Pre-Budget 2019: the European agenda

Sep 21, 2018
By Tom Maguire

The EU’s Anti-Tax Avoidance Directive (ATAD) has to be implemented into our law over the next number of years. This year’s Finance Bill will legislate for the Controlled Foreign Company Rule (CFC) contained within the directive.

The draft CFC legislation contained in the feedback statement from the Department of Finance goes beyond the ATAD’s requirements. Among various other issues, it seeks to ensure that companies can have income attributed to them rather than to the controlling company. Further, the ATAD requires that the controlling company own 50% of the voting rights and capital profits available for distribution, whereas the draft legislation contained in the feedback statement uses a provision existing within current Irish legislation that includes a company’s ability to acquire such rights in the future. 

From this, it would appear that Ireland may be leaning towards a 'best in class' or more stringent approach regarding the implementation of the CFC rule whereas other countries may not. In my view, it is necessary that a desire to engage in best practice does not lead to Ireland agreeing to non-mandatory or more onerous provisions which are contrary to its competitive offering and position going forward.

EU Tax Intermediaries’ directive

The EU Tax Intermediaries’ directive, which requires mandatory reporting by tax intermediaries and the automatic exchange of information by the tax authorities of member states for certain cross-border arrangements in relation to individuals, companies and other entities, took effect earlier this year. The directive, which takes the form of an amendment to the Directive for Administrative Cooperation (DAC), is part of the efforts to tackle tax abuse and ensure fairer taxation in the EU, and broadly reflects the elements of action 12 of the BEPS project on the mandatory disclosure of potentially aggressive tax planning arrangements.

The directive will provide EU tax authorities with information about such schemes by requiring intermediaries, such as tax advisors, accountants, banks and lawyers, who design and promote tax planning schemes for their clients, to report to the tax authorities in the country in which they are resident, and any cross-border tax planning arrangement they design or promote that contains specific broadly defined criteria (hallmarks). That EU member state then will share the information with all other member states on a quarterly basis. Penalties will be imposed on intermediaries that do not comply with the transparency measures.

If the taxpayer develops the arrangement in-house or is advised by a non-EU adviser, or if legal professional privilege applies, the taxpayer must notify the tax authorities directly. The directive will apply as from 1 July 2020, and member states will have until 31 December 2019 to transpose it into their national laws and regulations. It should be noted that arrangements, the first step of which is implemented between the date the directive entered into force (25 June 2018) and its effective date (1 July 2020), would have to be reported by 31 August 2020. However, it is likely that we will not see the legislation implementing the directive until Finance Act 2019 so taxpayers need to be aware that transactions being entered into currently may have to be reported.

My view

The implementation of the above directive will create substantial change to our law and practice. In my view, the CFC rule, if implemented in the form suggested by the Feedback Statement, goes beyond the requirements of the ATAD and may bring about tax competitiveness questions.

My prediction

It is to be hoped that the suggested CFC rule in the Feedback Statement will be amended to take account of competitiveness comments which should be reflected in responses to the above statement.

You can read the full Pre-Budget 2018 document here.

Tom Maguire is a Tax Partner in Deloitte.