The 2020 Finance Bill and transfer pricing
Finance Bill 2020 introduced a significant rewrite to the exemption from transfer pricing for certain non-trading arrangements between Irish associates. What are the impacts for taxpayers as a result of this rewrite, and the subsequent amendments introduced at Committee Stage and what can multinationals do in advance of year end to address these changes?
Lavannia, Senior Associate, Deloitte: Finance Bill 2020 (“FB20”) had initially proposed to substantially revise S835E TCA 1997, which was introduced only a year earlier through Finance Act 2019 (“FA19”). FA19, amongst other sweeping changes to Ireland’s domestic transfer pricing regime, extended its ambit to non-trading transactions. Certain Irish-to-Irish arrangements however, remain exempt as set out by S835E.
FB20’s proposed changes to S835E, which were intended to clarify the domestic exemptions criteria, could instead have restricted their application by imposing highly prescriptive conditions for the exemptions to apply. The proposed revisions defined qualifying relevant persons who could avail of the domestic exemptions, and introduced the concept of qualifying loan arrangements. Committee stage amendments expanded the definition of qualifying loan arrangement to include debt and considered the issue of replacement loans.
However, despite the amendments, the prescriptive conditions contained in the proposed legislation would have significantly limited the availability of the Irish-to-Irish exemptions to domestic groups. A decision has been made by the Department of Finance to delay the introduction of the proposed FB20 changes, subject to Ministerial Order. We understand such an Order will not be made to effect the changes from 1 January 2021. Instead, the FA19 version of S835E remains the relevant legislation for accounting periods beginning on/after 1 January 2020 and subsequent periods until such time as the law changes.
To recap, Section 835E as enacted in FA19 provides that the transfer pricing provisions contained in Part 35A TCA 1997 will not apply in computing the amount of the profits or gains or losses of a supplier or acquirer who are chargeable to tax under Schedule D (other than under Case I or II) in respect of arrangements involving qualifying relevant persons. To be a qualifying relevant person in relation to an arrangement, the supplier or acquirer must have profits or gains or losses chargeable to tax under Schedule D and the computation of those profits or gains or losses must take account of the results of the arrangement.
Irish Revenue are in the process of drafting guidance notes in relation to the FA19 changes to Ireland’s domestic transfer pricing law, including the operation of S835E. Discussions with Irish Revenue are ongoing through TALC on the draft guidance. In advance of year end, taxpayers should review their arrangements with Irish affiliates (both trading and non-trading transactions and transactions previously grandfathered) to determine whether transfer pricing rules need to be applied or whether the exemption under S835E can be availed of.
Perrigo: possible, and important, implications
What possible consequences could arise for corporation tax from the 155 page Perrigo judgment issued in the High Court this month? In particular, might it have consequences for pharma companies and other companies in the business of trading in intellectual, or other, capital product revenue streams. Are there protective measures that companies should consider in the context, for example revision of their object of trade in their memoranda of establishment, for example in relation to defining capital trading activity as a ‘badge’ of their trade
William Fogarty, Partner, Dublin Tax team, Maples and Calder, the Maples Group’s law firm: On 29 November 2018, Perrigo was served with a notice of amended assessment for over €1.6 billion for 2013. Total corporation tax receipts for 2013 were only €4.2 billion. If Revenue are ultimately successful in the Perrigo case, it will add 38% to that initial figure, from a single corporate taxpayer. Given the amounts involved, it's unsurprising that the Perrigo litigation attracts national and international scrutiny.
Most tax practitioners will be familiar with reported facts. Revenue contend that a transaction involving the disposal of intellectual property rights in Tysabri, should have been treated as a capital transaction. Perrigo contend it was a trading transaction. Obviously, the characterisation as a capital transaction increases the tax rate to 33%, but also removes the ability to mitigate the tax charge by utilising carry forward trading losses.
The recent High Court case is primarily a case on administrative law and not tax law. The technical position on whether the transaction generated trading or capital profits remains unanswered for now. The High Court case concerned whether the Irish Revenue had the authority to issue the assessment. Perrigo argued that the issuance of assessment breached their legitimate expectations.
