Following last week's publication of the various OECD/G20 reports on the Base Erosion and Profit Shifting ("BEPS") project, the Irish Budget delivered on 13 October 2015 contains the first Government initiative on implementing some of the recommendations. Key features are the introduction of the first of its kind knowledge development box with a tax rate of 6.25%, country-by-country reporting and an update on Ireland's International Tax Strategy. Details of the knowledge development box and country-by-country reporting remain sparse and are unlikely to emerge until the publication of the Finance Bill in the next six weeks or so.
BEPS, EU Law and the Irish Tax Regime
Some years ago, at an early stage of the OECD/G20 BEPS initiative, the Irish tax regime was targeted for its approach to Irish incorporated but non tax resident companies. The Irish Government listened to the BEPS representations and liaised with key industry players and tax professionals. Tax law was duly amended. Moreover, as the Irish tax code has developed, Ireland has taken steps ahead of any BEPS initiative to ensure that its code is at the forefront of best-in-class international tax practice. For example, having regard to the use of Ireland as a key base for big ticket asset finance, some years ago, Ireland made changes to its tax law so as to impose withholding tax on certain interest payments to countries that either do not have a double tax treaty with Ireland and/or do not generally tax such foreign source interest.
Ireland's latest Budget merely further cements the strong platform of using the Irish fiscal base to attract investment that has continued for more than half a century. Key long-term features of the Irish tax regime in light of the various BEPS final reports include:
- acceptance by the OECD/G20 that each country has a sovereign right to determine its own tax rate and by extension, Ireland's 12.5% tax rate is beyond international challenge;
- acceptance by the OECD/G20 that there should be no ring-fencing of the digital economy within a separate international tax regime. Hence, acceptance that digital businesses can continue to establish and grow from an Irish incorporated base;
- acceptance by the OECD/G20 that there is no requirement for Ireland to introduce a controlled foreign company regime that imputes taxable profits to an Irish parent company. Hence, Ireland will continue to be a favourable holding company location for technology companies, pharmaceuticals and other groups;
- acceptance by the OECD/G20 that any future discussion on a multi-lateral treaty will need to address EU law concern. Ireland's EU membership should be a key factor on the extent to which any multi-lateral treaty might otherwise have limited the attractiveness of Ireland's growing network of double tax treaties and information exchange agreements; and
- having regard to the OECD/G20 action plan on harmful tax competition, Ireland proposes a 6.25% tax rate on a modified nexus knowledge development box.
Knowledge Development Box
Under the modified nexus model advocated by the OECD, Ireland's knowledge development box will apply to income arising from certain patents and copyrighted software which result from R&D carried on in Ireland. A tax rate of 6.25% will apply to such income. Where R&D is carried on outside of Ireland or arises from bought-in intellectual property, the preferential rate of tax is unlikely to apply. We await the publication of the Finance Bill to ascertain the exact details of the new regime, the treatment of gains and its interaction with Ireland's 25% tax credit regime for R&D and IP amortisation tax regime.
Where a Multi-National Enterprise ("MNE") with consolidated group turnover of €750m+ has an ultimate parent incorporated and tax resident in Ireland, the new country-by-country reporting is likely to apply. Suffice as to note that under Action 13 of the OECD BEPS – "… large MNEs will be required to file a Country-by-Country Report that will provide annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax and income tax paid and accrued. It also requires MNEs to report their number of employees, stated capital, retained earnings and tangible assets in each tax jurisdiction. Finally, it requires MNEs to identify each entity within the group doing business in a particular tax jurisdictionand to provide an indication of the business activities each entity engages in."
We await the publication of the Irish Finance Bill for details of the compliance obligations that country-by-country reporting will bring.
Ireland's attraction as a key location from which to conduct business should be further enhanced in the post-BEPS world. Changes announced in the Irish Budget demonstrate Ireland's commitment to have its tax regime be one of the best in class and free from challenge under either OECD principles or indeed EU law. Whilst country-by-country reporting will create a further compliance burden for MNE's with an Irish holding company, it is merely part of the new world of accepting that a group's international tax affairs need to be capable of increased scrutiny in the new arena of openness.
Not alone is this a tax-driven initiative, the Irish Companies Act 2014 puts a requirement on directors to include an annual compliance statement on a company's Irish tax affairs. Such a statement will need to consider country-by-country reporting, maintenance of transfer pricing documentation and, by implication, a review on the overall tax strategy adopted by Irish incorporated companies.
Storm clouds may be growing in the EU with the European Commission's Action Plan for Fair and Efficient Corporate Taxation in the EU and a revised proposal on the Companies Consolidated Tax Base ("CCTB") awaited. For now, Ireland has once again dealt with the international agenda promoting openness and transparency of MNE's tax affairs whilst maintaining a stable tax environment to remain as one of the best location worldwide to conduct corporate activities.