International corporate tax rule changes

IRELAND - International corporate tax rule changes

September 2019

As signalled in the Irish Government’s Corporation Tax Roadmap, certain legislative changes are expected to be brought in later this year [see Ireland’s Corporate Tax Roadmap and Budget 2020 Tax Strategy Group Papers]. Much of this legislation results from the Irish Government adopting the international consensus achieved in the Base Erosion and Profit Shifting (BEPS) project or the European Union’s Anti-Tax Avoidance Directive (ATAD).

We highlight four developing areas of Irish tax law and guidance: (1) Transfer Pricing, (2) Anti-Hybrids, (3) Exit Taxes, and (4) Controlled Foreign Company Rules.

Transfer Pricing reform

At the conclusion of BEPS, the Irish Government commenced a review of its corporate tax code.  The review concluded in 2017 when the Government was advised on a range of reforms to corporate tax policy, including transfer pricing. In February 2019, the Government initiated a consultation on transfer pricing rules, covering the following five issues:

  1. Adopting the 2017 OECD Transfer Pricing Guidelines

Ireland’s domestic law cites the 2010 OECD Guidelines as the basis for determining the arm’s length price.  In practice, most Irish businesses today set transfer pricing policy based on the more recent 2017 OECD Guidelines.  By adopting the 2017 OECD Guidelines, the Government is reflecting accepted practice in its domestic law.

  1. OECD Master and Local file framework

Ireland has no formal documentation requirement today.  For years commencing 1 January 2020 or later, Ireland will require most businesses to prepare OECD-standard Master and Local files to document compliance with transfer pricing rules.  It remains to be seen whether the legislation will reduce or exempt the documentation burden for businesses of moderate size and scale.

  1. Remove the grandfathering exemption

When transfer pricing rules took effect in 2011 they exempted arrangements entered into prior to 1 July 2010 and remained unchanged. There has been considerable debate as to whether businesses can claim this exemption for ongoing arrangements. It has been long anticipated that the Government will remove the grandfathering exemption.

  1. Potential removal of exemption for SMEs

Ireland adopted common European principles to reduce compliance burdens on Small and Medium-sized Enterprises (SME), in that smaller businesses were exempt from having to comply with onerous transfer pricing rules.  Ireland’s tax regime contains numerous anti-abuse rules that otherwise restrict aggressive tax planning by all corporations and thus cover SMEs.  We expect no change this year to the SME exemption, as the Government broadly considers tax policy covering SMEs.

  1. Extend transfer pricing rules to non-trading and capital transactions

Ireland’s transfer pricing rules only apply to income and expenses related to a “trade”, primarily affecting taxpayers engaged in active business.  The Irish Government faces external pressures to address legal structures using interest-free loans (IFL) granted by Irish companies to non-Irish affiliates. The media has portrayed IFLs as a mechanism used by corporations to artificially reduce worldwide tax liabilities. If public pressure continues, businesses should expect a substantial tax law change in this regard.

Anti-Hybrid legislation

Anti-hybrid tax provisions prevent companies from engaging in tax system arbitrage, which seeks to exploit differences in tax systems of countries. The rules apply to situations where differences in legal characterisation of a financial instrument or entity between two Member States result in a tax benefit, either as a ‘double deduction’ or ‘deduction without inclusion’.  Ireland is required under the EU’s ATAD regime to legislate anti-hybrid provisions with effect from 1 January 2020.

In July 2019, the Irish Government issued a Feedback Statement regarding the implementation of anti-hybrid legislation in the upcoming Finance Bill 2019. This statement follows the Government’s public consultation from late 2018 and allows stakeholders an opportunity to provide further feedback on certain suggested legislation by 6 September 2019.

It is important to note that legislation addressing anti-reverse hybrids is not required under ATAD to be in place until 1 January 2022. Given the complexity of such rules we do not anticipate the Irish government expediting the timeline for anti-reverse hybrids.

Exit Taxes

With effect from 10 October 2018, Ireland’s Exit Tax regime was substantially amended to comply with ATAD. In general, Irish Exit Tax applies to tax unrealised capital gains (i.e. deemed disposals) where companies migrate residence out of Ireland for tax purposes.  Prior to this amendment, it was possible under certain circumstances for a company to migrate without incurring an Irish tax charge. 

The Exit Tax rate is 12.5%, though anti-avoidance provisions exist to ensure that the Capital Gains Tax rate of 33% applies in relevant circumstances, i.e. where the company undertakes a series of transactions to ultimately dispose of an asset and seeks to attract Irish tax at the lower 12.5% rate. 

In July 2019, the Irish Revenue Commissioners (Revenue) issued guidance on the application and interpretation of Ireland’s Exit Tax laws. This guidance is intended to assist affected companies to understand the rules and their implications.

Controlled Foreign Company (CFC) rules

In 2018, Ireland was mandated by ATAD to introduce CFC rules into domestic tax law for periods commencing on or after 1 January 2019. These rules are a form of anti-abuse provisions to restrict the ability of companies to establish structures that artificially divert profits from Irish controlling companies to subsidiaries resident in low tax jurisdictions.

Ireland chose to legislate the second of two CFC options permissible by ATAD. This second CFC option attributes, for tax purposes, to the parent company the undistributed income of a CFC arising from non-genuine arrangements put in place with the essential purpose to obtain a tax advantage.

In July 2019, the Revenue published over 100 pages of much-needed guidance including practical examples of how to apply the new CFC legislation to example fact patterns.

Kevin Doyle

Warren Novis