The 155 page judgment of Mr Denis McDonald is required reading for any practitioner who may seek to rely upon Revenue practice. It demonstrates the difficulty of binding Revenue to a position. In order to succeed on an argument of legitimate expectation, a public authority (in this case the Revenue Commissioners) must have made a statement or adopted a position amounting to a promise or representation, express or implied, as to how it will act in respect of an identifiable area of its activity. Perrigo based their claim on evidence including their Shannon Trading Certificate, many years of tax returns and their long history of dealings with Revenue. They argued that this amounted to a representation that their disposals of intellectual property would constitute trading transactions. The Judge disagreed ultimately concluding that there had never been a suitable representation.
The case is likely to be the subject of further litigation. The prospect of an appeal of the judgment of the High Court exists, as does the prospect of a hearing before the Tax Appeals Commission. The key learning points for tax advisors and taxpayers might include the difficulty of relying upon Revenue practice or precedent. This is especially so where issues have been apparently accepted for many years, but without a formal Revenue ruling being in place. Justice McDonald noted that Perrigo had not sought a formal transaction ruling from Revenue and there is a suggestion that this would have been a material event, if it had occurred.
The judgment also contains a lot of detail of the issues to consider in concluding whether a transaction is trading or capital, however those issues are likely to be more properly ventilated and explored before the Tax Appeals Commission in greater detail. However, as the court was not required to conclude on this evidence, no conclusions should be reached from the facts recited.
Perhaps of greater relevance is the willingness on the part of Revenue to litigate difficult and high profile cases. Historically, the prospect of Revenue pursuing a large international pharmaceutical company through litigation of this scale seemed remote. However, there is increasing evidence that Revenue is prepared to argue high-value cases publicly and, where it considers tax to be due, to fully pursue that. The necessity of getting reliable tax advice at all stages of a transaction has perhaps never been more pronounced
Down to the wire with Brexit preparations
How useful has the Revenue briefings on Brexit been, and what are the omissions have there been that could usefully be clarified between now and the end of the year?
Donna Hemphill, Senior Manager, Deloitte:As the end of the transition period grows ever closer, businesses are turning again to Brexit and what it will mean for trading with their closest partner, the UK.
Since the results of the referendum were announced, Revenue have been advising businesses to prepare for trading with the UK as a third country and to get ready for the new customs formalities. A dedicated Brexit email helpline was set up firstname.lastname@example.org and Revenue also provided a helpful checklist for businesses to work through to ensure that they have considered how they may be affected.
Since the UK chose to not extend the transition period in June, there has been an intensified programme of engagement by Revenue as regards Brexit readiness. Revenue’s focus is on helping and supporting those businesses that will be most affected by the new customs requirements, particularly SMEs who may not have internal resource or experience. More recently, Revenue concerted their efforts and hosted two full days’ worth of webinars to outline in detail what changes Brexit will bring and what steps businesses need to take.? These webinars covered a wide range of topics including AEO, special procedures and rules of origin and can be accessed on Revenue website or Youtube.
In September, Revenue wrote to 90,000 Irish businesses urging them to apply for an Economic Operators Registration and Identification (EORI) number in order to continue trading with the UK. This was followed up by phone calls to 14,000 businesses that they identified would be immediately impacted by Brexit from 1 January 2021. No stone has been left unturned in Revenue’s efforts to get Ireland ‘Brexit ready’.
Yet the response from business has been muted. Of course businesses have been fighting the impacts of Covid and Brexit has had to take a back seat, maybe there is also a misconception that a trade deal will resolve the issue and remove the customs formalities. The reality is that a trade deal will only remove (some) tariffs and all the administration and paperwork will still be required.
As we enter the final weeks of talks and the chance of agreeing a post-Brexit trading deal go right down to the wire, we urge businesses to take Revenue’s advice and prepare for the inevitable changes from 1 January 2021.
USA: a Democrat administration and the implications for Irish corporation tax competitiveness
What would be the likely tax consequences for Ireland of a Biden Presidency in the United States, particularly referencing corporation tax in the coming four years? (With or without a Democrat Party majority in the Senate – an issue that ‘s not likely to be decided until runoff election results in January).
