Budget/Finance Bill contain important changes for business taxation
On 21 October 2021, Ireland’s Department of Finance released the first draft of Finance Bill 2021, which sets out the proposed legislative changes required to implement the Budget 2022 announcements of 12 October. In addition to the measures announced in the Budget, the Finance Bill proposes some anti-avoidance measures, technical changes to the tax code and transposes a number of EU directives into domestic law.
Notably, on Budget Day, the Finance Minister spoke about the historic decision that the Irish government had made to join the global political agreement on corporation tax, which means that Ireland will apply a new minimum effective rate of 15% on certain corporate taxpayers. This decision is a significant shift from Ireland’s long re-affirmed commitment to the 12.5% rate. However, application will be limited to large entities, with the 12.5% rate retained and continuing to apply to corporates with revenue below EUR 750 million. The Minister re-emphasized that even with these changes, Ireland remains a competitive and attractive location for investment.
This article looks at the Budget and Finance Bill measures that affect businesses.
Measures announced on Budget day
The key business measures included in the Finance Bill but that were announced on Budget Day, are as follows:
- Interest expense deduction limitation rules: Ireland’s transposition of the EU Anti-Tax Avoidance Directives (ATAD1 and ATAD2) into domestic law will be completed, including the introduction of a general limitation on the deduction of interest expense. Deductible interest expense will be limited to 30% of EBITDA for companies within scope, for accounting periods commencing on or after 1 January 2022. Disallowed interest may be carried forward and deducted in future years if the company has sufficient interest capacity. In line with the provisions of ATAD 1, a de minimis rule will apply where net interest deductions are below EUR 3 million and exemptions will apply in certain cases. Companies may operate the interest expense deduction restriction on a single entity or local group basis, and certain group reliefs may apply where the Irish taxpayer is part of a consolidated worldwide group for accounting purposes.
The introduction of these rules will have a significant impact on part of the financial services industry. There has been extensive consultation with the Department of Finance, with the aim of ensuring that the ATAD requirements are met, while continuing to maintain Ireland’s competitiveness generally and in this industry in particular.
- Reverse hybrid entities: Rules that address reverse hybrid entity mismatches—as included in ATAD2—will be introduced ahead of the 1 January 2022 deadline. Reverse hybrid mismatches involve entities that are treated as transparent under the tax laws of the jurisdiction in which they are established but treated as taxable entities in the jurisdictions of some, or all, of their investors. The anti-hybrid rules are broadly aimed at preventing taxpayers from engaging in tax system arbitrage and they seek to neutralise tax advantages, or mismatch outcomes, that arise due to arrangements that exploit differences in the tax treatment of an instrument or entity arising from the way in which that instrument or entity is characterised under the tax laws of two or more jurisdictions. The careful implementation of these rules will be important in the context of certain Irish investment fund vehicles, including the newly reformed investment limited partnership and the common contractual fund.
- Relief for certain start-up companies: The corporation tax relief for start-up companies during their first three years of trading will be extended for five years until 31 December 2026. The relief is granted by reducing the corporation tax payable on the profits of the new trade and gains on the disposal of any assets used for the purposes of that trade.
- Bank levy: The bank levy, which was due to expire in 2021, is being extended for another year, but it will apply to fewer institutions because some banks are exiting the Irish market. A review of the bank levy is to be undertaken in 2022.
- Digital gaming tax credit: A new digital gaming tax credit will be introduced to improve employment growth in Ireland in the sector by providing a refundable corporation tax credit for qualifying expenditure. The relief will be granted at a rate of 32% on eligible expenditure from EUR 100,000 up to EUR 25 million, subject to some restrictions. For example, the taxpayer will need to obtain a cultural certificate from the Minister for Tourism, Culture, Arts, Gaeltacht, Sport and Media, the credit will not be granted for digital games produced mainly for the purpose of advertising or gambling and to avoid a double claim under similar tax credit regimes, it will not be possible for a claimant to claim film relief or the R&D tax credit, as well as the digital gaming tax credit. The effective date of the new tax credit is currently unknown because EU state aid approval is required but this is likely to take place in 2022.
