because there will be much consultation before changes are brought about. I’ve always said it’s good to talk and it looks like we’ll be doing a lot of that this year.

There will be two consultations on debt-financing a company’s activities this year and we’re in the middle of the first one. There will be consultations on the sci-fi sounding reverse hybrids legislation because that has to be good to go by end of the year. Essentially that refers to a foreign-owned entity in the EU which is treated as non-transparent under the laws of a foreign country but as see-through in the Member State where it’s established or incorporated. This is based on obligatory EU law which requires that such reverse hybrid be taxed on its income to the extent that it’s not otherwise taxed in that EU Member State or in any other jurisdiction.

A public consultation was due to take place in 2019 on moving from our current worldwide corporate tax system to a territorial corporate tax system but it was put on ice given the OECD’s work. That work has, as the update explains, “the potential to fundamentally alter the international tax framework”. A consultation on this issue will be launched in 2021. Any subsequent policy actions will need to take account of the outcome of the ongoing international discussions. This dates back to Seamus Coffey’s report on the Irish Corporation tax system.

The report explained at the time that the move to a territorial base system was to enhance the competiveness of domestic regimes. It noted that the transmission channel for improving competitiveness included: (i) improving the position of domestic firms vis-à-vis the taxation of outbound foreign direct investment, (ii) improving the attractiveness of the corporate income tax code vis-à-vis the location of holding companies and, (iii) reducing what may be a non-trivial compliance burden on domestic outbound investors. Given the combination of pooling and carry-forward provisions for foreign dividends and branch profits and a low tax rate ensures that domestic firms do not generally face an Irish tax charge on foreign income, the second and third channels are the most germane in the Irish case.

The way we deal with foreign income at the minute is by generally taxing it and giving credit for foreign tax suffered so as to ensure taxing the same income twice doesn’t occur. You can see the point but as was noted in the Coffey report an Irish tax charge may not arise because of a range of legislative tax measures available and they are all contained in “Schedule 24” to the taxes acts. I generally don’t go all legalese in these columns but I dare you to mention that schedule to any tax adviser and just watch their reaction which will resemble the audience reaction to an “I’m a celebrity” Bushtucker eating trial. It’s extremely complex because it has been added to bit by bit over the years. An exemption system would reduce such complexity because when it comes to the question of investment simplicity eats complexity for lunch and dinner. But such a move requires consultation which the roadmap’s update says is coming because while such a move sounds simple in theory the devil will be in the detail.

There will be consultations on defensive measures that may be brought about in respect of countries that are on the EU list of non-cooperative jurisdictions and in connection with outbound payments. We already started that ball rolling on that one in the previous Finance Act by upping the defence measures in our Controlled Foreign Company regimes for such jurisdictions.

One important point is brought about as part of the discussion on EU law. The update explains that “Ireland has noted a desire, in certain instances, to agree tax files using qualified majority voting. Ireland, like many Member States, has grave concerns about any proposals which may seek to undermine the requirement for unanimity on tax issues. In this context, it is important to highlight that unanimity has not been an obstacle to very significant tax reform at European level, as demonstrated by the remarkable achievements under the last Commission and the unprecedented number of Directives which have been agreed in recent years”. In the past EU tax changes have required unanimity on decision making, or put another way, countries could not make rules on behalf or other countries. The unanimous methodology needs to stay that way.

Overall, there will be much to talk about in how we shape our corporation tax regime into the future and it will be good to talk. Such conversations will seek to ensure that Ireland remains competitive from a tax perspective. Where we’re going we need roads…and maps so buckle up mes amis.

Please note this article first featured in the Business Post on 31 January 2021 and was re-published kindly with their permission on our website.

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