Anthony O’Halloran, Senior Manager, Deloitte: The race for the White House was called in favor of Democratic candidate Mr. Joe Biden by several major US news organizations on 7th of November 2020. While the Democratic Party will hold power in the White House, they are also projected to retain their majority in the House of Representatives. However, the race for the Senate will not be decided until the final two Senate seats are filled in Georgia, in early January. The outcome of the of the Senate race and the balance of power will ultimately influence Mr Biden’s ability to implement wide sweeping tax reform policies.
Mr Biden’s proposed tax policy provides for a corporation tax increase from 21% to 28%, however, such a significant increase would likely be difficult without a Democratic majority in the Senate. At first glance, one would expect that a US corporation tax rate increase would increase the attractiveness of Ireland’s 12.5% rate of corporation tax. However, Biden’s tax policy proposals go beyond a rate increase and if successful would make it more difficult for US corporations to significantly reduce or eliminate their global tax liabilities, which ultimately may erode some of the tax benefit provided by investing in Ireland.
At a high level, the proposed changes to the US Global Intangible Low Taxed Income (“GILTI”) regime are likely to have the most significant impact for US multinationals with operations in Ireland. Mr Biden has proposed an increase in the effective tax rate on GILTI income earned by US multinationals from 10.5% to 21% through to 2025 and the elimination of the 10% return on foreign tangible property. In addition, GILTI would move to a country by country basis, which would prevent taxpayers from offsetting amounts between higher tax jurisdictions to shelter incremental taxes that may be due under the GILTI regime on a US multinationals operations in Ireland. The changes Biden has proposed to the existing GILTI tax rules in the US would more closely align those rules with the international tax structure design the OECD is pursuing under Pillar II.
Mr Biden has been open in his intention to encourage investment back to the US. For example, his tax proposals provide for a made in America advanced tax credit of 10%, an offshoring tax penalty that would impose a surtax of 10% and a denial of tax deductions associated with moving jobs and production offshore. Given the critical role played by Irish companies in US Group’s overall supply chain operations as evidenced during the COVID 19 pandemic, it remains to be seen, if enacted the impact of these tax policies for Ireland Inc.
DAC 6 clarifications in the Finance Bill
With Mandatory disclosure provisions under DAC 6 set to be implemented on January, 1st, following the 6 month Covid-19 deferral, what final checklist of items should taxpayers have considered, (including clarificatory references in the Finance Bill 2020).
Lynn Cramer, Tax Partner, Maples and Calder, the Maples Group’s law firm: The effect of the COVID-19 deferral and the fact that the Irish Revenue guidance on DAC6 was only published in July is that many taxpayers and intermediaries (and taxpayers who are intermediaries) are only now getting to grips with the implications of these extremely broad disclosure rules. The complexity involved in implementing the very high level rules set out in the directive is evidenced by the fact that further clarification had to be included in this year's Finance Bill. One notable point is that intermediaries who are subject to legal professional privilege are now only required to notify the taxpayer rather than other intermediaries, a sensible amendment given that notifying other intermediaries would likely constitute a breach of that privilege.
In terms of a final checklist for taxpayers, we would recommend putting in place a written plan of action to cover the following points. This process will help the taxpayer build a methodical approach for audit purposes.
1. Understanding your legal obligations under DAC6 and, for taxpayers who may constitute intermediaries, ensuring that all staff have received adequate training;
2. Liaising with your advisors now and continued liaison to understand whether they may be planning to report any cross-border arrangements that the taxpayer has been involved in;
3. Ensuring you have systems and processes in place to review any arrangements implemented between 25 June 2018 and 1 July 2020 and with respect to new arrangements going forward; and
4. If reporting is required, consider co-ordinating reporting with one central intermediary to avoid multiple, potentially conflicting, reports being made.
Aine Gibney, Assistant Manager, Deloitte: The first DAC 6 reporting deadline is fast approaching with a return due to be filed on or before 31 January 2021 for relevant arrangements between 1 July 2020 and 31 December 2020. Returns in relation to relevant arrangements between 25 June 2018 and 30 June 2020 are due to be filed on or before 28 February 2021. Cross border arrangements which fall within the remit of DAC 6 are relatively broadly defined. Taxpayers and intermediaries should ensure that all relevant cross border arrangements are reviewed and conclude if the arrangement is reportable or not.