Measures not announced on Budget Day
- Amendments to the transfer pricing rules: The Finance Bill includes two areas of change for transfer pricing—modifications to the Irish-to-Irish exemption to the transfer pricing rules and the introduction of attribution of profits rules for Irish permanent establishments (PEs).
- The scope of the exemption for certain Irish-to-Irish transactions will be broadened to allow for a wider range of scenarios to qualify for the exemption. Furthermore, certain transactions that are not within the charge to tax are will be able to avail of the exemption, meaning that there no longer will be a requirement for Irish-to-Irish transactions to include a nominal fee to meet the requirements of the exemption. The updated rules on exemptions from transfer pricing rules for certain Irish-to-Irish intercompany transactions comes into effect for accounting periods commencing on or after 1 January 2022.
- The use of the “Authorised OECD Approach” (AOA) and the OECD’s guidelines on the attribution of profits to PEs have been applied in practice for some time; however, the Finance Bill will introduce the measures for incorporation into the Taxes and Consolidation Act for the first time.
The OECD model tax treaty, as well as many of Ireland’s treaties, include provisions on attributing profits to PEs, but the introduction of the AOA according to the Finance Bill brings more clarity on the treatment of PEs from an Irish domestic transfer pricing perspective.
- The Finance Bill will introduce a transfer pricing documentation requirement for PEs, with similar information required for the PE documentation than is found in a company’s local file. The documentation requirement mirrors that of the transfer pricing local file requirement for companies in that it includes a potential penalty protection provision for PEs that prepared their documentation by the tax filing deadline, as well as a requirement that PEs submit their documentation to the Irish tax authorities within 30 days of a request or be subject to penalties of up to EUR 25,000 + 100 per day.
- PEs that are part of small and medium-sized enterprises (SMEs) are exempt from preparing documentation, but in a notable divergence from transfer pricing documentation rules, PEs with attributable income to the PE of less than EUR 250,000 will also be exempt from the documentation requirement. The new rules for the attribution of profits to PEs will come into effect for accounting periods commencing on or after 1 January 2022.
- Transposition of the EU DAC7 Directive on Administrative Cooperation into domestic law: DAC 7 extends the automatic exchange of information to apply to digital platforms that provide for the sale of goods, the rental of immovable property, the provision of personal services and the rental of any mode of transport. A reporting obligation will apply to digital platform operators as from 1 January 2023 and will ensure that tax is paid where appropriate.
- Updated powers will be granted to the tax authorities to ensure the proper application of DAC6.
- Changes to the tax treatment of nonresident corporate landlords to bring them within the charge to corporation tax, rather than income tax: This measure is being introduced in conjunction with the introduction of the ATAD interest limitation rules as from 1 January 2022 to ensure that nonresident corporate landlords will be within scope of the new rules. Nonresident corporate landlords that do not carry on a trade in Ireland through a branch or agency are currently within the charge to income tax at the standard rate of 20%, rather than corporation tax. By contrast, Irish resident companies are liable to 25% corporation tax on Irish rental income and will be subject to the new ATAD interest limitation rule when introduced. To ensure parity of treatment, Finance Bill 2021 will introduce an amendment to bring nonresident corporate landlords in receipt of Irish rental income within the charge to corporation tax from 1 January 2022, concurrent with the introduction of the interest limitation rule.
- Technical amendments will be made to certain anti-tax avoidance provisions.
Overall, Budget 2022 and the Finance Bill provide some positive news for Ireland’s business community. The retention of the 12.5% rate for the majority of companies is an important development in Ireland’s policy of attracting foreign direct investment that helps create more job opportunities.
The Finance Bill 2021 is expected to be signed into law before the end of 2021.