International Tax Newsletter
07 December 2011
Cross-Border Irish Tax Matters
With Ireland's 12.5% tax rate accepted by all other EU Member States and further endorsed in today's Budget, we are continuing to advise numerous multi-national companies ("MNCs") on the use of Ireland as part of their global strategy.
The continuing EU discussions about "fiscal unity" are driven by a desire by all EU leaders and finance ministers to avoid excessive EU Member States' fiscal deficits. It is not in itself a challenge against any one country's ability to either set its own tax rates or necessarily to provide a uniform EU tax code in relation to tax amortisation, deduction for finance costs, tax exemption for dividends and other income or gains. Nonetheless, the EU debate on tax is widening. On 11 November Algirdas Šemeta, EU Commissioner for Taxation, launched a public consultation on non-discriminatory double taxation, whilst the Commission simultaneously launched a proposal to widen the Interest and Royalty Directive.
Of particular focus on double taxation will be the longevity of hybrid structures and instruments that treat a financing cost as deductible in one jurisdiction and a tax-free dividend in another. In Finance Act 2011, Ireland amended its rules to prevent the exploitation of the tax deduction on profit participating loans using Section 110 companies in group situations or where the recipient is not subject to a tax which generally applies to foreign source profits in that territory. It remains for other EU States to amend their rules on the use of hybrid instruments.
Finally, I would like to take this opportunity to announce a further expansion of our tax group and introduce new tax partner David Burke. David has more than eleven years tax experience specialising in structured finance transactions in major London offices of UK and US law firms.
2. Irish Special Purpose Vehicles for Cross-Border Transactions
Increasingly, Ireland is being recognised as an onshore EU Member State OECD white-listed location through which to arrange structured finance transactions. We are continuing to advise on numerous structures combining Section 110 vehicles with tax exempt qualifying investment funds ("QIF"). Section 110 Taxes Consolidation Act enables an Irish tax resident company to issue a tax deductible profit participating loan note on which the return can be paid gross. Finance Act 2011 enhanced Section 110 so that the business of the SPV could include the owning and leasing of plant and machinery including aircraft and ships and hence, assist in the ever increasing legal security requirement of investors.
Section 110 companies, and in certain cases tax exempt funds, can avail of Ireland's treaty network. Of particular relevance to US tax lawyers, the US/Ireland treaty specifically provides that an Irish "collective investment undertaking" can be a resident for the purposes of the treaty subject to satisfying the limitation of benefits clause. A QIF is a form of collective investment undertaking. A protocol change to the Ireland/Germany double tax treaty will also give certain Irish funds treaty access.
This year Ireland's treaty network has expanded to 65 treaties, including new ones with Armenia, Panama and Saudi Arabia. The ability to structure cross-border arrangements with reduced or zero withhold using an Irish SPV is further enhanced. In particular, readers should note that whilst often Ireland's treaties provide for reduced rates of withhold on income flows out of Ireland, the Irish domestic laws often apply zero withhold with our treaty partners, even when the treaty has yet to take effect.
3. Employee Incentives including Foreign Lawyer Disclosure Obligations
Previous MH&C international tax newsletters have considered the various changes to Ireland's tax regime applying to share-based incentives. For MNCs locating key executives to Ireland, various measures can be taken to limit the incidence of Irish tax on the executive, particularly where he performs some duties overseas. UK tax lawyers should note that in respect of employee benefit trusts, Ireland has no equivalent to ITEPA Schedule 7A that seeks to tax the third party provision of benefits on all kinds of employees.
Whilst the use of offshore trusts continues to provide a means of rewarding staff using share and other incentives, foreign advisors should be aware of the reporting requirements to Irish Revenue. Section 896A Taxes Consolidation Act 1997 imposes an obligation on foreign lawyers that are concerned with the making of a settlement where the settlor is Irish tax resident (e.g. an Irish parent company or shareholder) and the trustees are non-Irish resident to make a disclosure to Irish Revenue.
Over recent months, we have seen renewed interest in groups looking to rearrange their group structure under an Irish holding company. Many groups are considering adopting an Irish parent to avoid the incidence of foreign withholding tax. Whilst Ireland has a dividend withholding tax, where the recipient is resident in a treaty country and an appropriate declaration is made, the withholding obligation is removed. From an international tax perspective, and unlike many EU Member States, the Irish tax system does not exempt foreign dividends received by an Irish holding company. Instead, Ireland offers a credit relief system with favourable onshore pooling credit policy. The continued absence of any CFC regime in Ireland means replacement of the credit relief system by the exemption system is unlikely.
Often an inversion under an Irish holding company may entail unacceptable foreign tax costs. In such situations, consideration may be given to staple stock arrangements using an Irish intermediate holding company or indeed, structuring certain investors' shareholding through a tax-exempt Irish collective investment undertaking in the form of a qualifying investor fund.
5. Budget 2012 International Incentives
In his Budget speech, Ireland's Minister for Finance, Minister Noonan, indicated that he would be introducing various measures in the Finance Bill (to be issued in early 2012) aimed at enhancing Ireland's position as a key jurisdiction for inward investment. Measures include the enhancement to;
i) the Special Assignment Relief Programme ("SARP") (to attract and retain key executives to Ireland to help create additional jobs and to facilitate the development and expansion of business in Ireland),
ii) the Research and Development ("R&D") tax credit scheme (including measures to reward key employees involved in the development of the R&D), and
iii) the financial services industry (to support the continued success of the international funds industry, the corporate treasury sector, the international insurance industry and the aircraft leasing industry).
In addition, a new foreign earnings deduction will be made available to further support Ireland's export drive by aiding companies seeking to expand in Brazil, Russia, India, China and South Africa. The targeted deduction will apply where an individual spends 60 days a year developing markets for Ireland in these economies.
Finally, as was widely expected, Minister Noonan reaffirmed Ireland's commitment to the 12.5% tax rate, confirming that "there will be no change in Ireland's 12.5% corporate tax rate".
The on-going EU debate about tax competition needs to be seen against the legal framework behind the EU, including the Treaty of Rome. If there is to be significant change to the basis or rates of taxing MNCs in the EU, it is likely to require treaty change. The introduction of any new treaties will require support in all Member States and in some cases, including Ireland, public referenda and the political uncertainty associated therewith. Without unanimous support, the idea of such treaty change is flawed.
In developing cross-border strategies, tax lawyers need to focus on other changes that may occur to the taxation of hybrid structures, the use of non-statutory ruling systems and the position of EEA status vis-à-vis the EU.