In addition, from 1 January 2021, a return is required to be filed within 30 days beginning on the day after the arrangement is made available for implementation, on the day after the arrangement is ready for implementation, or when the first step in the implementation of the arrangement was taken, whichever occurs first.
Therefore, all taxpayers and intermediaries should ensure that they have the necessary controls and procedures in place supported by a robust governance policy to ensure the identification of reportable cross border arrangements in real time within the 30 day period. The penalties for non-compliance can be significant.
Finance Act 2020 included a number of clarifications on reporting exemptions for intermediaries and the production of a schedule of arrangements that may use standardised documentation but are not reportable under Hallmark A3 which should provide greater certainty to taxpayers.
VAT: financial & insurance (FSI) services
The EU has commenced a consultation period on the efficacy and application of VAT as it applies in the financial and the insurance sectors.
What can be expected of this, and will there be change.? (See also: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12671-Review-of-the-VAT-rules-for-financial-and-insurance-services).
Suzanne Tierney, Director, Deloitte: By way of background, Directive 2006/112/EC outlines the rules governing the VAT treatment of financial and insurance (“FSI”) services. These rules were initially introduced in 1977 and provide for a VAT exemption in respect of FSI services. As most FSI services do not carry the right to input tax deduction, any VAT incurred on purchases consequently becomes an absolute cost for many FSI businesses – this is becoming an increasingly bigger challenge for FSIs with the rise of outsourcing arrangements and the gig economy (i.e. the use of contractors/ free-lance workers).
In practice, the current rules for VAT treatment of FSI services no longer reflect the complexity of the sector (in particular, with the rise of FinTech and non-traditional FSIs) and therefore are no longer fully fit for purpose. This is evidenced by the significant volume of FSI VAT litigation coming through at the EU level. In particular the exemptions are criticised for being complex, difficult to apply and not having kept pace with the development of new FSI activities (e.g. due to the advancement, and use of, technology), which has led to:
• legal uncertainty for businesses
• inconsistency in treatment
• high administrative costs
Consequently, in April 2020, the European Commission instigated a review of the VAT treatment of FSI services, with the aim of modernising how VAT is applied in this sector. The review will assess the impacts of a number of different elements which have been broadly grouped into five ‘Areas of Intervention’ including:
i. Service definitions (e.g. is a legislative revision of the FSI definitions needed or would clarification of the rules governing the current definitions suffice)
ii. Removal of the exemption (e.g. reviewing the impact of removing some (or all) of the FSI exemptions and / or the implications of introducing a reduced VAT rate)
iii. Option to tax (OTT) (e.g. should it be mandatory for Member States to implement OTT rules)
iv. Cost-Sharing arrangements (e.g. potentially introducing new arrangements for FSIs)
v. Fixed rate of deduction (e.g. impact of mandatory or optional fixed rates of input tax deduction)
The Commission acknowledges that the reform itself could be made up of a combination of different elements as it is unlikely that a one size fits all approach will work. Consequently different options may need to be targeted toward specific industries (e.g. asset management, general insurance Vs life insurance).
The Commission’s impact assessment is due to be issued by the end of 2021.
Pensions Tax report: old fears revived
The Government Published (13th November) the Interdepartmental Pensions Reform & Taxation Group 2020, which it was obliged to to on foot of The Roadmap for Pensions Reform 2018-2023 which allocated a number of Actions to the Interdepartmental Pensions Reform & Taxation Group (IDPRTG) for consideration. These relate to three general areas: proposals aimed at simplifying and harmonising the supplementary pension landscape; an assessment of the cost of State support for pension savings; and a review of the Approved Retirement Fund (ARF). (See also: https://www.gov.ie/en/
Niamh Barry, Senior Manager, Deloitte:There are currently many different Revenue approved pension schemes in operation on the Irish market. Due to the diverseness in pension scheme participants – from civil servants to private sector employees to the self-employed – it is difficult to create a single arrangement into which all the various schemes could be consolidated.
