BEPS Pillar II ‘Top Up tax’ comes into view

The Minister of Finance has published the proposed legislative approach to BEPS Pillar Two Implementation seeking stakeholder feedback on topics including its approach on establishing a Qualified Domestic Top Up Tax (QDTT) and its proposed administrative separation of GloBE rules and top-up taxes from Ireland’s corporate tax regime. Can you comment on the proposals?

Andrew Quinn, partner, Maples Group:The Feedback Statement issued by the Department of Finance in March 2023 on the implementation of the EU Minimum Tax Directive has said that it is considered appropriate that Ireland should introduce a Qualified Domestic Top Up Tax (QDTT), and this will be part of the Finance Act 2023. Under the QDTT, a “top-up tax”, computed generally in accordance with the Directive and the OECD Pillar Two Model Rules, would be paid on low-taxed constituent entities of the group located in Ireland. The QDTT will provide a safe harbour in certain cases so for example a parent entity in another EU Member State would not be able to levy tax under the “income inclusion rule” on that parent in respect of the profits of the Irish entity if Ireland has implemented the QDTT.

The Feedback Statement did not contain draft QDTT legislation and that is expected to be published instead in a second feedback statement this summer, so we do not have details of the measures it will contain. However, it is expected that the QDTT will mean that Ireland would levy the top-up tax on “under-taxed” entities within the scope of the Directive and not exempted or under a safe harbour in the Directive.

That could mean that Ireland could levy tax in certain limited cases on entities that to date have generally been treated as tax exempt in Ireland under Irish tax legislation, such as an Irish regulated fund. Most Irish regulated funds would not be expected to fall within the scope of the Directive in the first place given the high financial threshold (€750m pa) for it to apply and also on the basis it may not be considered part of a “group” as defined by the Directive. Also, “investment funds” and an “investment entities” as defined are largely carved out of the Directive. However, certain closely held Irish regulated funds which are part of a large consolidated group may fall within scope and the question then is whether the QDTT when implemented in Ireland would apply in that case to tax the fund. It is considered likely that this would be the case, because otherwise Ireland would simply cede taxing rights under the Directive and OECD Pillar Two to other EU or third countries who could then tax an entity in their jurisdiction under IIR or the UTPR (under-taxed profits rule) on the amount of the profits of the Irish fund.

While it may seem a surprising result that the existing Irish domestic exemption could be overridden by the QDTT, there is already precedent for this in other EU law introduced in Ireland being the “reverse hybrid” rules where in certain cases an Irish tax transparent regulated fund can be taxed in Ireland.

Joseph Keane, Tax Manager, Corporate & International Tax, Deloitte Ireland LLP:
- Model Rules, Commentary and Administrative Guidance in the legislation
Overall, the draft Irish legislation largely follows the structure of the Pillar Two Directive; this is a welcomed approach as it assists Ireland in targeting consistency with other countries in the adoption of the directive. However, the draft Irish legislation does include some extracts from the OECD Model Rules, Commentary and Administrative Guidance. As part of Deloitte’s response to the Feedback Statement, we explain that we broadly agree with the inclusion of said extracts, however, it is yet to be seen how these additions will be considered from an EU Law perspective.

- The possible approaches to legislative implementation of an Irish Qualified Domestic Top Up Tax (QDTT)
It is notable that there is no proposed change to Ireland’s headline tax rate of 12.5%; instead, a QDTT is proposed such that the additional tax (up to the minimum tax of 15%) is collected via a top-up tax. As proposed in the OECD Model Rules and EU Directive, the QDTT should be calculated in a similar fashion to the Income Inclusion Rule (IIR) and Under Taxed Profits Rule (UTPR).
The Feedback Statement suggests two options for the adoption of the QDTT: (1) separate and stand-alone legislation; or (2) short provisions referencing the IIR, with any necessary modifications – the Feedback Statement proposes that the latter approach is adopted. Due to the close connection between IIR and QDTT, we welcome this approach.

