Tax Update: 2018 - Never a Dull Moment
11 December 2018
The evolution of the international tax landscape continued in 2018. US tax changes as well as EU and OECD measures have all impacted Ireland and the attractiveness of its tax regime. The changes have brought both opportunities and challenges for Ireland as it adapts to the changing environment, while seeking to maintain its position as a competitive regime for international business. There was also a focus on tax enhancements to benefit SMEs, including improvements to the KEEP share option scheme which is intended as a tax efficient share option scheme to allow SMEs compete for talent. Highlights from the year include:
A “Controlled Foreign Company” regime
Finance Act 2018 introduces a controlled foreign company (CFC) regime into Irish tax law, as required under the EU’s Anti-Tax Avoidance Directive (ATAD). The ATAD requires the introduction of the CFC regime by 1 January 2019. The rules provided for in the Finance Act are broadly in line with expectations highlighted in feedback published by the Department of Finance this year on what approach Ireland would take to optional aspects of the ATAD rules. CFC rules are designed to prevent the diversion of profits to offshore entities in low/no tax jurisdictions. The Irish rules will attribute undistributed income of foreign subsidiaries of Irish companies to the Irish parent where the income arises from non-genuine arrangements put in place for the purpose of obtaining a tax advantage. The charge only applies where the actual corporation tax paid by the relevant entity for an accounting period is less than half the corporation tax that would have been paid by the entity on its profits if they were taxed under the Irish corporation tax system. The Irish Government’s published analysis does not project any revenues from the new CFC regime and we expect that groups potentially affected will restructure accordingly.
New Exit Tax
The introduction of a new exit tax regime with effect from Budget Day came as an unwelcome surprise to many. The changes are required under ATAD but the deadline for implementation is 1 January 2020 and, therefore, the rules were introduced over a year earlier than many expected.
This new exit tax is a material change from the limited exit charge which was in place previously. The new legislation taxes unrealised capital gains where companies migrate their tax residence or transfer assets offshore and leave the scope of Irish tax. The rate of tax is 12.5% except in cases of tax avoidance when the rate is 33% (the current capital gains tax rate). This presented as more positive news as there was a concern the general rate might be 33%. The new rules may impact on US multinationals, who may be considering moving assets such as IP back to the US to take advantage of the lower US tax rate of 13.125% which applies to foreign derived intangible income.
Other EU developments
Work will continue in 2019 to implement the remaining rules required under the ATAD. A consultation is underway on interest limitation and anti-hybrid rules which are both required under the ATAD. The anti-hybrid rules are intended to counteract tax mismatches where:
The same expenditure item is deductible in more than one jurisdiction, or
Expenditure is deductible but the corresponding income is not fully taxable.
The interest limitation rule is likely to have a wider impact on companies doing business in Ireland. It is designed to limit the ability of Irish companies to deduct borrowing costs when calculating taxable profits. The ATAD interest limitation rule operates by limiting the allowable tax deduction for ‘exceeding borrowing costs’, or in broad terms, net interest costs, in a tax period to 30% of EBITDA. The implementation date for the ATAD interest limitation rule is 1 January 2019. There is, however, a derogation for Member States with existing rules which are “equally effective” as the ATAD interest limitation ratio. This derogation allows a Member State to defer implementation until as late as 1 January 2024 (or such time agreement is reached at an OECD level for a minimum standard on interest deductibility, if earlier). Ireland’s current rules are different in structure to the ATAD rules. Ireland, however, has taken the view that the derogation should be available and is engaging with the EU Commission on the issue. The outcome of this engagement will impact on when the rules are legislated for.
The prospect of a Common Consolidated Corporate Tax Base, or CCCTB, continues to make headlines but has achieved little progress due to opposition from several countries, including Ireland. The EU’s proposals to tackle the taxation of the digital economy have faced a similar lack of consensus and efforts to bring about change in this area are likely to take place at OECD rather than EU level in 2019. Ireland is supportive of addressing the issues at an OECD rather than EU level.
Ireland is one of 78 countries to sign a Multilateral instrument (MLI) to transpose a range of recommendations from the OECD’s BEPS (base erosion and profit shifting) project into their existing bilateral double tax treaties. Ireland intends to ratify the MLI by the end of 2018 and the changes would then take effect in 2019/2020, depending on the particular measure. This will impact on certain international structures. For example, one measure introduces a “principal purpose test” which denies the benefit of relief under a double tax treaty for arrangements put in place for tax avoidance purposes. Groups are considering existing structures and assessing whether changes will be required to structures in light of the changes.
Although the EU’s attempts to address the taxation of the digital economy appear to have faltered, efforts to address the concerns will continue at an OECD level. It is likely to take some time to agree the scope of any changes given that consensus is required between countries and there are several different approaches favoured.
US tax reform
From an Irish perspective, US tax reform signified a threat to the Irish corporate tax model by encouraging US multinationals to review their global structures and repatriate cash from subsidiaries in Ireland to the US. However, while 2018 saw many groups reviewing their global structures, we have not seen significant movement of assets or functions back to the US and Ireland’s corporate tax regime and business friendly environment continues to be attractive to multinationals looking to expand into Europe and build an EMEA hub.
Ireland’s tax regime remains internationally competitive and Ireland continues to be attractive as a country in which to do business despite the changing landscape. As well as dealing with the impact of US tax reform, Ireland witnessed fundamental change to its corporate tax system in 2018 through the introduction of new legislation required under EU law. Further change is expected in 2019 in the form of a revamp of Ireland’s transfer pricing rules as well as continued work on the implementation of the ATAD. The Irish Department of Finance is taking the approach of consulting and engaging with stakeholders in advance of implementing the significant changes which are on the horizon and this is welcomed.
For more information on tax issues which may impact your business in 2019, contact a member of our Tax team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.