Where to next for Ireland’s corporation tax regime?

With the publication of the Corporation Tax Roadmap, Ireland has a clear route towards BEPS implementation.

BY PETER VALE

Last month saw the publication of Ireland’s Corporation Tax Roadmap document by Minister Donohoe. This document outlines how Ireland intends to implement mandatory EU tax directives and other non-binding recommendations under the OECD’s BEPS tax anti-avoidance project.

International tax

Corporation tax receipts have doubled since 2013 and now make up 16% of our total tax take. So far this year, it is the more than €400 million increase in corporate receipts over the prior year that is cushioning deficits elsewhere. The point is: robust corporation tax receipts are critical to the Exchequer’s health.

Much of the focus of the Roadmap document is on international tax issues. This is relevant for Ireland as 80% of our corporate receipts are made by foreign multi-national corporations and 39% of that is made by the top 10 companies. So what imminent changes are addressed in the Roadmap document?

A tightening of our existing laws on the deductibility of interest is an important aspect. At the moment, Ireland has relatively light rules in terms of disallowing ‘excessive’ interest payments.

Under the EU’s Anti Tax Avoidance Directive (ATAD), interest deductions will be capped at 30% of EBITA. Originally, it appeared Ireland would have until 2024 before this restriction would be introduced, but an earlier implementation date now looks likely.
The restriction on interest deductibility is not just in respect of intra-group interest charges, it also applies to third-party interest.

For groups with significant financing costs, this restriction will increase after-tax costs and is already being factored into financing models, with an implementation date of somewhere between 2020 and 2022 seen as prudent.

It is planned to hold a public consultation shortly on the proposed new interest rules, in tandem with certain other ATAD changes.

Exit tax

Ireland currently has rules that provide for an ‘exit tax’, where an Irish tax-resident company moves its tax residence away from Ireland. Broadly, that exit event triggers a deemed disposal of assets at market value for Capital Gains Tax (CGT) purposes, resulting in a potential 33% CGT charge.

There are a number of exemptions to the exit tax rules and, in practice, it is currently not a significant issue for most Irish tax-resident companies.

Under the EU’s ATAD rules, the existing rules will be tightened significantly, making it much more difficult to escape an Irish tax charge on migration of tax residence.
You could assess this as making it more difficult to move valuable assets, such as intellectual property, out of Ireland, but will possibly encourage existing groups to stay, which could be seen as a positive move, but in reality, anything that reduces flexibility for either existing groups or potential new investors is not a good thing. However, all EU countries will be obliged to introduce similar rules by 1 January 2020 at the latest.

It is also worth noting that the current CGT rate of 33% applies to exit tax charges. One suggestion, which seems reasonable, is that a 12.5% rate is more appropriate. 
We can expect to see legislation on the exit tax changes next year, although there is no formal public consultation phase planned.

A final point to note is that the grandfathering of the old “Double Irish” rules ends on 31 December 2020, at which point many groups will have made a decision to “onshore” their intellectual property from an existing low/nil tax jurisdiction. A change in the exit tax rules could potentially influence this decision.

Controlled Foreign Company regime

The Roadmap document also covers the most imminent change to our corporation tax rules: the introduction of a Controlled Foreign Company (CFC) regime to Ireland.
Many countries already have a CFC regime under ATAD. We are obliged to introduce similar rules by 1 January 2019, with the legislation to be presented in the 2018 Finance Bill later this month.

Broadly, under CFC rules, low-tax subsidiaries are taxed in the parent company’s jurisdiction where there are ‘non-genuine’ arrangements in place for the purposes of obtaining a tax advantage. Where the tax rate in the subsidiary is less than half of the tax rate in the parent company, then the CFC rules can take effect.

The CFC rules can impact on Irish groups with low-tax operations overseas but also on Irish companies with a foreign parent which itself might be impacted by the new CFC rules by virtue of Ireland’s relatively low rate.

Transfer pricing

There have been major transfer pricing (TP) developments in recent years, with a broad move towards aligning taxable profits with real substance.

Ireland has yet to adopt the latest OECD TP guidelines, something that is expected to happen in the near future. This will be a significant development for many groups, with a welcome consultation phase in early 2019. Legislation is expected to be introduced later that year, effective 1 January 2020.

How Ireland and other countries implement TP rules could have a significant impact on future corporation tax receipts, with the taxation of valuable IP one of the most sensitive areas of the OECD’s BEPS project.

Probably the most welcome feature of the Roadmap is the willingness of the Minster to engage via public consultation on issues that are critical to the future sustainability of our corporate tax receipts.

As ever, many things remain outside of our control, but we’re at a critical juncture given the requirement to introduce further anti-avoidance provisions while simultaneously maintaining the attractiveness and sustainability of our regime.