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Review of Ireland’s Corporation Tax Regime
AUTHOR(S): Turlough Galvin, Matthew Broadstock, Christian Donagh, Joe Duffy, Aidan Fahy, Shane Hogan, Alan Keating, Catherine O’Meara, Mark O’Sullivan, Kevin Smith, Gerry Thornton, John Ryan
PRACTICE AREA GROUP: Tax
Ireland’s Minister for Finance (the “Minister”) welcomed the results of the independent review of Ireland’s corporation tax regime (the “Review”) issued on 12 September 2017: “I welcome the emphasis given in the Review to the importance of certainty, which is core to our corporate tax offering. Our 12.5% corporation tax rate remains the bedrock of our competitive corporation tax regime and that is not going to change.”
In addition to recognising the importance of certainty in the Irish tax code, a number of recommendations were made on foot of the Review:
- Reintroduce an 80% cap on the level of tax amortisation that may be claimed in respect of intellectual property (''IP'') acquired by Irish taxpayers – currently under Irish law the cost of IP acquired by a company may be written off against taxable profits either in accordance with the IP amortisation in the financial statements or on a straight line basis over 15 years. Under the recommendation, taxpayers claiming the relief would be permitted to relieve a maximum of 80% of annual taxable profits. If the measure is introduced certain companies whose tax amortisation equals or exceeds their taxable income would become subject to tax. The change would also result in the relief being spread-out over a longer period. It is possible that this change could be included in this year’s Finance Bill (expected next month) and applied from 1 January 2018.
- Update Ireland’s transfer pricing rules and incorporate the 2017 OECD guidelines – this recommendation was not surprising following Ireland’s active participation in the OECD’s base erosion and profit shifting project. Currently, Irish transfer pricing rules apply to arrangements entered into on or after 1 July 2010. It has been recommended that arrangements entered into before that date and that are still in place should become subject to transfer pricing. Other recommendations made on transfer pricing included extending the rules to non-trading transactions (such as IFLs). It has also been proposed that in advance of making any changes to Ireland’s transfer pricing rules, the matter should be opened for public consultation. Finally, it is recommended that transfer pricing changes are made no later than the end of 2020.
- Ireland should consider moving to a territorial tax system – Ireland is one of the few OECD countries that taxes companies on a worldwide basis. While a comprehensive unilateral credit mechanism is provided for under Irish law, it is more necessarily complex to apply than an exemption system. The implementation of the Anti-Tax Avoidance Directive ("ATAD”) in 2019 will require Ireland to adopt controlled foreign company rules by 1 January 2019. It is against this background that the recommendation to move to a territorial system (for dividends and foreign branch income) is made. As an alternative, it is suggested that Ireland should simplify the existing rules for calculating foreign tax credits. A public consultation on both options has been recommended.
- Ireland should hold a public consultation on the implementation of ATAD – as mentioned above, one of the broad themes of the Review is the importance of certainty in the tax system. In light of this one of the outcomes of the Review is that Ireland should engage in pro-active consultation on tax changes. ATAD is due to be implemented in part by 1 January 2019 and will make substantial changes to the Irish tax system. In his statement on the publication of the Review, the Minister agreed that the “consultation process recommended in the Review is important if we are to reduce uncertainty and have better-informed policy making.” All recommended consultations are due to be launched when the annual budget is announced on 10 October 2017 ("Budget Day”).
- Ireland should ensure an adequately resourced Competent Authority – in light of the increased level of international tax disputes it was recommended that Ireland should ensure its Competent Authority is adequately resourced.
On Budget Day, we should expect a number of consultations on Irish corporate tax to be launched.It seems likely that we will see an updated version of Ireland’s International Tax Strategy which should give firmer indications on the timing of some of the proposed changes. Over the next three years a number of important changes will be made to the Irish corporate tax rules. These changes are expected to be broadly positive and reinforce Ireland’s commitment to a transparent, robust and competitive tax system. It is clear from the Review that those changes will only be made following consultation and at the latest by the end of 2020.
If you would like further details on any aspect of the Review or how it might impact your organisation, please speak to your usual Matheson contact or any of the Tax Partners listed above as authors of this article.