While the 145 page report does outline a number of options to harmonise some pension schemes, it is fair to say that the working group has not yet formulised concrete proposals as to how such a goal would be achieved. That said, it would appear likely that changes to allow, or require, buy out bonds to be transferred into PRSAs will eventually materialise.
With regard to the proposed automatic enrolment savings system, the report does not provide any further insights. A big concern is the level at which employers will be required to contribute, with any such contributions being viewed as a further stealth tax that adds to the cost of employment similar to employer PRSI.
To date, there has been little consideration for the international aspects of pension participation. EU cross border arrangements are difficult to navigate. The report does not address the position for members of foreign schemes who work or retire in Ireland or members of Irish schemes who move overseas.
Proposals in this area – such as updated regulations on the migration of pension schemes to and from Ireland - would be welcome.
Regardless of the ultimate outcome of the review, it is vital that any reform preserves the reliefs currently available for pension contributions by participants and also to the pension schemes themselves. A reluctance to contribute to supplementary pensions remains due to concerns about investment performance, administration charges and the possibility that another “raid” on pension funds could happen. The pension levy, which imposed a charge on the value of all private pension funds from 2011 to 2014 is fresh in a lot of people’s memories.
The mismatch in personal tax relief for contributions being limited to the income tax rate at 40% with the ultimate tax due on pension income being the combined income tax and USC at 48% is also a factor that discourages individual pension contributions.
In summary, while progress has being made in identifying a lot of issues, it remains difficult to predict what changes we can expect for the pension landscape in 2023 and beyond.
Covid-19’s impact on cross border tax profiles
COVID19 has forced many multinational enterprises to change the way they do business. While some industries have enjoyed a boom, several MNEs are experiencing significant disruption and change. How can MNEs flex and adapt existing transfer pricing policies to reflect a shifting risk profile, and does the COVID19 situation present any opportunities for MNEs in this area?
Wilco Froneman, Senior Manager, Deloitte: Covid-19 forced many multinational enterprises to change the way they do business, adapting their operations to survive the unprecedented disruption. One of the biggest disruptions faced by multinational enterprises, was undoubtedly the disruption to the workforce. Governments across the globe introduced measures enforcing temporary social distancing guidelines, resulting in temporary remote working policies becoming the norm in early 2020.
Given the now tried and tested success of the temporary remote working policies, many multinationals are now actively exploring the sustainability in adopting these remote working arrangements on a more long term basis. These more modern ‘Future of Work’ policies would provide multinationals with a lot more flexibility when it comes to the management of their workforce, from enhanced mobility to the wider retention and attraction of foreign talent. In more flexible arrangements, remote working would allow employees to be based in countries different to that in which their employing entity is based for corporate tax purposes. This could potentially result in unforeseen corporate tax compliance measures (particularly where a permanent establishment (PE) of their employer is created) and a change to a multinational group’s transfer pricing arrangements.
Multinational enterprises are advised to consider the tax compliance risk when developing ‘Future of Work’ policies. Identifying key indicators that should be used to determine the eligibility of and support required by remote working staff will become more critical in mitigating associated tax risks. These indicators include the seniority of staff, their influence over key business decisions coupled with these employees’ ability to enter into contractual agreements. More subtle indicators include the number of staff located in a certain jurisdiction, their access or lack thereof to a local offices, their personal tax residency and the duration they’ll work in the foreign jurisdiction.
Regardless of the specific indicators, it’s becoming more and more apparent that multinationals exploring more permanent solutions have to consider the tax appropriateness and the adaptability of their remote working policies. Risk mitigating procedures could include the incorporation of local entities, development of adequate service contracts, employee secondments or the formulation of an established framework/policy around activities which can and cannot be performed remotely. Enhanced numbers in remote work staff could even result in the operational requirement of a centrally managed employment company, tasked with the management of all remote employees.
There are many solutions on offer, and advisors like Deloitte are actively developing new approaches, to assist clients in adhering to the tax compliance measures brought forward by the ever changing working environment.