- Administrative aspects of the Pillar Two rules in Ireland
The Feedback Statement included suggestions on various administrative topics such as registration, self-assessment, filing of returns, payments and record keeping. In short, it is proposed that the administration for Pillar Two be kept separate and distinct from the traditional Corporation Tax return (i.e. Form CT1); this is a welcomed proposal. Deloitte have proposed that an election be available to MNE Groups such that one entity may be responsible for the payment of Pillar Two liabilities and the filing of relevant return(s) on behalf of the MNE Group’s I - doubled in 3 years entities.

The doubling of Corporation Tax in just 3 years

Corporation Tax receipts are forecast to reach €24.3 billion in 2023, up 7 per cent from 2022 (with €9.1bn forecast to accrue in Q4 2023). Please comment on this growth and on Minister McGrath’s caution around the ‘windfall’ nature of Ireland’s Corporate Taxation revenue?

Emma Arlow, Tax Director, Tax Technical & Policy Centre, Deloitte Ireland LLP: In recent years, Ireland has seen a significant increase in corporation tax receipts notwithstanding the impact of the COVID19 pandemic; in fact, corporation tax receipts appear to have weathered the storm here in doubling in just three years. Notwithstanding such positive soundings, data from the Department of Finance would suggest that windfall corporation tax receipts will be in the region of €12 billion and when stripped out from the forecasted results, the numbers tell a different story with an underlying deficit in the region of €1¾ Billion. Such windfall tax receipts are likely to be driven by increased profitability, and a high concentration among a small number of companies with the 10 largest firms accounting for over half of corporate tax receipts. The report issued by the Department of Finance on 10 May 2023 makes it clear that even in the face of strong tax receipts, there are known risks to the public finances. In particular, the linkage between the record corporation tax receipts in recent years and the strong performance in income tax has not gone unnoticed, with concentrations of not only corporate tax but also income tax receipts identified as a vulnerability for the public finances.

Taking such vulnerabilities into account, commentary and analysis from the Department of Finance would suggest that potential options may be considered including ring fencing windfall revenue gains into a form of longer-term saving vehicle. In addition, much has been noted with respect to the relatively narrow income tax base in Ireland, with the top 10% of earners paying approximately 60% of total income tax. As the challenges associated with the inherent vulnerability in the corporation tax receipts and the connection to future income tax receipts look unlikely to dissipate anytime soon, we will likely see further discussions and work being carried out to identify how best to make use of the windfall corporation tax revenue of recent years. In addition, we may also see further conversations at Government level with respect to base broadening measures and a reform of the personal tax system.

In our view, any such changes should be supportive of business and economic growth and should recognise the already high rates of personal tax paid by employees and self-employed taxpayers in Ireland.

VAT & Digital Services

The European Commission’s focus on VAT & Digital Services has been highlighted by a number of recent developments, including the Commission’s recently published working paper on the VAT treatment of non fungible tokens (NFTs) and a Court of Justice of the European Union ruling (CJEU, C-695/20) on VAT liability for platforms providing digital services. Please comment.

Emma Galvin, Director, VAT, BDO: In our ever-changing economy, there are many benefits associated with the constant evolving digital economy but with new developments comes new VAT challenges, as VAT legislation lags the speed of developments in the digitised economy.
The VAT challenges are evident with the increased level of disputes between taxpayers and Tax Authorities, resulting in local and Court of Justice of the European Union (CJEU) cases, as taxpayers, Tax Authorities and the court systems struggle to apply current VAT legislation to supplies made in the digital economy, as can be seen in the recent Fenix International Ltd CJEU ruling (C-695/20) which dealt with the VAT liability for platforms providing digital services, which was referred from the UK.
In this case, the CJEU ruled in favour of HMRC determining that Article 9a of Council Implementing Regulation No 282/2011 which provides that electronic services supplied via a platform are deemed to be supplied by the platform rather than the service provider, is compliant with EU law.
As a result of the case, platforms should review in detail the services they facilitate to ensure that they are compliant from a VAT perspective on the potential deemed supply of such underlying services.

