Finance Bill 2019 Corporation Tax measures

Oct 21, 2019

Finance Bill 2019 covers several corporation tax measures which include changes to the R&D tax credit regime, the introduction of Anti-Tax Avoidance Directive anti-hybrid rules and a major overhaul of Ireland’s transfer pricing rules. The Bill also includes a number of amendments to reliefs which aim to keep the status quo in the event of a no-deal Brexit. 

Research and Development Tax Credit

Section 24 of the Bill confirms the measures announced on Budget day while also introducing a number of new measures. A summary of the new legislative amendments are outlined as follows:

  • Grants funded by any State and/or by the European Union must be deducted when calculating the amount of qualifying R&D expenditure.
  • A company which outsources to third parties must now notify in advance of, or on the day of, payment, if that company intends to make a claim for the R&D tax credit.
  • The application of a penalty for an over claim of the R&D tax credit has been aligned with the procedure for over claims of other credits.
  • Where a payable amount or amount surrendered to a key employee is later withdrawn, any offset of losses or credits cannot be used to shelter the clawback on this amount.
  • Amendment to capital expenditure on scientific research to ensure that relief for capital expenditure on buildings or structures cannot be claimed in respect of the same expenditure.

Read a reminder of the amendments to the R&D tax credit regime that were announced on Budget Day.

Transfer Pricing

As announced on Budget day Ireland’s existing transfer pricing rules are being updated with effect from 1 January 2020, except for the extension of transfer pricing rules to SMEs, which is subject to a Ministerial Order. Section 26 of the Bill substitutes a new Part 35A into the Taxes Consolidation Act 1997. The main amendments include:

  • The OECD 2017 Transfer Pricing Guidelines (including OECD guidance on Hard-to-Value Intangibles and Application of the Transactional Profit Split Method) are incorporated into Irish law.
  • Bring arrangements, the terms of which were agreed before 1 July 2010, within the scope of transfer pricing rules.
  • Non-trading transactions are brought within the scope of Irish transfer pricing rules. However, these rules will not apply to domestic transactions, unless a transaction is considered a tax avoidance transaction.
  • OECD transfer pricing documentation requirements are introduced for large taxpayer groups, with a master file revenue threshold of €250 million and a local file revenue threshold of €50 million.
  • Transfer pricing rules will apply to the computation of capital allowances and chargeable gains on transactions relating to assets that have a market value of over €25 million.
  • SMEs will be brought within the scope of transfer pricing rules. However, no formal documentation requirements will apply to small enterprises. Simplified documentation requirements apply to medium enterprises, where the value of the related-party cross-border transaction exceeds €1 million or in the case of capital transactions, the value of the asset exceeds €25 million.

Section 110 companies

Section 27 of the Bill amends section 110 TCA 1997 which deals with the taxation of securitisation companies. The profit participating notes are being carved out from transfer pricing rules and additional anti-avoidance provisions are being introduced into section 110 instead.

Tax-deductible expenditure

The Finance Bill includes changes to the general rules applying to tax deductible expenditure. Firstly, a tax deduction is not available for taxes on income. This is particularly relevant in the context of Irish companies that suffer foreign withholding tax on their business profits. The second amendment aligns the tax deduction for doubtful debts with impairment losses under the relevant accounting standards.

Pension deduction

Section 16 amends section 774(6) of the Taxes Consolidation Act 1997 to provide tax relief for pension contributions made by a company to occupational pensions schemes set up for employees of another company in certain defined circumstances.  This amendment is to accommodate cases of a merger, division, joint venture, reconstruction or amalgamation where an issue could arise as to whether contributions are being made in respect of employer’s own employees.  The contributions made in these cases will qualify if:

  • they are made on foot of a legally binding agreement between two or more companies, under a scheme of reconstruction, under a merger, under a division or under a joint venture;
  • the scheme members are current or former employees of the parties to the agreement, or parties which are subject to the agreement; and
  • the contributions would be deductible under section 774(6) TCA if the person making the contribution was the employer of the scheme members in respect of whom the contributions are paid.

Anti-hybrid rules

As outlined on Budget day and last month in the Anti-Hybrid Feedback Statement, section 30 of the Bill introduces anti-hybrid rules with effect from 1 January 2020. 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 and are required by the EU’s Anti-Tax Avoidance Directive (ATAD) rules. The new rules, will be contained in a new Part 35C in the Taxes Consolidation Act 1997

Stock borrowing and repurchase (repo) arrangements

Section 33 of the Bill include provisions which relate to the tax treatment of stock borrowing and repurchase (repo) arrangements. These provisions are being introduced in conjunction with the introduction of the ATAD anti-hybrid rules and are intended to ensure the tax treatment follows the substance of transactions rather than its legal form.

Investment Limited Partnerships

Section 31 of the Bill amends section 739J of the Taxes Consolidation Act 1997 which deals with Investment Limited Partnerships (ILPs) which sets out the rules for the taxation of the income and gains of an ILP. The amendments are being introduced in conjunction with the introduction of the ATAD anti-hybrid rules and are intended to clarify the existing treatment of ILPs in legislation.  The amendments replace references to a “unit” and a “unit holder” with references to a “partnership interest” and a “partner” and clarify how losses are treated. The amendments apply to ILPs that are granted authorisation under the Investment Limited Partnership Act 1994 on or after 1 January 2020.

Mandatory disclosure of cross-border arrangements

The Bill implements EU Council Directive on Administrative Cooperation, DAC6, which introduces a mandatory disclosure regime for certain cross border transactions. Reporting of transactions will begin from 1 July 2020 but will capture transactions entered into on or after 25 June 2018. Mandatory disclosures received by Revenue from intermediaries and taxpayers will be shared with other EU Member States.

Exit Tax

As announced on Budget day two amendments to the Exit Tax regime were introduced and took effect from Budget night. The first amendment removes the requirement in certain scenarios for the company transferring the asset or business to be resident in an EU Member State, and secondly and amendment was made to clarify the that the deemed disposal of assets by the company will take place immediately before the company ceases to be resident in Ireland.

Additional Tier 1 capital

The Bill has extended the definition of an “Additional Tier 1 instrument” for the purposes of Section 845C TCA 1997. Under the revised definition, the Bill extends the treatment afforded to Additional Tier 1 instruments to comparable instruments with equivalent characteristics to Additional Tier 1 instruments which are issued by entities other than regulated financial institutions.

Tax treaties

The Bill proposes the introduction into law of the revised treaty with the Netherlands and a protocol to the Switzerland treaty