Highlights of 2017
What would you consider to have been the tax highlights of 2017?
Tax highlights include the first step taken by Ireland, in Finance Bill 2017, to ratify the OECD multilateral instrument (MLI). This will have the effect of simplifying the process of modifying existing bilateral tax treaties. It will only apply though to the extent that the other jurisdiction has also ratified the MLI, for provisions mutually adopted by both parties. Minimum standards are required in respect of the anti-treaty abuse and dispute resolution articles of the MLI, which is expected to impact significantly on the international tax landscape in the next two to three years. Optional measures include the approach to hybrid mismatches and avoidance of permanent establishment status.
The Tax Appeals Commission (TAC) announced that there will be a less intimidating, less formal and more accessible Tax Appeal process from 2018. Their goal is to improve the interaction with appellants and to speed up the current process which has resulted in considerable backlog through differentiating between cases that are relatively straightforward and those that are more complex. The TAC is also to move to new facilities so that increased number of hearings can be dealt with at the same time and to allow consultation between the parties to the appeal.
Lowlights of 2017
What would you consider to have been the tax lowlights of 2017?
1. KEEP share scheme for SMEs
The new measure contained in the Finance Bill in relation to share options provides that Capital Gains Tax (CGT) will apply on a share disposal rather than Income Tax when the option is exercised.
Some concerns around the scheme include:
i. The requirement to get valuations done on a regular basis and inherent uncertainty as to how shares are valued;
ii. The cap of €3 million in place for options could present challenges for some companies;
iii. A share purchase scheme where employees could acquire shares at nominal value, with CGT on a disposal, would mean greater employee participation than the KEEP scheme;
iv. How to realise the value of share options in a private company is also a challenge.
This new scheme, while welcomed, raises a number of issues which it is hoped will be addressed in due course.
2. Permanent Establishments – an area of increasing complexity
The recent Dunlop case (Sweden) highlights the difficulties around what constitutes a permanent establishment (PE). While always a grey area, the Dunlop case gave rise to a split decision in the Swedish court with the president of the court dissenting. Dunlop Tyres is a German tax resident company found to have a PE in Sweden. Dunlop sends people from Germany to Sweden every year to test software and collect associated data from the Nordic region, as part of one of their product lines – the sale of software for tyre inflation systems to car manufacturers. The testing lasts for three to four months where the Dunlop employees spend some time in Sweden, use cars provided by its German car manufacturer clients and bring the relevant equipment from Germany. In the view of the dissenting judge, the data being collected was preparatory for R&D activities that took place in Germany. It was held that the Swedish activities were essential and integral to the overall product development of tyre inflation systems, given that Dunlop had returned for each of the previous ten years to perform the testing.
It is clear from this split decision that the issue of when a company is considered to have a PE is becoming an increasingly grey area. Companies need more than ever to be aware of the risks, aware of developments in terms of tax cases and the progress of BEPS, particularly in relation to the MLI discussed under the response to question 1 above and the increased complexity around the approach taken by treaty partners to the optional elements, and to proactively manage those risks.
3. The dogs that didn't bark in 2017?
At the beginning of 2017 much was made of pending reforms and improvements in the tax system.
The Oireachtas Budget Office was going to reform the annual Budget circus and make the process more of a transparent year around one. Did this happen?
At a time when, more than ever, Ireland needs to attract the best and brightest to work here, not least from the UK and the City of London, no reforms to the limping SARP programme were forthcoming in 2017. What else was promised and never showed?
The Oireachtas Budget Office was set up to improve the level of active involvement of the Dáil and Seanad in the budgetary process. The intention was to facilitate more amenable proposals in the Dáil which would be validated by an independent office before submission, improving the quality of the budget. However, delays in setting up an independent Oireachtas Budget Office meant that the committee’s role in the Budget process was severely constrained. The Oireachtas Budget Office made its first submission two weeks before Budget 2018 was announced and this was a secret report. As such, we will only be in the position to assess the benefit of this new model and its success in reforming the budget process during Budget 2019 stages.
Apart from anticipated reforms to the SARP programme, there was disappointment over the failure to make any changes to the CAT regime, with the Government having previously committed to restoring the tax-free thresholds for gifts to children to pre-bust levels. In addition, the promised merger of the PRSI and USC regimes, deduction against rent for local property tax and the fast-tracking of the amount of mortgage interest allowable as a rental expense never materialised.
