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Ireland’s Corporation Tax Roadmap

Ireland’s Corporation Tax Roadmap

This month saw the publication of Ireland’s Corporation Tax Roadmap (the roadmap) by Minister for Finance and Public Expenditure and Reform, Paschal Donohoe.It looks at recent changes in Ireland’s tax regime and lays out the country’s plans in terms of corporate taxation over the coming years.

Recent changes for a more robust global economy

In the report, the government outlines how it will implement commitments made through various EU directives including

It also reflects on feedback to recommendations made by UCC Economics Lecturer Seamus Coffey in his recent Review of Ireland’s Corporation Tax Code.

The roadmap highlights recent reforms that have taken place to bolster global tax policy since the financial crisis. Ireland’s implementation of the OECD’s Common Reporting Standard (CRS) and the FATCA agreement with the US, enabling the automatic exchange of information between tax authorities, are also mentioned in the report.

It also references Ireland’s signing of the OECD’s Multilateral Convention to Implement Tax Treaty Measures to Prevent Base Erosion and Profit Shifting (BEPS) in 2017 as further proof of its commitment to ensuring Ireland’s tax regime is aligned with the highest global standards. Over the past decade a significant body of work has been completed by the OECD in addressing BEPS.

The nuts and bolts of tax reform

Let’s look at some of the key points:

Controlled Foreign Company (CFC) regime

The aim of the new CFC regime is to deter companies from shifting profits from Ireland to another location, eroding the Irish tax base. Ireland has chosen an ‘Option B’ approach as per advice given in the Coffey report. This means that income of a non-Irish resident CFC from non-genuine arrangements put in place for the essential purpose of obtaining a tax advantage may be regarded as CFC income.

General Anti-Avoidance Rule (GAAR)

Ireland has had a statutory GAAR for almost 30 years, so no changes are required to implement the anti-abuse rule included in the ATAD.

Interest limitation rule

The roadmap points out that Ireland considers the existing domestic rules limiting interest deductions to be at least as equally effective to those contained in the existing ATAD. Although full agreement has not been reached, the roadmap notes that: “it is anticipated that transposition could potentially advance, at the earliest, to the Finance Bill 2019.” It asserts that Ireland is entitled to a derogation from the introduction of the ATAD interest limitation rule until the beginning of 2024.

Anti-hybrid rules

The first tranche of anti-hybrid rules will be effective from 1st January 2020 following their introduction in the Finance Bill 2019. There will be further legislation after that for anti-reverse-hybrid rules.

Exit Tax

The roadmap confirms that the exit tax outlined in the ATAD will come into effect from January 1, 2020. Although no rate has been decided upon, most participants in the review suggested that a 12.5% rate would be appropriate.

Transfer Pricing

The roadmap confirms that Ireland will update domestic transfer rules with effect from January 1, 2020. This will enable the incorporation into Irish law of the 2017 OECD Transfer Pricing Guidelines in the Finance Act 2019.

Moving to a Territorial Regime

Although further consideration is planned, the roadmap indicates that Tax Law will move to a territorial regime for foreign dividends and branch profits. This would effectively mean the introduction of a participation exemption for dividends. Coffey’s report also highlights broad support for moving to a territorial regime.

Multilateral Instrument (MLI)

Ireland will look to complete the ratification of the MLI in Finance Act 2018 with the view to it taking effect to update Ireland’s double tax treaties from 1 January 2020

The roadmap also includes a statement on Ireland’s domestic withholding tax provisions:

“The most important changes to Ireland’s treaties under the Multilateral Instrument will be the introduction of strong anti-avoidance rules that should prevent treaty benefits being claimed inappropriately.”

Taxation of the digital economy

The roadmap notes the EU’s and OECD’s work on the taxation of the digital economy and confirms Ireland’s commitment to finding a system of international taxation “which is appropriate to meet the challenges and opportunities that arise from the digitisation of the economy.”

The timeline set out in the roadmap is as follows:

Q3 2018Public consultation on interest limitation rule and anti-hybrid rule
Q4 2018Finance Bill 2018 is published to include CFC rules and final legislative steps to allow ratification of the Multilateral Instrument

Publication of International Mutual Assistance Bill

1st January 2019Effective date of CFC rules
Early 2019Public consultation on updating transfer pricing rules

Public consultation on moving to a territorial regime or simplification of foreign tax credit regime

Q2 2019Implementation of Dispute Resolution Mechanism Directive
1st January 2020Alignment of Irish mandatory disclosure regime with DAC6

Effective date of anti-hybrid rule

Effective date of updated transfer pricing rules including adoption of the 2017 OECD Transfer Pricing Guidelines

Effective date of amendments to exit tax

Effective date of reverse hybrid rule

Latest possible introduction of interest limitation rule

Looking to the future with peace of mind

The roadmap helpfully charts the proposed route that Ireland will take over the coming years to ensure its tax system is fully aligned with international standards. This certainly gives existing companies, and firms looking to setup here, peace of mind allowing them to future proof any long-term investment decisions.

Ireland is one of only 23 jurisdictions worldwide to be fully compliant with new international best practice by the Global Forum on Tax Transparency and Exchange of Information for Tax Purposes and the plans laid out in the roadmap further bolster its pro-business tax regime.

Ireland’s 12.5% Corporation Tax Rate is here to stay

The roadmap strongly reaffirms Ireland’s commitment to its 12.5% rate corporation tax.  As a cornerstone of Ireland’s economic policy, Minister Donohoe has spoken of the government’s intention to ‘robustly defend it’ on all fronts.

Stability, clarity and confidence

With Brexit on the horizon, the roadmap provides certainty as to Ireland’s corporate taxation policy going forward enabling business owners to focus on the challenges that lie ahead post March 2019. The government’s consultative approach to policy making has ensured business is the central pillar of its tax strategy. This focus by the State on supporting business has been key in attracting so much foreign direct investment to these shores.

The roadmap indicates the government’s commitment to increasing this transparency, without adversely affecting Ireland’s pro-business environment. Providing such clarity, in an ever-changing international tax environment, enables companies to plan for the long term with confidence.