On the 14th of January 2021, the Irish Government published its update to Ireland’s corporation tax roadmap. Minister Donohue explained in his foreword that he published the corporation tax roadmap in 2018 to provide a clear indication to stakeholders of the actions that Ireland would take to ensure that our corporation tax system remained competitive, fair and sustainable.
This update now provides an opportunity to take stock of the significant actions Ireland has taken to date as part of its international tax reform. Meeting its commitments set out in the 2018 Roadmap, whilst also setting out Ireland’s key commitments to further actions.
The update signals a series of further policy considerations and the consultations which will take place to ensure that key stakeholders will have an opportunity to provide input into the development of policy over the coming months and years.
The update sets out Ireland’s commitment to:
- Implement interest limitation rules in accordance with the ATAD standard;
- Legislate for new international tax transparency rules for digital platforms;
- Legislate for reverse hybrids about ATAD anti-hybrid rules;
- Adopt the authorised OECD approach for transfer pricing of branches;
- Consider actions that may be needed in respect of outbound payments from Ireland and the wider withholding tax regime;
- Strengthen the domestic stakeholder engagement process.
The Government has confirmed its commitment to Ireland’s corporation tax regime. It will remain competitive, fair and sustainable with the 12.5% rate at its core.
The publication of this update enables Ireland to set out the next steps in the ongoing process of modernising and further strengthening its corporation tax system.
Ireland and the roadmap commitments
The key commitments and timelines
Below is a summary of the 12 commitments set out in the update which Ireland has committed to and the expected timelines. It is worth noting that 1-5 are existing commitments from the 2018 roadmap which require further action, whilst 6-12 are further commitments to action, consult and consider:
Each commitment is discussed in further detail as follows:
1. Introduce ATAD-compliant Interest Limitation Rules
ATAD requires Member States to implement an interest limitation ratio, designed to limit the ability of entities to deduct net borrowing costs in a given year to a maximum of 30% of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA).
Ireland's interest limitation rules differ. Ireland utilise purpose-based tests, designed to limit certain borrowings, as opposed to the ratio-based approach the ATAD takes.
Nevertheless, despite these differences, the Irish Government argued that the country's rules remain “equally effective”. As a result, this allowed Ireland to postpone transposition of the interest limitation element of the ATAD until 2024. The European Commission took a different view, however, asking that interest limitation rules be transposed into Irish law sooner.
In December 2020, Ireland launched a feedback statement on the ATAD implementation of Article 4 interest limitation. It stated that an interest limitation ratio (ILR) will be transposed in Finance Bill 2021, effective 1 January 2022.
2. Legislate for reverse hybrids in relation to ATAD anti-hybrid rules
The purpose of anti-hybrid rules is to prevent arrangements that exploit differences in the tax treatment of a financial instrument or an entity under the tax laws of two or more jurisdictions that generate a tax advantage.
ATAD requires that such a reverse hybrid entity be regarded as resident in the relevant Member State and taxed on its income to the extent that it is not otherwise taxed under the laws of the Member State or any other jurisdiction.
ATAD-compliant anti-hybrid rules were introduced in Finance Act 2019. Transposition of anti-reverse-hybrid rules is planned for 2021.
3. Consult on the possibility of moving to a territorial tax regime
Consideration of moving to a territorial system of taxation was due to take place in 2019; however this was deferred. It was deemed advisable to wait until there was greater certainty around the international taxation environment before addressing this issue directly. This consultation process is now scheduled to commence in 2021.
4. Progress the international mutual assistance bill
This was a commitment in the 2018 roadmap. It is stated in the update that work is close to finalisation on the drafting of this Bill with a view to publishing in the coming weeks.
5. Apply defensive measures to countries on the list of non-cooperative jurisdictions
Ireland supports the EU list of non-cooperative jurisdictions for tax purposes.
Delivering on the commitment made by Member States to introduce new defensive measures. Ireland’s Finance Act 2020 provides that controlled foreign corporation (CFC) rules apply more stringently to companies with subsidiaries operating in jurisdictions that remain on the EU non-cooperative list.
6. Consider additional defensive measures to countries on the list of non-cooperative jurisdictions
In 2021, consideration will be given to introducing additional defensive measures, if required, including denial of tax deductions or the imposition of withholding taxes where material payments are made from Ireland to listed jurisdictions.
A public consultation will be launched in early 2021 with the objective of considering the introduction of appropriate measures in Finance Bill 2021.
7. Consider actions that may be needed in respect of outbound payments
In 2021, consideration will be given to broader issues related to outbound payments from Ireland and the wider withholding tax regime. At the same time, it is anticipated that issues raised in respect of outbound payments relate fundamentally to historical issues which have essentially been resolved by US tax reform. A consultation on the issue will provide an opportunity to consider whether further action by Ireland may be necessary.
8. Adopt the authorised OECD approach for transfer pricing of branches
Ireland reformed its transfer pricing rules significantly in Finance Act 2019 to bring them in line with best international practice under OECD guidelines. Further reform of Ireland’s rules are to take place now, seeing the extension of rules to the taxation of branches in Ireland in line with the authorised OECD approach.
Work will commence in early 2021 on this policy and it is intended to bring forward the necessary legislation in Finance Bill 2021.
9. Continue to meet international best practices on exchange of information and support efforts to enhance information exchange
Ireland has been proactive with respect to policy developments and is fully committed to developing and implementing the latest standards for the exchange of information among tax authorities.
Ireland is committed to contributing to the development of new reporting rules for crypto-assets and e-money to complement the common reporting standard. This will feed into a European Commission proposal in this area (DAC8) which is expected towards the end of 2021.
Ireland is committed to ensuring the best use of information received under the international exchange of information framework. Ireland is actively working with other jurisdictions to this effect. Ireland is currently working with the EU fiscal programme and the OECD forum on tax administration.
10. Proactively respond to the outcomes of international reform efforts
While governments will always need to be proactive in clamping down on any emerging aggressive tax planning schemes, it is hoped that successful agreement at the OECD and implementation of measures can lead to a period of stability after a decade of constant change. As the future direction of the global tax framework becomes clearer, Ireland will continue to take a proactive, consultative approach in ensuring Ireland’s corporation tax system is well-placed for the changing environment.
11. Publish a tax treaty policy statement taking account of international developments
Before the end of 2021, we should see the publication of a tax treaty policy statement, with emphasis on tax treaties with developing countries.
12. Continued engagement in international fora and develop a new framework for domestic stakeholder engagement
Engagement with domestic stakeholders is an essential component of policy development.
A new formal annual stakeholder engagement process, to facilitate engagement on broader matters in interest, is expected to be established in 2021.
The future for Irish corporation tax
It is evident from the details set out in the update to Ireland’s corporation tax roadmap that Ireland is fully committed to continue in implementing the necessary tax measures to prevent aggressive tax planning.
Similarly, the Irish Government is committed to consulting with stakeholders for their feedback on the impact of these measures through a formal engagement process, to ensure reforms are well designed and sustainable.
This work is ongoing, Ireland will continue to take a proactive, consultative approach in modernising its corporation tax system to enable it to be well-positioned for the changing environment.