Corporation tax measurements (Budget 2020)

Oct 08, 2019

This year the Minister has again reaffirmed Ireland’s commitment to retaining the 12.5% corporation tax rate amidst the changing international tax environment. Recognising the volatility of such receipts, the Minister has published the Fiscal Vulnerabilities Scoping Paper which examines corporation tax over-performance and policy options aimed at ensuring the sustainability of the public finances. The measures introduced are enhancements to the R&D tax credit for small and micro companies, as well as a number of anti-avoidance provisions with immediate effect. As expected, anti-hybrid rules and updates to Ireland’s transfer pricing rules will be written into Finance Bill 2019.

 

Anti-hybrid rules

As outlined in Ireland’s Corporation Tax Roadmap, Finance Bill 2019 will introduce Anti- hybrid rules with effect from 1 January 2020 as required under the EU Anti-Tax Avoidance Directive (ATAD). These rules are an anti-abuse measure designed to prevent arrangements that exploit differences in the tax treatment of an instrument or entity under the tax laws of two or more jurisdictions to generate a tax advantage. According to the Minister, consequential provisions are also being introduced to ensure that the existing treatment of stocklending and repo transactions – and of investment limited partnerships – is clear in legislation. The detail of these measures will be included in Finance Bill 2019.

Transfer pricing

As expected, the Minister confirmed that Ireland’s transfer pricing rules will be amended to transcribe the OECD 2017 Transfer Pricing Guidelines into Irish legislation. The rules will also be extended to cover cross-border non-trading and material capital transactions, and to extend the application of transfer pricing rules to SMEs, subject to a Ministerial Commencement Order. The detail of these amendments will be included in Finance Bill 2019.

Research & Development tax credit

The Minister announced a number of changes to the R&D tax credit, with a particular focus on small and micro companies accessing the credit. The R&D tax credit will increase from 25 percent to 30 percent for micro and small companies. The Minister also announced the introduction of a new provision that will allow these small companies to claim the credit before the business commences to trade. The credit will be limited to offset against VAT and payroll tax liabilities only. These provisions are subject to state aid approval.

Another change to the R&D tax credit is that the limit of outsourcing to third-level institutions of education will be increased from 5 percent to 15 percent of R&D spend or €100,000 (whichever is greater). The Minister outlined that this measure is aimed at benefiting smaller companies who rely on outsourcing to undertake R&D, and also to support R&D activities in the third-level sector.

Exit tax

The Minster announced that a technical amendment to the exit tax provisions will take effect via a Financial Resolution from Budget night. This amendment is being made in order to ensure that the rules function as they are intended to. The exit tax provisions were amended in last year’s Budget to bring them in line with the Anti Tax Avoidance Directive (ATAD), where a new exit tax regime of 12.5 percent was introduced on any unrealised capital gains arising when companies migrate or move assets offshore.

Anti-avoidance measures

Announced were several anti-avoidance measures aimed at Irish real estate funds (IREFs), real estate investment trust companies, section 110 companies and capital expenditure on scientific research. The Minister outlined in his speech that “institutional investors have an important role to play in terms of increasing supply of both commercial and residential property”; however, he also outlined how “it is essential that an appropriate level of tax is paid by such investors”.

Irish real estate funds and section 110 companies

The Budget papers highlight that Revenue, following an analysis of the first sets of financial statements filed by IREFs, has identified aggressive activities by some IREFs, including the use of excessive interest charges to avoid the payment of tax in respect of profits from Irish property. To address these issues, limitations on interest expenses based debt to property cost and on an income to interest ratio are being introduced. These measures will come into effect on Budget night via a Financial Resolution.

Anti-avoidance provisions in section 110 of the Taxes Consolidation Act 1997 (TCA 1997) are also being strengthened to ensure that they operate as intended. These changes will be brought in as part of Finance Bill 2019.

Real estate investment trust companies

A number of amendments are also being introduced regarding real estate investment trust companies (REITs) to ensure that an appropriate level of tax is being collected, particularly in the area of capital gains, and also to ensure such companies operate in line with the original policy intention of encouraging stable, long-term investment in the rental property market. The following amendments were announced:

  • The distribution of proceeds from the disposal of a rental property will now be subject to dividend withholding tax upon distribution.
  • An existing provision whereby a deemed disposal and re-basing of property values occurs should a company cease to be a RIET is being limited to apply only where the REIT has been in operation for a minimum of 15 years.
  • These changes will take effect from Budget night via a Financial Resolution.

Allowance for capital expenditure on scientific research

Section 765 TCA 1997 provides allowances for capital expenditure on scientific research. According to the Budget papers, an anomaly has been identified whereby the interaction of this section with other provisions could create the potential for unintended additional claims to relief. The Budget papers outline that this was not the policy intention of the legislation, and the anomaly is being corrected in Finance Bill 2019.

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