With the current minority led government a general election is never too far away and it this regard there is no surprise that the 2018 Budget has the old-fashioned look of a pre-election type offering. With Brexit fast approaching this approach needs to be left aside as urgent moves are necessary in order for Ireland to capitalise on opportunities available.
4. Brexit means Brexit
The past week's dramatic game of Mexican stand-off between the UK and the EU seems to have been resolved, allowing Phase II of the Brexit negotiations to proceed in the New Year.
However, as predicted here right at the start, the UK's end position is starting to look more and more like a "Norway 2 Deal", i.e. access to the 27, but no influence over the rules and compliance with those rules as a sine qua non. Whither Brexit in the second half of the countdown to exit and what will the implications be for Ireland on the tax front?
It remains difficult to determine the outcome of the Brexit negotiations. While it was agreed that “sufficient progress” was made under the lengthy phase I negotiations, actual negotiations on future trade ties under phase II will not start until March 2018. It is anticipated that phase II negotiations will be tougher and more protracted than the initial negotiations.
It would be preferable if the UK choose a Norway-style relationship with the EU, that is, membership of the EEA and access to the single market. However, based on the agreed negotiation guidelines
if the UK insists on leaving the EU, the single market and customs union, the UK will likely be forced into adopting a deal similar to the Canadian and South Korean trade pacts, with limited access to the EU and free movement of key personnel only.
The UK is Ireland’s key trading partner, with €14 billion of exports to the UK annually. Brexit and the associated introduction of tariffs, customs and travel restrictions will have a significant impact on Ireland, the extent of which cannot be forecast with any degree of certainty at this stage. However, Brexit should also be seen as an opportunity for Ireland to increase its FDI attractiveness to companies who want a presence in the Single Market, helped by our simplified tax system, investment incentives, R&D tax credits and of course access to 440 million customers across Europe.
5. BEPS, ETAD, ETAP, CCCTB
In the battle for international tax dollars, there would appear to be two contenders, the OECD's BEPS programme favoured by Ireland and the EU's more localised ETAP programme, coupled with the eternal CCCTB.
Where is the international tax reform caravan going next in 2018 ... and what about the US tax reforms, which have just cleared Congress? Will US reforms be implemented in 2018 and what impact will these have on Irish FDI?
In terms of EU tax reform, it is likely that the focus for 2018 will be on digital tax reform and an overhaul of the VAT system.
On foot of submissions to consider a new corporate taxation system based on the virtual presence of digital firms, the European Commission is expected to release proposals in 2018 for temporary measures for taxing the digital economy. This digital tax system would provide for the taxation of online businesses where the companies has virtual activities and not only where they are headquartered and would have a significant impact on the tech giants, the majority of which are located in Ireland.
In October 2017, the EU Commission published its proposals for fundamental changes to the EU VAT system to tackle the VAT gap representing a significant level of VAT fraud estimated at more than €50 billion per annum. The reforms aim to move towards a definitive system based on the destination principle which seeks to replace the current intra-Community supply regime. The EU Commission is clear in this objective – to obtain a fraud-proof VAT system that helps businesses operating out of Europe to compete in global markets while at the same time simplifying and modernising the European VAT collection process.
Ireland’s competitive tax system is a contributing factor to the surge of US businesses locating here. Maintaining a strong inflow of investment from the US is essential for the continued growth of the Irish economy. With the US tax reform aimed at bringing business ‘home’, it is likely the Irish economy will feel an impact of these changes in some shape or form. However, the Irish corporation tax rate of 12.5% remains attractive vis a vis the reduced US corporation tax rate of 21% (plus State taxes). While the spirit of the tax reform movement was to simplify and bring “home” US companies, initial feedback from US tax advisors is that the new legislation is complex. This is to be expected given that nearly 1,000 pages of tax legislation was enacted at an almost unprecedented pace. It will be months before the full impact of the reform on US businesses in Ireland, and Irish businesses in the US, will be understood.
This article first appeared in Finance Dublin magazine in January 2018 as part of the The Irish Tax Monitor Roundtable.