Budget 2015 launched the “Road Map for Ireland’s Tax Competitiveness”. The document aims to position Ireland as a competitive tax jurisdiction, while at the same time conforming to best practice. It will form the basis for the continued growth of indigenous Irish business and expand our position as a Foreign Direct Investment (FDI) hub. Irelands tax strategy will continue to be founded on the three “R’”; rate, regime and reputation. The Road Map plots out the strategic direction which future tax policy will address in order to win FDI. Ten key elements, covering corporate and income taxes, have been identified which are considered intrinsic to the attainment of this winning objective.

Road Map for Ireland’s Tax Competitiveness

Some of these objectives have been acknowledged in Finance Act 2014. However, if Ireland is to truly be competitive in the FDI space, it will be necessary for these objectives to be revisited and enhanced on a regular basis. It will not be sufficient for Ireland to benchmark itself against the “traditional” FDI jurisdictions and match their offerings.

New corporate residence test

In Budget 2015 Minister Michael Noonan responded to international pressure by announcing changes to our tax code that will target the use of the “double Irish” tax structure. Conscious of the effects of this change, the Budget detailed a range of new attractive tax measures to encourage FDI. These measures were enacted in Finance Act 2014. In a move that was widely flagged, the Minister announced that the “double Irish” will not be available after 1 January 2015. Grandfathering provisions will allow “double Irish” arrangements in place at 31 December 2014 to remain for six years up to 31 December 2020. This is a sensible measure given the uncertainty over the degree and extent to which international and especially US tax reforms will take place in the current BEPS dominated tax environment. This should allow companies sufficient time to examine their structures.

Finance Act 2014 substitutes a new section 23A TCA1997. In general, this new legislation provides that a company which is incorporated in Ireland will be regarded as Irish tax resident. The only exception will be, if the Irish incorporated company is considered resident in a jurisdiction with which Ireland has a double tax treaty. The legislation goes on to provide that a foreign incorporated company may be considered Irish tax resident if it is managed and controlled in the State. The legislation has effect from 1 January 2015. Where a company was incorporated prior to 1 January 2015, it will have effect:

• after 31 December 2020, or
• from any date after 31 December 2014, where there is a change in ownership of the company and there is a major change in the nature or conduct of the business of the company within the relevant period.

Readers of the Finance Bill as initiated may have noticed that the new section 23A drafted did not make reference to the change in ownership test. This additional criterion was introduced during the Committee Stage of the Bill. It is understood that its inclusion was intended to address concerns of a surfit of shelf companies being incorporated prior to 1 January 2015 and thereby availing of the grandfathering provisions.

Knowledge Development Box

In January, the Department of Finance launched a public consultation on the introduction of a new tax incentive – the Knowledge Development Box. This new incentive will provide an effective tax rate for intellectual property below the Irish headline rate of 12.5%. Coupled with an attractive R&D tax credit regime, this new incentive will encourage companies to locate high value roles associated with the development of intellectual property to Ireland.

The BEPS project is currently examining existing knowledge development regimes in force by other jurisdictions. The OECD’s initial perspective would appear to require the intellectual property to be generated in the jurisdiction where the favourable tax regime applies. Consequently, it is likely that the Irish regime will require a direct correlation between R&D activity and the availability of this new incentive.

In his Budget speech, Minister Noonan indicated that the incentive will be “best in class and at a low competitive and sustainable rate”. It is speculated that the new incentive will have a rate of 5% to 6%. The incentive is expect to come into force next year.

Ireland has committed to adhering to the OECD recommendations. With this in mind, the consultation paper reflects the OECD’s draft international rules. The decision to engage in a consultation process is welcomed as it demonstrates our desire to achieve a sustainable and transparent tax system. Interested parties are invited to respond to seven questions. These address issues such as:

• Definition of intellectual property;
• How the qualifying income will be calculated;
• What expenditure should be included within the definition of “qualifying expenditure”;
• The interaction of the regime with double taxation relief; and
• Provisions which should be included in the regime to encourage small indigenous Irish businesses.

The consultation process will run for a period of 12 weeks and will close on 8 April 2015.

BEPS

In the current environment it is impossible to look at international tax without giving due consideration to the BEPS project. It is hard to believe, but the project has already reached its halfway point. Seven reports have been delivered, with the remainder deliverable in September and December 2015.

Of the reports, possibly the most interesting and of relevance to businesses looking to grow internationally is Action 7. This concerns the definition of permanent establishment. Specifically the action seeks to:

“Develop changes to the definition of PE to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and the specific activity exemptions. Work on these issues will also address related profit attribution issues.”

It is not the intention of this article to review in detail the proposals outlined under Action 7. However, at a high level, it is considered that if the proposal were to be implemented, it would result in a dilution of the existing Permanent Establishment (PE) definition. This could lead to the easier establishment of PE’s and consequently could lead to increased compliance requirements. Extending this thought process out, it is also feasible that there could be increased inter-jurisdictional disputes on profit allocation.

What lies ahead?

The next couple of years will witness significant changes in the international tax landscape. The work of the BEPS project will conclude, morph into new guidelines, which in turn will become the foundation on which domestic legislation will be constructed. Aside from a very clear audible commitment to BEPS, Finance Act 2014 is a clear acknowledgement of that commitment. The decision to change the definition of corporate residence and delaying the introduction of the Knowledge Development Box regime, are all indications of drafting legislation which will have longevity post-BEPS. The challenge will be in successfully marrying the objective of Ireland becoming “the country of choice for mobile foreign direct investment” with the changed landscape post-BEPS.

Cormac Kelleher is a Tax Director with Mazars.

Tel : +353 1 449 4456

Email: ckelleher@mazars.ie