Originally appeared in the Times, Irish edition on 18 September, 2018.
The Department of Finance published "Ireland's Corporation Tax Roadmap" (the Roadmap) on 5 September 2018. This was followed on Friday, 7 September 2018 with the release of a "Feedback Statement" on the implementation of Controlled Foreign Company ("CFC") legislation in Ireland.
The Roadmap outlines the actions taken to date in relation to corporate tax reform following EU and OECD initiatives. More importantly, it sets out the next steps in Ireland's implementation of certain EU Directives, the OECD BEPS reports and recommendations from the Coffey Report which was published in September 2017, together with a timetable for implementation. This is a very positive development as it sets the stage for future change.
The international tax landscape is changing and it is crucial that Ireland continues to maintain its competitiveness and remain attractive as a location for foreign direct investment. In his foreword to the Roadmap, the Minister for Finance reiterates the Government's policy that Ireland "will continue to foster economic activity…..while maintaining our key 12.5% rate and ensuring that we have a regime that is transparent, sustainable and legitimate".
The contents of the Roadmap are not particularly new. However, it is a reminder of the scale of the forthcoming changes, with Minister Donohoe acknowledging the "huge body of work that will be required to implement these agreements into national legislation" and which will result in a "fundamental rewriting of large parts of our corporation tax code". Busy times ahead for the legislature, business and tax practitioners alike!
The journey – key milestone
The process to implement the EU Anti-Tax Avoidance Directive ("ATAD") will begin in the Finance Bill 2018. Ireland will be required to introduce Controlled Foreign Company ("CFC") legislation from 1 January 2019. CFC rules may tax the profits of overseas subsidiaries before they are actually repatriated from the overseas territory. Historically, CFC rules were only found in the tax law of large capital exporting countries such as the UK and the US so this is a new departure for Ireland.
The ATAD provides two options for the implementation of the rules. The Roadmap confirms Ireland's intention to adopt the provisions which broadly seek to tax undistributed income arising from non-genuine arrangements which are put in place for the essential purpose of obtaining a tax advantage and can be attributed to activities carried on in Ireland. Essentially this deals with a scenario where a foreign company has assets and earns income only as a result of control by its parent company. The choice of this option will be welcomed by most companies and also reflects the preferred option of the OECD in this area. The Feedback Statement goes further in terms of setting out a framework for the implementation of the rules. Whilst it is very encouraging that the Department of Finance is considering adopting some of the exemptions provided for in the ATAD, there will be disappointment that not all the options are being taken up and that consideration is being given to going beyond what is required by the EU. Whilst obviously it is crucial that Ireland's CFC rules are compatible with the ATAD, it is equally important that they are implemented in a competitive and business friendly manner. Helpfully, the Feedback Statement does provide for a further short consultation period on this topic with stakeholders invited to comment by 28 September.
Debt - what will happen to tax deductions for interest costs?
Most companies use debt to finance their businesses and generally a tax deduction is available for the associated interest cost (subject to some fairly complicated rules). However, going forward, the ability to obtain a tax deduction for debt will be curtailed as a result of EU and OECD initiatives in this area. 1 January 2019 is also the implementation date for the ATAD's fixed ratio interest limitation rule (which essentially will limit a taxpayer's interest deduction to 30% of their earnings before interest, tax, depreciation and amortisation). However, there is an option for Member States to potentially defer implementation to 1 January 2024, at the latest if their existing rules are "equally effective" to the ATAD interest limitation provisions. Ireland has notified the European Commission of its intention to defer the implementation of the measures arguing that our interest deductibility rules are "equally effective". However, the Roadmap notes that the European Commission is taking a strict view of what is meant by "equally effective" and therefore it is unclear as yet if agreement will be secured in relation to the derogation. In light of this, the Roadmap suggests an acceleration of the interest limitation provisions noting that it could be advanced to the Finance Bill 2019. It will be important for companies to review their financing arrangements in preparation for these changes. However, a public consultation is planned for Q3 2018 in which stakeholders can express their views. Nonetheless, the potential acceleration of the change to the Finance Bill 2019 is a significant development.
A range of both amending and new legislation will be required in the 2019 Finance Bill. Changes to our exit tax provisions are required with effect from 1 January 2020 which will result in a much broader application of the exit tax rules and the removal of the current exemption from the exit tax (subject to certain conditions). This too is a concern for many companies given Ireland's high rate of capital gains tax (currently 33%). Respondents to the Coffey Report recommended that the applicable tax rate on gains from the disposal of trading assets should be 12.5%. It remains to be seen whether or not this recommendation is taken on board. An extension of Ireland's transfer pricing rules is also on the table. However, this will be subject to a public consultation early in 2019. An extension of the rules to cover all related party transactions will require careful consideration. Work will continue to strengthen legislation in the area of tax transparency and exchange of information. The Department of Finance will have a lot on its plate during 2019.
This is not the end of the journey
The European Commission continues to drive change with proposals to tax the digital economy and of course, the Common Consolidated Corporate Tax Base (C(C)TB) proposals are still on the table. In relation to digital tax, the Roadmap states that "Ireland is committed to working with our international partners to reaching a fair and appropriate solution to …digital tax". Work at OECD level continues apace but the key difference is the EU's legal power to effect change.
The Roadmap reminds us that that Ireland is committed to global tax reform. Businesses must continue to navigate considerable change and increased compliance in the coming years so they can remain agile and competitive. GPS at the ready!