IRELAND - Finance Act 2018 and Ireland's international tax strategy
Finance Act 2018 (FA18) implemented some of the measures included in the EU Anti-Tax Avoidance Directive (ATAD). The ATAD was also reflected in Ireland’s Corporation Tax Roadmap (The Roadmap), which was issued on 5 September 2018 by the Department of Finance arising out of the consultation process. This followed the publication of the Review of Ireland’s Corporation Tax Code, which was carried out by Mr Seamus Coffey (The Coffey Report). Please refer to World Wide Tax News issue 46 for further details on the Coffey Report.
Below is an overview of a number of these matters which are relevant to international business.
Ireland’s 12.5% corporate tax rate unaffected
The Irish Minister for Finance reaffirmed Ireland’s commitment to the 12.5% corporation tax rate.
Ireland brought the Exit Tax under Article 5 of the ATAD into effect as of 10 October 2019. The Exit Tax applies where assets are transferred, or where a company migrates from Ireland, resulting in assets no longer being within the scope of Irish tax. Unrealised gains will be taxed at a rate of 12.5%, which is equivalent to the Irish corporation tax rate on trading income.
Controlled Foreign Company (CFC) Rules
CFC rules will apply in Ireland for accounting periods commencing on or after 1 January 2019. Of the two implementation options allowed under Articles 7 & 8 of the ATAD, Ireland has chosen to adopt Option B, i.e. the attribution to the parent company of undistributed income of a CFC arising from non-genuine arrangements put in place to obtain a tax advantage.
Future changes to Ireland’s corporate tax regime
The Roadmap set out further measures that will come into effect in Ireland that were not reflected in FA18. These future changes to Ireland’s corporate tax regime are set out below.
Interest Limitation Rule
Under Article 4 of the ATAD, the implementation of the Interest Limitation Rule may be deferred until 1 January 2024 by a Member State where it has national targeted rules which are equally effective. The Roadmap sets out the view that Ireland’s existing interest limitation rules are at least equally effective to the rules contained within the ATAD. However, Ireland is currently engaging with the EU Commission on this issue.
The Interest Limitation Rule operates by limiting the allowable tax deduction for ‘exceeding borrowing costs’ to 30% of EBITDA. This issue was part of a public consultation process that ended on 18 January 2019. Please see BDO Ireland’s responses on behalf of our clients to the questions raised as part of that process.
General Anti-Abuse Rule (GAAR)
The Roadmap sets out the view that Ireland already has a robust GAAR and that no amendment is needed to its domestic legislation in respect of the measures contained in Article 6 of the ATAD.
Hybrid Mismatch Rules
These rules apply to situations where the differences in the legal characterisation of a financial instrument or entity between two Member States result in a ‘double deduction’ or ‘deduction without inclusion’. The implementation deadline for these rules is 1 January 2020. Given the complexity involved in implementing the Hybrid Mismatch Rules under Article 9 & 9A of the ATAD, this issue was part of a public consultation process that ended on 18 January 2019. Please see BDO Ireland’s responses on behalf of our clients to the questions raised as part of that process.
Transfer pricing (TP)
The Roadmap sets out Ireland’s commitment to reviewing and updating its TP rules to bring them in line with International best practice. A public consultation is due to commence in Q1 2019 and any changes are likely to take effect from 1 January 2020. It is expected that these changes will reflect the 2017 OECD guidelines. Other matters being considered include the application or otherwise of TP legislation to arrangements that were agreed before 1 July 2010, the application or otherwise of TP rules to Small and Medium-Sized Enterprises and the impact of extending TP rules to non-trading income and capital transactions.
The Roadmap refers to the recommendation in the Coffey Report that Ireland consider moving to a territorial basis of taxation. A public consultation on this issue is due to commence in Q1 2019.
Other international issues
The Roadmap sets out a number of other international measures that Ireland has committed to implementing in the coming years. These include the OECD BEPS Multilateral Instrument, the DAC6 Directive regarding mandatory disclosure, the Dispute Resolution Mechanism Directive, the International Mutual Assistance Bill and the EU list of non-cooperative tax jurisdictions.