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Investing in Ireland, Corporate Governance and Tax

The international tax landscape is continuing to face extensive changes on a global level as further measures aimed at enhancing fair and transparent taxation are introduced. 

The source of these changes is a combination of measures agreed at an OECD, EU and domestic level. 

Notwithstanding significant developments in the global tax landscape, continuing to attract FDI remains a fundamental cornerstone of Irish tax policy and legislation. Ireland is taking steps to ensure that Ireland’s corporation tax regime will remain competitive, fair and sustainable.  A review of Ireland’s R&D tax credit is expected in the coming year and the Irish government has established a Commission on Taxation and Welfare to conduct a comprehensive review of the Irish tax and welfare systems. This review extends to simplifying the Irish tax system and considering potential amendments to the personal tax regime to continue to attract mobile workers.

It is clear that 2022 and onwards into 2023 will be a transformative period in the international tax landscape as key new measures, such as the global minimum effective tax rate of 15% are implemented into Irish domestic legislation.  We expect to see many of these changes introduced in this year’s Finance Bill to be published in October 2022.  

On the Corporate Governance side, Covid-19 dominated the boardroom agenda for the past two years but, for companies and their boards, the focus now begins to shift towards the busy legislative slate ahead. 

Domestically, themes such as investment screening, the establishment of the Corporate Enforcement Authority, an overhaul of the competition enforcement regime and the modernisation of laws governing certain corporate vehicles are expected to feature prominently. 

Some emergency company law measures designed to facilitate the continuation of business during the pandemic will make their way permanently onto the statute books. EU commitments under the European Green Deal will begin to be felt in the boardroom.  Irish companies will be keeping a close eye on developments in the ESG area. The Proposal for a Corporate Sustainability Reporting Directive would oblige companies in scope to report against common EU sustainability reporting standards.  This will see a large number of companies being brought within the sustainability reporting regime for the first time. The related Proposal for a Corporate Sustainability Due Diligence Directive seeks to introduce a sustainability due diligence duty for large companies to address adverse human rights and environmental impacts.  Early planning on the part of companies and their directors is key.

Key Themes in Taxation and Company Law

Tax Developments

A whirlwind of change as the path to global tax reform begins 

Update on the OECD’s two pillar approach

The landmark agreement reached by the international community in October 2021 will result in a major reform of the international tax system to address tax challenges arising from the digitalisation of the economy.  This will be achieved with the adoption of the OECD’s Pillar One and Pillar Two proposals. 

  • Pillar One will introduce a new formulaic mechanism for allocating profits among multinational groups.  It is expected that taxing rights on more than EUR 100 billion of profits will be reallocated to market jurisdictions each year under this mechanism. 
  • Pillar Two introduces a global minimum corporate tax rate set at 15%.  The new minimum effective tax rate will apply to companies with revenue above EUR 750 million and it is expected to generate around EUR 130 billion in additional global tax revenues annually.  

The OECD is moving ahead with an ambitious timeframe for this project, with effective implementation of the proposals targeted for 2023. Model rules in respect of both Pillars have been published by the OECD and public consultations are continuing.  Therefore, we expect to see these rules being shaped and refined throughout 2022, with the final proposals implemented into Irish domestic legislation by 2023.

Importantly, Ireland’s headline 12.5% corporation tax rate will remain in force for businesses in Ireland with revenues below EUR 750 million. This will mean that there will be no increase in the corporate tax rate for over one hundred and sixty thousand businesses operating in Ireland. 

 

The European Union's Tax Policy

In parallel with the OECD’s work plan, many new EU measures will also be implemented in 2022 and subsequent years aligning with the European Commission Tax Action Plan published in 2020.  A common EU approach is emerging in certain areas such as transparency, information sharing and common rules on targeting tax advantages arising from mismatches between different regimes.  Some key EU tax proposals include:

  • ATAD III: In December 2021, the European Commission presented ATAD III, or the draft Directive known as the “unshell” proposal, to ensure that entities in the EU that have no or minimal economic activity are denied the benefit of certain tax advantages. If adopted, this Directive is proposed to come into effect on 1 January 2024.
  • Public country-by-country reporting: Tax authorities within the EU have been exchanging a wide range of tax data since 2016.  Under a new EU public country-by-country reporting Directive to be transposed by June 2023, much of this information will now be shared publicly by in-scope entities for financial years from June 2024.  
  • DAC 7: The latest iteration of the EU information sharing directives is DAC 7, which will extend the scope of the existing information exchange in 2023 to digital platforms that will be required to collect and report information on income realised by sellers on such digital platforms.

