International tax: what’s coming in 2020?

Peter Vale and Christopher Crampton outline some expected changes to international taxation in the coming year.

2020 is set to be a busy year for international tax. For Ireland, it’s a key period. While international tax reform to date has been good for the country, the changes being looked at in 2020 pose challenges.  

Global tax changes – Pillars One and Two

The outcome of meetings in January are key to the OECD’s plans to reach consensus on both the Pillar One and Pillar Two proposals. While the Department of Finance expects the ultimate outcome to be a reduction in Irish corporate tax receipts by up to €2 billion, it’s a very difficult one to call.

Pillar One examines a reallocation of profits to market jurisdictions. While this does impact on our corporate tax base, it should not prove fatal on its own. However, recent pronouncements from the US suggest that getting consensus on the Pillar One changes could be difficult.

Pillar Two looks at a global minimum effective tax rate and is, perhaps, of more danger to Ireland. A tax rate of 12.5% was suggested by the French Finance Minister in December. While at first glance this would look positive from an Irish perspective, the devil is in the detail.  

The most recent OECD draft proposals look at an allocation of profits to individual countries based on a group’s consolidated financial statements. This could provide a distorted result for groups with large intellectual property (IP) migrations to Ireland, in particular, and potentially lead to an effective tax charge significantly lower than 12.5%. 

The early months of the year should provide key signals as to the direction of travel on both Pillars, with the outcome critical to the relative attractiveness of our corporate tax regime in the future. We should not rule out the EU taking matters into its own hands, particularly if reaching a consensus looks like being a protracted affair.

Transfer pricing

Finance Act 2019 saw the introduction of OECD 2017 guidelines into Irish tax legislation. One of the biggest impacts of the guidelines will be more onerous documentation requirements in 2020 for Irish companies, although many will already be maintaining similar documentation on a group-wide basis.

At first glance, this might seem to cause disruption for Irish subsidiaries of US multinationals with significant IP in Ireland. While these groups typically have significant substance here, many of the IP functions are carried out outside Ireland; often in the US.

Another key change in Finance Act 2019 was the introduction of transfer pricing for Irish small- and medium-sized enterprises (SMEs). While it is expected that the documentation requirements will be more relaxed for SMEs, the extension of transfer pricing will create further administrative requirements on Irish businesses.

On the positive side, the extension of transfer pricing to SMEs is subject to Ministerial Order, which we might see later in 2020. Any transfer pricing requirements will apply from that date or later; they should not be retrospective to 1 January 2020.
For businesses within the scope of transfer pricing now, more focus from Revenue in 2020 can be expected.  

IP migrations

2020 will see the final year of “double Irish” migrations, with 31 December 2020 marking the end for groups with IP currently housed offshore in Irish incorporated non-resident entities. After that date, those entities become regarded as Irish tax resident.
While many groups have already moved their IP onshore (much of it to Ireland), a significant number of groups have yet to do so. Hence, we expect many IP migrations to take place in 2020.

When an IP migration takes place, the market value of the IP determines the amount of tax allowances available in Ireland. This number is often large, and so we expect to see Revenue examine these IP valuations closely.

Interestingly, when these tax allowances expire then, all other things being equal, a significant increase in Ireland’s corporate tax receipts at some point in the future would be expected. However, a lot could happen in the intervening years!

Revenue audit focus

Aside from the focuses identified above, we don’t expect significant change in the nature of Revenue audit activity in 2020. We expect Revenue’s focus to remain on PAYE and VAT for SMEs, which tend to be the areas of greatest non-compliance.  
On the corporation tax side, we have seen Revenue increasingly look for back-up supporting tax losses carried forward, which can prove challenging where the losses were generated some time ago but are being used presently. Businesses should be aware of this when considering document retention policies.

Budget 2021

While Budget 2020 has just passed, it’s worth noting that this Budget was based on a more negative outlook than now appears to be materialising.

This could mean we finally see more meaningful movement on our high marginal income tax rates later in the year, or possibly a reduction in capital taxes. Of course, a lot can happen between now and then, including a new government, further global tax changes, and six months of known unknowns! And, that’s all without mentioning Brexit.
In summary, another year of significant developments on the international tax front looks likely, with the outcome critical for Ireland.
Peter Vale FCA is a Tax Partner at Grant Thornton.

Christopher Crampton ACA is an Associate Director at Grant Thornton.

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Brass Tax -- new year, new tax rules

by Leontia Doran

Since we’re fast approaching a new tax year in the UK (from 6 April 2020), let’s take a look at what is on the horizon for practitioners.

IR35 rules

From 1 April 2020, the IR35 rules in the public sector are being extended to the private sector with an exemption from the rules only available to “small” businesses. The IR35 legislation is designed to combat avoidance by individuals who are supplying their services to businesses via an intermediary (such as a company) but who would be an employee if the intermediary wasn’t used.

Making Tax Digital

From 1 April 2020, the UK will join the ranks of France, Italy, Austria, Turkey and Malaysia when it introduces its own digital services tax. 

Making Tax Digital (MTD) for VAT continues. Some businesses are now able to apply for an extension to meet the digital links requirement once the one-year soft-landing period ends on either 1 April 2020 or 1 October 2020. However, the criteria to do so is strict, as set out in the updated VAT notice. 

Corporation tax

The rate of corporation tax is also legislated to fall from 19% to 17% from 1 April 2020. However, the Government has stated that it will remain at 19%. As it’s already on the Statute books, legislation will be needed to reverse this. 

And therein lies the rub. The next UK Budget isn’t taking place until 11 March, which means the related Finance Act likely won’t be enacted until several months later. Retrospective legislation is never a good thing.

Leontia Doran FCA is UK Taxation Specialist at Chartered Accountants Ireland.