The Irish Minister for Finance and Public Expenditure & Reform, Mr Paschal Donohoe, made his Budget speech to the Irish Parliament on Tuesday 8 October 2019 and published the Finance Bill 2019 on 17 October 2019.
In this update we have summarised some of the more significant announcements from today's Finance Bill 2019 from an international perspective (modernising transfer pricing rules, implementing ATAD anti-hybrid rules, implementing DAC6 and introducing section 110 anti-avoidance changes). For further information on other provisions of international interest introduced on Budget Day please refer to our earlier alert "Budget 2020".
Modernisation of transfer pricing rules
On Budget Day the Minister announced he would be reforming Ireland's transfer pricing rules to ensure they are in line with up to date OECD standards. These new rules are to apply for accounting periods commencing on or after 1 January 2020. The rules are being modernised in accordance with the Coffey Review of the Irish Corporation Tax Code and following on from the publication by the Irish Government in September 2019 of its Feedback Statement. The Feedback Statement was itself a response to an earlier public consultation on proposed transfer pricing changes.
The changes to Ireland's transfer pricing rules include:
- the incorporation of the OECD 2017 Transfer Pricing Guidelines into Irish law in place of the existing 2010 guidelines
- extending the rules to cover cross-border non-trading transactions
- removing the exemption from transfer pricing rules for grandfathered arrangements (i.e. pre July 2010)
- extending the rules to material capital transactions; and
- extending the rules, with relaxed transfer pricing documentation requirements, to SMEs (subject to a Ministerial commencement order being issued).
New anti-hybrid mismatch rules, in line with Ireland's commitments under the Anti-Tax Avoidance Directive (ATAD) are being introduced.
ATAD I included rules on hybrid mismatches between EU Member States while ATAD II added rules extending its scope to mismatches between EU Member States and third countries. ATAD II also extended the basic anti-hybrid rules to include hybrid Permanent Establishment mismatches, hybrid transfers, imported mismatches, reverse hybrid mismatches and dual resident mismatches. The implementation deadline for these anti-hybrid rules is 1 January 2020 (with the exception of anti-reverse hybrid rules which must be implemented by 1 January 2022).
Following a public consultation process the Department of Finance issued an ATAD Feedback Statement in July 2019 which formed the basis for the Finance Bill 2019 provisions implementing the anti-hybrid mismatch rules into Irish law. The anti-hybrid provisions essentially seek to prevent taxpayers from engaging in tax system arbitrage whereby a taxpayer seeks to exploit differences in countries tax systems to benefit either from a double tax deduction or a tax deduction without inclusion of the payment as taxable income of the recipient.
In September 2018 the Irish Government published Ireland's Corporation Tax Roadmap (the Roadmap). At the time of publication of the Roadmap it was noted that Ireland would introduce an ATAD compliant interest limitation rule. The timing of implementing legislation was to be determined following engagement with the European Commission. Work was commenced to examine bringing forward implementation from the original planned deadline of January 2024 to as early as Finance Bill 2019. However, nothing has been included in Finance Bill 2019 dealing with the interest limitation rule. As such it is considered unlikely that the matter will be addressed for another twelve months (i.e. in Finance Bill 2020) at the earliest.
Council Directive (EU) 2018/822 (DAC6) is a European Directive which introduces an obligation for 'intermediaries' or taxpayers to disclose potentially aggressive tax planning arrangements and an automatic exchange of such disclosed information between the relevant tax authorities of EU Member States. Disclosure is required in respect of cross-border arrangements that meet certain hallmarks. DAC6 is effective from 25 June 2018 and requires Member States to introduce a common mandatory disclosure regime by 1 January 2020.
The Irish Government previously confirmed in its Roadmap that it would make the necessary changes to Ireland's existing mandatory disclosure regime to ensure full compliance with DAC6 by the end of 2019. The provisions to be introduced by Finance Bill 2019 deliver on that statement. As a transitional measure where the first step in a reportable cross-border arrangement is implemented between 25 June 2018 and 1 July 2020 that arrangement should be reported to the Irish tax authorities by 31 August 2020. From 1 July 2020 a reportable arrangement must be reported within 30 days beginning on the day after the arrangement was made available or made ready for implementation or the first step in implementation was undertaken (whichever occurs first).
Section 110 anti-avoidance changes
On Budget Day the Minister announced that anti-avoidance provisions in section 110 of the Taxes Consolidation Act 1997 would be strengthened to ensure that they would operate as intended. The Finance Bill 2019 introduces these changes. The definition of "specified person" has been broadened with the aim of increasing the number of structures that will be subject to the anti-avoidance provisions. This broadens out the definition to include inter alia persons who have the ability to exercise significant influence over the section 110 company and have a 20% holding in the relevant debt instrument. In addition amendments place the tax avoidance main purpose test on an objective basis.
Significantly though there is a carve out from the application of the new transfer pricing rules mentioned above for section 110 companies.
There are other measures in the Bill which may be of interest such as enhancements to the KEEP taxation of employee incentive arrangements provisions, improvements to the R&D tax credit arrangements, but also additional anti avoidance provisions in certain areas including in relation to stock lending arrangements.