The Department of Finance has published a 'Strawman' proposal setting out an alternative approach to the taxation and deductibility of interest in Ireland.
What is your assessment of the proposal? Does it sufficiently address stakeholders’ primary concerns?
Contributor: Angela Fleming, Partner & Head of Financial Services Tax, BDO
Reform of Ireland’s interest regime has been top of the wish list for a number of years, in particular since the introduction of interest limitation rules in 2022. The need for reform is borne out of the fact that the existing regime contains vast restrictions on the availability of interest deductibility. The principle behind reform of the rules is to introduce a new regime that is best in class internationally, simplified, and with greater clarity for taxpayers. Unfortunately, the feedback statement published does not appear to have delivered on this promise.
The main issue with the proposed reform centres around the proposed new interest deductibility rule. In responses to previous consultations, calls were made for the introduction of a commercial business purpose test that would apply to all interest deductions regardless of the business activity supported by the borrowing and regardless of whether the borrowing is trade related or not. However, the feedback statement outlines that detailed consideration was given to this proposal, but that further analysis of the terms “commercial” and “business purpose” indicated that these terms are open to different interpretations and may be construed very widely. Thus, the strawman puts forward an alternative approach referred to as the “profit motive test”. The intention is to link the deduction of interest to the realisation of profits. While on the face of it this may seem a noble principle, digging into the details of the proposal it would appear to create a cumbersome requirement on taxpayers to look at both the intention and the actual application of funds, and to do so on an ongoing basis. Furthermore, linking to a profit motive, rather than commercial business purpose may mean that interest deductibility may be denied in situations where debt financing is applied for genuine business purposes.
That said it is greatly encouraging to see that the Department of Finance is considering substantially broadening the availability of interest deductions in non-trading situations. This is a necessary improvement to our current regime where deductibility for interest in non-trading situations is extremely limited.
It is clear that there has been a significant investment made by the Department of Finance to get to this point. Hopefully, with further engagement with businesses and their representatives, the next stage of the process will reflect a regime that is aligned with the stated objective of enhancing Ireland’s competitive offering by providing greater simplicity for taxpayers.
Content published in Finance Dublin Irish Tax Monitor.