Tax Update: Review of 2017 and Looking to 2018
15 January 2018
The last twelve months have seen renewed international focus on Ireland’s 12.5% low tax offering and its interaction with other tax systems around the globe. The OECD Base Erosion and Profit Shifting (BEPS) initiative has driven international groups to restructure their business structures away from zero tax haven locations and into Ireland. Ireland’s focus on the knowledge economy and technology has made the country a natural location to develop new innovative products and processes that generate new business. Accordingly, many internationally focused groups that have or are developing a significant presence here have onshored their intellectual property into Ireland. This has had the added benefit of enabling groups to develop licensing hubs from Ireland that can avail of the EU Royalties Directive to avoid withholding taxes on licence fees, whilst sheltering taxable profits for tax depreciation on expenditure incurred on specified intangible assets. Withholding tax on licences to non-EU tax residents can be avoided having regard to Ireland’s network of double tax treaties and the specific obligations of the licensor under the terms of the licence. The 6.25% tax rate on the knowledge development box has also attracted new business to Ireland’s shores with a steady wave of computer software and programmes being developed, improved or created by Irish tax resident companies supported by technology engineers employed in Ireland and in other EU locations. For certain non-listed groups the introduction of a new share-based incentive that taxes gains at 33% instead of rates in excess of 50% is to be welcomed, and will encourage further entrepreneurs to establish businesses here and share the wealth creation with key Irish employees.
The boom in Irish real estate and the influx of numerous foreign based investors that purchased distressed Irish real estate loans has unfortunately continued to attract the attentions of the Irish Government. Notwithstanding the introduction of a 20% tax on gains made by non-Irish residents using Central Bank tax exempt approved funds to access Irish real estate assets and similar changes impacting the overseas market for loans secured on Irish property, the last quarter of 2017 saw the Irish Government raise stamp duty on commercial property to 6%. Further, in December the Finance Bill was amended to extend the scope of the 6% charge to partnership and other indirect interests in Irish commercial property. Whilst the Irish State may see some short-term increase in its tax yield from the sector, ultimately it will reduce liquidity in the Irish marketplace by dis-incentivising foreign investors into the sector, especially where yields are approaching historic lows. Long-term, the commercial property market is likely to be dominated by both local and foreign approved tax exempt pension funds that fall outside the remit of the new 20% tax charge.
Ireland’s close economic link with both the US and UK and their respective tax regimes has also been a key influencer on the Irish economy. President Trump’s much-debated US tax reform has not led to any major exits of US parented groups with Irish operations; in fact, existing US parented groups have continued to expand their Irish operations. President Obama’s various tax reforms to deter US groups using M&A acquisitions outside the US to cause the enlarged group to sit beneath an Irish rather than a US tax-resident parent company have largely ceased, whilst BREXIT developments have caused US businesses looking to expand internationally to focus on the Irish EU offering in preference to the UK.
From an EU perspective, Ireland’s 12.5% tax rate is not for debate. In 2017 the EU debate has moved towards a discussion on determining each member’s share of profits that should be assessed to tax. Such discussion is being resisted by Ireland and various other EU Member States. The EU has opened the debate on taxation of the digital economy, notwithstanding that a similar debate is occurring under Action One of the BEPS initiative under the auspices of the OECD, of which the EU is a member. The Apple State aid litigation rumbles on, and is probably deflecting from the efforts Ireland is making to bring its entire tax regime within international norms that have developed under the OECD BEPS initiative.
In the autumn the Irish Government published the Coffey Report on a review of Ireland’s corporate tax code. Whilst the report found the Irish corporate tax regime is generally fit for purpose, it did recommend introducing more far-reaching transfer pricing code, including extending it to companies not engaged in Irish trading operations. The introduction of a wider transfer pricing regime will impact on the ability, for example, of Irish companies to make interest-free loans to affiliates and certain royalty arrangements.
US and EU tax reform will be relevant to Ireland’s international tax offering. With the US Federal rate falling from 35% to 21%, the differential with Ireland’s 12.5% rate is significantly reduced, however when local US State tax are taken into account, it is still likely that the Irish tax rate will be less than half of the US effective rate. To the extent that the US tax code has an implicit requirement for an overseas tax rate that will not generate excess US foreign tax credits, Ireland will be uniquely placed as a gateway to the EU for US companies expanding overseas. Any introduction of a participation exemption to enable profits to be repatriated to the US tax-free will further assist Ireland Inc.
Ireland is committed to introducing various aspects of the EU anti-avoidance tax directive. In Finance Bill 2019, Ireland will introduce exit tax for Irish resident companies looking to leave its shores, but the rate of such a tax and any rebasing to market value at 31.12.18 is a subject of ongoing debate. It is looking increasingly likely that any controlled foreign companies regime Ireland introduces will not cause profits of subsidiaries of Irish companies that are not functionally connected to the Irish operations to fall within the scope of Irish tax. The debate for exempting foreign dividends received by Irish parent companies continues.
The international taxation of the digital economy will be of key relevance to Ireland’s inward investment in 2018. If the OECD and/or the EU seeks to change the very basis of taxation from one of residence to one where tax is payable where the recipient of digital services resides, some existing business models will need substantial reorganisation – there is however a ray of hope in that under Action One of BEPS the OECD expressly recognises that digital does not require a distinct tax regime from the rest of the economy and as such, any change to taxation of digital needs to be designed in a manner that does not undermine the works and principles of the BEPS project.
For more information, please 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.