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Tax Strategy Papers – A glimpse of the future for Irish Corporation Tax

24 October 2018

The Department of Finance has published its Budget 2019 Tax Strategy Group ("TSG") (‘the Group’) Papers. The Group is chaired by the Department of Finance. It members include senior officials and political advisers from a number of Civil Service Departments and Offices. It does not have decision making powers and so its papers outline a list of options and issues to be considered in the Budgetary process. In line with the Government’s commitment to Budgetary reform, the TSG papers are now published in advance of the Budget to facilitate informed discussion.

From a corporate tax perspective, the TSG papers have been eagerly awaited as companies prepare for the legislative change required as a result of the EU Anti-Tax Avoidance Directive (‘ATAD’). The process of implementing ATAD will start in Autumn with the release of Finance Bill 2018 as some measures are due to become effective on 1 January 2019. In particular, the implementation of a controlled foreign company (‘CFC’) regime in Ireland is significant for multi-national companies. The paper on Corporation Tax in the Group papers contains a number of interesting points from an international tax perspective.

CFC rules

The ATAD provides Member States with options as to how CFC rules should be implemented. The Corporation Tax paper signals Ireland's intention to elect for option B. Under this option, undistributed income arising from non-genuine arrangements which are put in place for the essential purpose of obtaining a tax advantage will be taxed. Most multi-nationals will welcome this choice as it's also the option endorsed by the OECD. In a welcome development, the Group asks its members to consider whether Ireland should adopt elements of optionality within ATAD, such as the small profits and low-profit margin exemptions, as well as the use of white, grey or black lists of third countries and provision of a ‘grace period’ in respect of newly acquired CFCs which would allow multi-national companies time to ensure their structures are compliant. However, the Group has also asked its members to consider the implementation of rules which would go beyond the minimum standard imposed by ATAD and would target certain ‘cash box’ subsidiaries. We will not have any further clarity until the legislation is published in the Finance Bill.

Anti-hybrid rules

As expected, the Department of Finance plan to announce a consultation paper on the ‘linked issues’ of hybrids and interest deductibility during Q3 of 2018. The period of consultation is likely to be 12 weeks and is welcomed given the complexity of anti-hybrid legislation.

Exit tax

Irish tax legislation currently provides for an exit tax on migrating companies subject to a generous exemption. However, ATAD requires a much broader regime that will impose a tax charge on all unrealised gains of migrating companies and assets transferred abroad, including transfers between a head office and its permanent establishment, with an effective date no later than 1 January 2020. ATAD does not provide for an exemption and with our high rate of capital gains tax (33%), this is unwelcome. However, on a positive note, the Group acknowledges that, as a result of BEPS measures, many multi-national companies are moving towards an alignment of assets and functions in countries where they already have a significant presence. Those who responded to the Coffey consultation recommended that Ireland should the rate of tax applicable to gains on the disposal of trading to the trading rate of 12.5% and should signal its intention on this issue as soon as possible.

Interest limitation rules

ATAD provides for an implementation date of 1 January 2019 for interest limitation rules. However, there is a derogation for Member States that have existing rules which are equally effective to the ATAD interest limitation ratio such that those member states can defer implementation until such time agreement is reached at OECD level for a minimum standard on interest deductibility (Action 4) but no later than 1 January 2024. Ireland has notified the EU Commission of its intention to defer the implementation of the measures on the grounds that our interest deductibility rules are ‘equally effective’.

Interestingly, the Group has highlighted that the European Commission seem to be taking a very literal interpretation of what is meant by ‘equally effective’, such that only a ratio-based approach is acceptable. This seems to be at odds with the wording in ATAD, and although Ireland remains of the view that derogation is sustainable based on our current rules, they highlight that it is ‘unclear as yet if agreement will be secured in relation to the derogation’. The Group also suggest that work on agreeing a minimum standard for Action 4 may be accelerated, and for this reason a detailed technical consultation on the introduction of the ATAD interest limitation ratio rule will also be included in the consultation paper to be launched in Q3.

Multilateral instrument (MLI)

The paper signals Ireland's intent to complete the ratification process before the end of the year, and note that the impact of the MLI on Ireland's tax treaty network will then start to take effect from the beginning of 2020. This is likely to be true in most cases. However, companies should monitor the process carefully as the implementation date for companies will actually depend on the dates of ratification of the MLI by other countries and the company's accounting year end date.

Common Consolidated Corporate Tax Base (C(C)CTB)

The paper provides an update on the Department of Finance's work on these proposals. As expected, the paper notes that the proposals are unlikely to be good for Ireland. However, Ireland is engaging constructively with the process while noting that unanimity will be required before any proposal is adopted.

Digital tax

The Group reiterates Ireland's view that the Commission's uncoordinated proposals on digital tax are not an appropriate solution. The paper states that Ireland will be working with its fellow Member States and the OECD to reach a fair and appropriate solution which ‘ensures that tax is paid where real value creating activities take place’ and that has international acceptance.

The paper also deals with other issues. Of particular interest to both indigenous and multi-national companies will be the discussion on Ireland's loss relief rules, which although the primary focus is on banks, it does reference a wider proposal that could limit the benefit of losses for all companies. The UK introduced limitations on losses a few years ago.

Summary

Whilst the topics covered in the report are not new, it is nonetheless a reminder of the significant corporate tax changes which will be implemented in Ireland in the coming years and which will certainly give rise to increased complexity for companies going forward.