The Department of Finance’s Tax Strategy Group (TSG) recently issued their strategy papers on the various options for tax policy changes prior to Budget 2020.
The first strategy paper focuses on Corporation Tax. The TSG once again reiterate Ireland’s commitment to the 12.5% rate of corporation tax saying it is ‘notable for its long term stability’.
The strategy paper describes how Ireland has been at the forefront in implementing the OECD Base Erosion and Profit Shifting (BEPS) recommendations, including country-by-country reporting (CbCR); introducing the first OECD-compliant patent box (the Knowledge Development Box); early signature and ratification of the BEPS Multilateral Instrument (MLI); and agreement of the EU Anti-Tax Avoidance Directives (ATAD), the Dispute Resolution Mechanism Directive (DRM) and amendments to the Directive on Administrative Cooperation (DAC).
The strategy paper provides an update on the Corporation Tax Roadmap, most notably the following:
| Commitment | Action to be taken by Ireland |
| Interest Limitation Rule
(BEPS Action 4, ATAD Article 4) |
The TSG confirms that Ireland remains of the view that our national targeted rules for preventing BEPS risks are equally effective to the ATAD interest limitation rule. However, work has commenced to examine options to bring forward the process of transposition from the original planned deadline of end-2023. A timeline for transposition of the ATAD interest limitation ratio is expected imminently. |
| Hybrid Mismatch Rules (BEPS Article 2, ATAD Article 9 & 9a) |
Legislation will be introduced in Finance Bill 2019 to implement anti-hybrid rules and further legislation will be introduced in a subsequent Finance Bill to introduce anti-reverse-hybrid rules.
Work on transposition is ongoing and publication of a feedback statement is imminent. |
| Transfer Pricing Rules (BEPS Actions 8-10 & Action 13, Coffey Recommendation) |
Legislation will be introduced in Finance Bill 2019 to update Ireland’s transfer pricing rules. A public consultation took place earlier this year. Work on transposition is ongoing and it is intended that a feedback statement will be published during the summer. |
|
Mandatory Disclosure Rules (BEPS action 12, DAC6) |
Work on transposition is ongoing and legislation will be included in Finance Bill 2019. |
|
Consideration of a Territorial Regime |
Consideration of moving to a territorial system of taxation has been deferred until there is greater certainty around the international taxation environment. |
Implementation of the ATAD
Following the publication of the BEPS reports in October 2015, agreement was reached at EU level to progress five separate anti-avoidance measures via the ATAD, as follows:
- Interest limitation rule,
- A general anti abuse rule (GAAR),
- Controlled foreign company (CFC) rules,
- Hybrid mismatches and
- Exit taxation.
In Ireland, work on three of the five measures is now complete. New CFC rules and a revised Exit Tax were introduced in Finance Bill 2018 and Ireland’s existing GAAR already meets the required ATAD standard.
Work is continuing in respect of the two remaining measures: interest limitation rule and anti-hybrid/reverse-hybrid rules.
Interest Limitation Rules
ATAD requires Member States to implement an interest limitation ratio, designed to limit the ability of entities to deduct net borrowing costs in a given year to a maximum of 30% of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA).
The general implementation date for the ATAD interest limitation rule was 1 January 2019, but a derogation is available for Member States that have national targeted rules for preventing BEPS risks which are equally effective to the ATAD interest limitation ratio. Such Member States may defer implementation until agreement on a minimum standard for BEPS Action 4 is reached at OECD level, but no later than 1 January 2024.
The Department of Finance are of the view that Ireland’s existing interest rules are at least equally effective to the rules contained in the Directive. However, the European Commission have assessed applications for derogation using a ratio-based approach.
While the Department of Finance remain of the view that the extended deadline of 1 January 2024 should apply, work has commenced to bring forward the transposition process. A timeline for transposition of the ATAD interest limitation ratio is expected to be determined imminently.
Anti-Hybrid and Anti-Reverse Hybrid Rules
The first and most substantial part of anti-hybrid rules is due to be transposed in Finance Bill 2019 with the remaining anti-reverse-hybrid rules due for transposition in 2021. Anti-hybrid rules are intended to counteract tax mismatches where the same expenditure item is deductible in more than one jurisdiction, or where expenditure is deductible, but the corresponding income is not fully taxable.
The TSG confirms that due to the complexity of the legislation required to implement anti-hybrid rules, a Feedback Statement will be published imminently and both the Irish Revenue and Department of Finance officials will engage with stakeholders to address any ambiguities or unintended consequences identified as a result.
Link to the Strategy papers: https://www.gov.ie/en/collection/dc3850-budget-2020-tax-strategy-group-papers/
For further information, please contact any member of the William Fry Tax Advisors team.