There are also a number of other EU tax proposals in the pipeline, including BEFIT, a new framework for income taxation for businesses in Europe, which aims to replace the previous proposals for a CCCTB by building on the approval of formulary apportionment in the global tax agreement. In addition, rules to incentivise investment in companies by way of equity rather than debt are also being proposed under the EU’s “DEBRA” initiative.

In the wake of changes, the Future of Foreign Direct Investment looks bright

Ireland remains a willing participant in the ongoing process of global tax reform and fully supports most of these proposals. The move to a global minimum effective tax rate is a step towards greater tax certainty, which is widely welcomed by multinational taxpayers in Ireland. Importantly the 12.5% headline corporation tax rate will remain in force for companies below the Pillar Two revenue threshold of EUR 750 million revenue threshold.  Ireland also intends to ensure that the use of R&D tax credits can continue to support innovation and growth in compliance with the OECD framework.

Aside from Ireland’s competitive tax regime, there are a myriad of reasons why Ireland is an attractive FDI location, including our highly skilled workforce, membership of the EU, vast treaty network and multitude of non-tax government incentives. A recent OECD report found that Ireland was the second most open economy to trade in in the OECD. This is also reflected in statements by the Irish Development Authority, (the "IDA") which confirmed that in 2020, Ireland actually increased its market share of Foreign Direct Investment into Europe in the face of global declines in FDI flows. 

Overall, it is clear that the FDI pipeline looks to remain strong throughout 2022 and onwards.

 

Corporate Governance Developments

The focus on boards and their accountability sharpens

Foreign direct investment (“FDI”) remains a pillar of the Irish economy. An FDI screening regime is now firmly on the horizon, having been categorised as priority legislation in successive legislative agendas in recent times.

The recent introduction of an equivalent UK investment screening regime generated much attention. The fact that pre-legislative scrutiny  has been waived may ease the passage of the (as yet unpublished) Investment Screening Bill but we can still expect policy debate in this area over the coming months.

The COVID-19 pandemic only served to intensify calls for investment screening in the period since the EU Investment Screening Regulation 2019/452 became operational in October 2020. The precise parameters of the proposed Irish regime and its interaction with existing merger clearance procedures will only become apparent upon publication.

The Companies (Corporate Enforcement Authority) Act 2021 became law on 22 December 2021 but awaits commencement.  Its key aim is to establish the Corporate Enforcement Authority as a statutory agency with the autonomy and resources to respond effectively to white collar crime.  The act also ‘fixes’ certain anomalies found in the Companies Act 2014.

While welcome, these amendments fall short of those recommended by the Company Law Review Group and other expert bodies. Further legislation will be required to address these anomalies but whether this will be within the Companies (Miscellaneous Provisions) Bill or elsewhere remains to be determined.

Enhanced sustainability reporting for corporates on the horizon

The proposed Corporate Sustainability Reporting Directive (“CSRD”) would oblige companies to report against common EU sustainability reporting standards. Some 11,000 EU companies are already covered by the CSRD’s predecessor, the Non-financial Reporting Directive 2014 ("NFRD") which was transposed into Irish law in 2017.

NFRD reporting requirements apply to large “public interest entities” with more than 500 employees. The CSRD will apply to all large EU companies (except listed micro-companies) bringing approximately 49,000 companies in scope of a more ambitious sustainability reporting regime. 

Companies are likely to start reporting to the new standards in 2024, based on FY2023 information, with SMEs being given additional time. Now is the time for boards to plan for these significant changes coming down the tracks.

EU Directive on public country-by-country reporting

Dec 13, 2021, 09:17 AM
Title : EU Directive on public country-by-country reporting
Filter services i ds : 2233475e-1d3c-49cc-9136-5142858c1949;
Engagement Time : 6
Insight Type : Article
Insight Date : Dec 9, 2021, 00:00 AM

On 1 December 2021, the EU published the recently approved Directive on public country-by-country reporting, Directive (EU) 2021/2101 (the “CBCR Directive”).  The CBCR Directive requires multinational entities and standalone entities with a consolidated revenue over EUR 750 million for each of the last two consecutive financial years to publicly disclose certain information (including details as to revenues, number of employees and amount of tax paid) in respect of their activities in each EU Member State, as well as in certain third countries.  This information will need to be published on the group’s website by December 2026 for in-scope entities with a 31 December year-end.

