Ireland has gained much attention in the media over the last few months for having what some might call “unique” tax conditions. A number of companies, for example Apple, are incorporated in Ireland, but not tax resident in Ireland based on a number of exceptions which exist under Irish tax legislation. The result of this is that such companies do not necessarily pay any corporation tax as they are not regarded as tax resident in Ireland. From a tax authority’s perspective, a greater problem arises where such companies do not pay corporation tax in any other country either and are what have been termed “stateless companies”.
In an effort to remedy this perceived shortcoming in Irish tax law the Minister for Finance amended the law in the Finance Act (No. 2) 2013 (the “Act”) and emphasised his desire for Ireland to be a part of a solution to an changing international tax landscape. The change to the law as it relates to the tax residency of companies is summarised below.
Old rules on company residency:
A company which is incorporated in Ireland will generally be tax resident in Ireland for Irish tax purposes. The effect of this is that the company is taxable in Ireland on its worldwide income. This rule is subject to two important exceptions. Firstly, the “trading exception,” applies where the company or a related company carries on a trade in Ireland and either the company is ultimately controlled by persons resident in an EU Member State or in a treaty country, or the company or a related company is a quoted company. Secondly, the “treaty exception,” applies where the company is not regarded as resident in Ireland under the provisions of a double taxation treaty between Ireland and another country.
The change to the current rules on company residency:
The amendment put forward by the Act provides that where an Irish incorporated company is managed and controlled in another relevant territory, it must be regarded as tax resident in that relevant territory in order to avail of the exceptions to the incorporation test. If the Irish incorporated company is not regarded as tax resident in that relevant territory, the Irish incorporated company will remain as an Irish tax resident company. The provision came into effect on 24 October 2013 for companies incorporated on or after that date and the provision will come into effect from 1 January 2015 for companies incorporated before 24 October 2013.
Movement towards reform
The Organisation for Economic Co-operation and Development launched an action plan on a Base Erosion and Profit Shifting (“BEPS”) project in July 2013. This is a project aimed at reviewing national tax laws in an interconnected world and in particular, it will look at gaps which may allow a company to avoid taxation in their home country by pushing activities abroad to a more favourable tax jurisdiction.
The Minister for Finance in Ireland launched a BEPS consultation process on 27 May 2014, which lasted for eight weeks. The aim of the consultation process was to explore the potential implications of the greater BEPS project in an Irish context. The Minister invited interested parties to give their views on international tax proposals and the impact of the BEPS project from an Irish perspective.
A number of potential issues have been raised as part of the consultation process including the following:
- The BEPS action plan provides for 15 specified actions to be completed in three phases – September 2014, September 2015 and December 2015. This is seen as an ambitious and aggressive timetable and as a result, some industry bodies fear that proposals will lack legal certainty and clarity. It is hoped that transparency will be a key feature of any changes made and that any proposals will be in the form of technically sound and workable changes.
- In an effort to target the abuse of tax treaties, it is proposed to place a limitation on the “benefits” provision. This has been criticised by many industry bodies on the basis that it may adversely impact Ireland’s access to tax treaties through the use of cross border investment funds. This may have an adverse effect on smaller economies like Ireland as they often have to go beyond their geographical boundaries to source both markets and capital.
- There is a real concern amongst commentators that the redefinition of the concept of “permanent establishment” as it is now might move companies away from where the value is created and towards the countries where their products are mostly sold. This would be particularly problematic for smaller countries like Ireland where the market place is smaller.
- Ireland does not have a controlled foreign corporation regime at present and this is likely to be reviewed by the Irish Government in due course as part of the BEPS consultation process. It is hoped that a full consultation and review will take place if the Irish government considers introducing such a regime along with the introduction of an exemption system for foreign dividends and foreign branch profits.
- Some industry bodies have suggested a review of the deductibility of interest payments across borders. Where industries require treaty provisions to facilitate borrowing, Ireland’s tax treaty network will be important. Any change in the facility to secure a deduction for interest would have a significant impact on companies such as banks, leasing companies and securitisation companies.
We await the outcome of the consultation process, but in any case, the Minister for Finance has stated that the issues which arise from this public consultation will influence his views and considerations as the Irish Government prepares for its next Budget, due in October of this year.