What impact does Finance Bill 2019 have on international investment?

Dec 06, 2019
While Finance Bill 2019 may have seemed to cater to SMEs, Peter Vale highlights where it includes significant measures for international businesses.

The headlines surrounding Budget 2020 and Finance Bill 2019 may have left the impression that most of the legislative changes have been focused on domestic small- and medium-sized enterprises (SME), with less focus on foreign direct investment (FDI) and Irish companies with international operations (which may, of course, include SMEs).

The reality is that the Finance Bill was packed with provisions of interest for groups with international operations, either inbound or outbound, albeit many of these were expected and hence didn’t attract the same headlines.

Here are some of the key Finance Bill measures for international businesses, some of which were expected, and others which came as a surprise.

Mandatory reporting

As expected, the Finance Bill saw the introduction of  Council Directive 2011/16/EU (DAC6), which covers the mandatory reporting of certain cross-border transactions to home country tax authorities, to be subsequently exchanged between EU Member States.

The DAC6 provisions reflect the ever changing global tax environment and follows on from the Common Reporting Standard (CRS), which was a game-changer in terms of providing for a new level of reporting and transparency.

Irish taxpayers might feel relaxed about the new provisions on the basis that Ireland already has domestic mandatory reporting rules, although these haven’t had much bite in practice.  The new DAC6 provisions, however, are much wider in reach, covering not just tax-motivated transactions, but also transactions that may have a “potential tax effect”, but aren’t themselves driven by tax avoidance motives.

While the new rules only require reporting from August 2020, they apply retrospectively to transactions from 25 June 2018. Intermediaries and taxpayers need to be aware of the scope of the new rules and have measures in place to track and report such arrangements.

Anti-hybrid rules

The Finance Bill also saw the expected introduction of anti-hybrid rules, effective for payments made after 1 January 2020, and follow on foot of the binding EU Anti-Tax Avoidance Directive (ATAD1). It is worth noting that the anti-hybrid rules apply to payments made post-1 January 2020 – the actual accounting period of a company is not relevant.

So, who needs to be concerned about anti-hybrids? Minority sport?

The first thing to note is that there is not a de minimis threshold, therefore all companies irrespective of size are potentially within the scope of the new provisions.
The rules target a number of arrangements, in particular where there is a “deduction without inclusion” or a “double deduction” as a result of hybrid mismatches, such as a payment being treated as tax deductible interest by the payor country but as a tax-exempt dividend in the recipient country.

It is worth noting that just because a country does not tax a payment does not mean that there is a hybrid mismatch. Thus, the payment of interest by an Irish company to a jurisdiction that does not tax interest income will not be a hybrid mismatch, although interest withholding tax may need to be considered.

The anti-hybrid rules are complex. While Revenue guidance (due to be published in 2020) is critical, equally critical is that this guidance is drafted in consultation with relevant industry stakeholders so Ireland’s attractiveness is not adversely impacted vis-a-vis other EU countries.

Transfer pricing

As expected, the Finance Bill introduced 2017 OECD transfer pricing guidelines into Irish legislation.

Other important provisions were also introduced, including the introduction of transfer pricing to non-trading transactions (with limited exceptions), the abolition of pre-2010 grandfathering arrangements and the extension of transfer pricing rules to both capital transactions and to SMEs.

The extension to SMEs is significant as it will, at a minimum, add an administrative burden to smaller companies. It is, however, subject to a Ministerial Order. The Minister was reluctant to add to the administrative burden of the SME sector with Brexit looming.

Bringing Irish transfer pricing requirements in line with 2017 OECD guidelines will introduce some additional reporting requirements for many companies, with master file and local file requirements now in place.  

Of note is that the thresholds for master file and local file introduced in the Bill, €250m and €50m respectively, are much lower than in many other countries. This could trigger additional documentation requirements for some large groups.

Many Irish groups will also have intra group financing arrangements in place that may not be arm’s length compliant, and these will now need to be reviewed in light of the Finance Bill changes, which come into effect for accounting periods beginning on or after 1 January 2020.

Financial Services/property fund changes

There were several changes in the Bill to provisions governing the taxation of Irish real estate funds and section 110 securitisation vehicles.

The changes for property funds as initially drafted were unexpected. They were wide-ranging and impacted on funds that only had third party debt. At the time of writing, Committee Stage amendments were expected to correct this anomaly and other provisions that could have inadvertently created a double tax charge for some funds.
Additional anti-avoidance provisions have been added for section 110 companies, including the broadening of the control test used in determining whether certain profit participating interest payments are tax deductible, and placing the bona fide commercial purposes test on an objective basis, thereby giving Irish Revenue more scope to challenge aggressive securitisation arrangements.  

Interest deductibility limitations

Under ATAD1, Ireland is obliged to introduce new rules which broadly restrict interest deductions to 30% of earnings before interest taxes and amortization (EBITA). The Finance Bill did not contain any provisions in respect of these new rules, which are now likely to apply from 1 January 2021 onwards.  

In summary, Finance Bill 2019 was one of the most significant in recent years, with new anti-hybrid and transfer pricing provisions, and the introduction of DAC6 reporting requirements. These fulfil Ireland’s commitment to being at the forefront in the adoption of international tax changes and bring our tax regime into compliance with international best practice and relevant EU Tax Directives. Undoubtedly, however, these will add further complexity to the lives of tax professionals and in-house tax teams. 

Peter Vale FCA is Tax Partner at Grant Thornton.