Publication:

BDO Coffey Consultation Review

05 February 2018

Department of Finance’s Public Consultation – Review of Ireland’s Corporation Tax Code October 2017

Background

The international tax landscape has been rapidly evolving over the last few years as individual countries consider whether or not their tax regime is fit for purpose and aligned with modern day business structures. In 2012 the G20 identified the need to prevent base erosion and profit shifting as a matter that the OECD should formulate a strategy on. The OECD’s Base Erosion and Profit Shifting (“BEPS”) Project was announced in 2015 and contained 15 ambitious actions that were aimed at modernising international tax law and double tax agreements whilst also reducing the need for individual countries to implement tax changes unilaterally.

Not to be outdone by the OECD, the EU Commission put forward its Anti Tax Avoidance Directive (“ATAD”) in 2016. The ATAD is designed to ensure consistent implementation of a number of the BEPS initiatives across the EU. A number of the ATAD measures must be implemented by EU countries by 2019.

In order to better inform the Government about potential Irish tax reform that may be needed in order to meet Ireland’s requirements under the BEPS and the ATAD, and to also ensure Ireland remains competitive from a tax perspective, the Department of Finance appointed Mr Seamus Coffey (UCC, Irish Fiscal Advisory Board) as an independent expert tasked with carrying out a review of Ireland’s corporation tax code. Mr Coffey’s review was made public on Budget day in October 2017 and at the same time, Minister for Finance Paschal Donohoe also announced a public consultation on various recommendations contained within the review paper.

The public consultation paper focuses on:

  • The implementation of the ATAD,
  • The implementation of BEPS related transfer pricing changes,
  • The potential expansion of Ireland’s existing transfer pricing rules to include SME’s, non-trading income and capital gains,
  • The effects of a potential move to a territorial tax system, and
  • Means of potentially simplifying the computation of foreign tax credits.

On behalf of our clients we have made a submission on the consultation which you can find here.  A summary of our recommendations is outlined below.

  • Draft legislation to implement any proposed changes should be introduced as early as possible and subject to consultation and discussion with industry and practitioners to ensure that legislation does not have unintended consequences. Draft legislation should be released outside of the current budget process as October – December is too restrictive a timeframe for such extensive legislative changes as will be required to implement BEPS/EU ATAD.
  • While there are existing GAAR provisions, it might be reasonable to align the Irish GAAR with that proposed under EU ATAD. This could give more certainty to taxpayers over the medium-to-long term as guidance could be sought from EU case law on interpretation of a GAAR that is consistent across the EU, rather than only having Irish case law as guidance.
  • We recommend Option B for implementation of CFC rules into Irish law. For our SME clients in particular it will be important that there are de-minimus limits which can be applied in determining potential CFC exposure in order to minimise the administrative burden on those clients. A “substantive economic activity” exclusion should also be included with a clear definition of the term.
  • Legislation on the implementation of Anti-Hybrid provisions should be clearly drafted with definitions which are aligned with existing definitions already contained in Irish tax law (where possible). The definitions contained in the directive are not aligned to Irish tax law and would make interpretation of the legislation in Ireland difficult.
  • The existing exclusion for SME’s from transfer pricing should be kept in order to minimise the administrative burden on SME’s.
  • To the extent that transfer pricing is extended to SME’s, reduced documentation requirements should be introduced for the SME sector.
  • Where transfer pricing is extended to non-trading transactions, an exemption for domestic transactions should be included.
  • Transfer pricing should not be extended to capital gains as the existing legislation already contains market value substitution for related party transactions.
  • It is our strong recommendation that we move to a territorial system for branch and dividend income in order to increase Ireland’s tax competitiveness. To the extent that a partial territorial system is introduced (e.g. with restrictions for say non-EU/DTA sources) a simplification of Schedule 24 should also be undertaken.
  • Simplification of Schedule 24 should be carried out for other sources of foreign income not subject to territorial system (e.g. interest and royalties).

If you have any queries or wish to discuss this submission or any other international tax matter with BDO Ireland, please contact Kevin Doyle – kdoyle@bdo.ie.