Tax, Transfer Pricing and Tax Controversy
It is clear that the next few years will be a transformative period in the international tax landscape as key new measures, such as the Pillar Two global minimum effective tax rate of 15% are implemented into Irish domestic legislation.
Ireland is taking steps to ensure that Ireland’s corporation tax regime will remain competitive, fair and sustainable upon implementation of these changes. As part of the Budget 2023 statement, the Irish Minister for Finance reaffirmed Ireland's commitment to the OECD's Pillar Two rules and noted that work is ongoing to develop the multiple new elements required to give effect to the proposed minimum effective corporate tax rate. Importantly, Ireland’s headline 12.5% corporation tax rate will remain in force for businesses in Ireland with revenues below EUR 750 million.
Tax - Latest Developments
Finance Bill 2022 was published on 20 October 2022. The bill includes amendments, previously announced in Budget 2023, in order to better align Ireland's corporation tax system with the proposed international tax reforms under Pillar Two (which are currently expected to be implemented by 31 December 2023):
Research and Development ("R&D") tax credit: The existing R&D tax credit is amended to ensure that it is a qualifying refundable tax credit for Pillar Two and US foreign tax credit purposes. The amendments are timing changes and do not affect the quantum of credit that a company is entitled to claim. A company will now have an option to request payment of the credit in a three year fixed payment schedule without offsetting it against other tax liabilities first. Existing caps on the payable element of the credit are also being removed. The new regime is being introduced with effect for accounting periods commencing on or after 1 January 2022. Transitional measures will be in place for one year to assist the transition to the new payment system for companies that are already engaged in R&D activities.
Knowledge Development Box ("KDB"): The KDB will be extended to accounting periods commencing before 1 January 2027 and the effective rate will be increased by ministerial order to 10% (from 6.25%) to align with the Pillar Two 'subject to tax rule' once agreement is reached at OECD/G20 level on implementation.
The Bill will be debated in the Houses of the Oireachtas and the final text is expected to be passed into law before the end of 2022.
As part of the Budget 2023 statement, the Minister also confirmed that, in conjunction with Pillar Two implementation, the options for a move towards a territorial corporation tax system are being given serious consideration. The introduction of a dividend participation exemption and a foreign branch exemption would better accommodate the implementation of the Pillar Two rules by providing more clarity and less complexity.
The Department of Finance launched public consultations seeking views on the implementation of the Pillar Two minimum tax rate proposal in Ireland and on a possible move to a territorial system of taxation earlier this year. The feedback received through these consultations will be taken into account in drafting any domestic implementing legislation.
"Ireland has committed to the two-pillar agreement and has engaged intensively at OECD and EU level to follow through on this commitment. The agreement is in line with Ireland’s long-standing position that co-ordinated multi-lateral action is the best approach to ensuring the international tax system keeps pace with changes in how business today is conducted internationally"