Scope of the CBCR Directive

The CBCR Directive requires multinational enterprises (whether headquartered in the EU or outside) and standalone undertakings with activities in the EU and a total consolidated revenue of more than EUR 750 million (USD 915 million) in each of the last two consecutive financial years to publicly disclose specified information (detailed below) in respect of their activities in each EU Member State, as well as in certain third countries.  EU branches of undertakings located outside the EU can also trigger a reporting requirement where the parent undertaking satisfies the EUR 750 million revenue threshold. 

An exemption applies where the relevant entity only has a presence in one single EU Member State or if the undertaking is already subject to similar reporting obligations. 

Where the parent of a multinational group is established outside the EU, a reporting obligation will arise where an EU subsidiary constitutes a “medium” or “large” undertaking under the terms of the EU Accounting Directive 2013/34/EU.  Broadly, this means that a multinational group will be required to file a public CBCR report where it has an EU subsidiary that exceeds at least two of the following three criteria:

(i) balance sheet total: €4,000,000;

(ii) net turnover: €8,000,000; or

(iii) average number of employees during the financial year: 50.

If an EU subsidiary does not have all necessary information required to be published under the CBCR Directive, it must request this information from its parent entity or publish a statement that the parent has not made the necessary information available.

Information to be disclosed publicly

Where a reporting obligation arises, the entity must disclose the following information in the form of an income tax report (the “Report”):

  • name of the relevant undertaking, the financial year concerned, the currency used and, where applicable, a list of all subsidiary undertakings in the EU and subsidiaries listed on the EU blacklist or greylist;
  • a brief description of business activities;
  • number of full-time employees;
  • details of revenues, profits or loss before income tax and accumulated earnings;
  • amount of income tax accrued during relevant financial year; and
  • amount of income tax paid on a cash basis.

The Report must be made on a country-by-country basis for all EU Member States as well as for each jurisdiction included in the EU blacklist or included on the EU greylist for two consecutive years.  For all other third country tax jurisdictions, the Report can be made on an aggregated basis. 

The countries currently on the EU blacklist and greylist are as follows:

The CBCR Directive provides for a safeguard clause whereby certain information can be temporarily withheld from the Report where its disclosure would be seriously prejudicial to the commercial position of the undertaking.  However, such information must be disclosed within the next five years, and reasons for the non-disclosure must be provided.

Publication and accessibility of the Report

The Report must be made accessible to the public and free of charge on the website of the relevant undertaking for a minimum of five consecutive years.  The Commission intends to lay down a common template which must be followed when making the Report.

EU Member States also have the option of allowing undertakings to publish the Report on a public central, commercial or companies register which must be referenced on the website of the relevant undertaking.  Access to any such public register must be available free of charge.  It remains to be seen whether this option will be adopted by individual EU Member States. 

Implementation timeline

The CBCR Directive will enter into force on 21 December 2021 and EU Member states will be required to transpose the CBCR Directive into national law by 22 June 2023.  The reporting requirements will apply at the latest for all financial years starting on or after 22 June 2024 but could potentially apply from an earlier date depending on domestic implementation. 

The Report must be published within 12 months of the balance sheet date of the relevant financial year.  This means that in-scope entities with a 31 December year end will need to publish relevant information by December 2026.

Responsibility for the Report

The members of the administrative, management and supervisory teams of the relevant undertaking have collective responsibility for ensuring that the Report is drawn up, published and made accessible within the required timeframe.

In addition, statutory auditors will be required to confirm and state whether a company falls within the scope of the rules and whether the Report was published in accordance with the provisions of the CBCR Directive.

There are no specific penalties included in the CBCR Directive and it is up to EU Member States to provide for penalties and ensure those penalties are enforced upon implementation into domestic law.

Review of the CBCR Directive

The impact and effectiveness of the CBCR Directive will be reviewed by 22 June 2027.  This review will examine, in particular:

  • whether it would be appropriate to extend the reporting obligation to smaller undertakings;
  • the impact of allowing data for third-country jurisdictions to be provided on an aggregated basis; and
  • the operation of the safeguard clause.

The Matheson tax team will continue to keep you updated on the implementation of the CBCR Directive in Ireland.  Should you have any questions on the above or if it would be helpful to discuss further with a member of our tax team, please do not hesitate to contact us.  

 

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