In response to the continued VAT challenges associated with VAT & Digital Services, the European Commission has in recent times particularly focused on this area.

On the 8th of December 2022, the European Commission published its proposed VAT in the Digital Age (VIDA) reforms to amend the EU VAT system. The proposal is a series of measures to modernise and ensure that the EU VAT system works better for businesses and should assist with tackling VAT fraud by embracing and promoting digitalisation.

The European Commission also recently published a Working Paper on 21 February 2023 in relation to the initial VAT reflections on Non-Fungible Tokens (NFTs). The intention of the Working Paper was to describe the NFT environment to address NFT related recent questions and concerns.
It notes that NFTs have been in existence for c.20 years but that the volume of trade has grown exponentially in recent years, but many questions remain unanswered as to the applicable VAT treatment to supplies linked to NFTs. It also highlights for the sake of legal certainty; it is desirable to reach a common position on the VAT treatment.

As the digital economy evolves and develops at a rapid pace, it is reasonable to assume that cases will continue to come before local courts and the CJEU, further proposals and Working Papers will be issued by the European Commission and that updates to the VAT Directive should be expected around VAT & Digital Services.

Cecile Fournis, Tax Manager, Indirect Tax, Deloitte Ireland LLP: The European Union is developing tax policies to regulate the fast-growing digital economy. These recent developments are a clear illustration of the EU’s commitment to adapt well established VAT legislation to the new digital services and business models to prevent the VAT gap from growing further.
In February 2023, the EU VAT Committee published Working Paper No 1060 on the VAT treatment of NFTs. NFTs are a type of digital asset created using blockchain technology. Unlike traditional cryptocurrencies such as Bitcoin or Ethereum, which can be exchanged on a like-for-like basis, NFTs are unique. Each NFT contains distinguishing information that is stored in its smart contract, making it distinct and giving it a specific value.
As there is no definition of NFT in the EU VAT law, the paper reinforces the necessity to analyse each NFT’s features and uses, whereby an NFT is a digital token that consists of:
i. an identification code; and
ii. metadata, which refers to what the NFT represents.

The paper provides some guidance on the potential VAT treatment of commonly used NFTs, including NFTs that are akin to:
• Proof of ownership or authenticity (e.g., property title) should look through to the underlying asset to determine the VAT treatment.
• Voucher rules (single or multipurpose) may apply if the NFT grants the right to access goods or services upon redemption.
• Digital services (e.g., digital art, media) should be treated as electronically supplied services (“ESS”).

However, the more complex situations are still open for interpretation on a case-by-case basis – for example, composite supplies, where the token and the underlying asset both have value, would need to be specifically evaluated to confirm what the principal element of the transaction is.

In short, while the paper is a helpful validation of much of our existing thinking, what the metadata represents is key to determining the VAT treatment.

The CJEU also handed down its judgment in a pivotal case (Fenix, C-695/20) regarding the VAT liability of supplies of digital content distributed via a social media platform. The CJEU held that Article 9a of the Implementing Regulation 282/2011 is compliant with EU law. Art 9a is a very wide deeming provision which provides that where ESS (i.e., digital content) are sold through online platforms, in most cases it is the platform that has to account for VAT on the sale of the services. Whilst the Fenix judgement is not specific to NFTs, it does increase the onus on NFT / crypto platforms to understand the nature of the assets traded on their platforms and the associated VAT implications. As such, many digital asset trading platforms will need to re-assess their tax compliance procedures and ascertain their potential liability in collecting indirect tax on NFT transactions.

Unhelpfully, neither the Working Paper nor the CJEU judgment comment on some of the core industry issues, such as:
• At what point would individuals engaged in trading NFTs be doing so in a business capacity?
• When should NFT / digital asset platforms/exchanges be treated as ESS marketplaces?
• What is the VAT impact / interaction of the marketplace rules on C2C trading?

‘Land Value Sharing’ changes questioned

The proposed Land Value Sharing Bill. Its proposed operation, calculation, and impacts:
Dominic O’Shaughnessy, Tax Director, Corporate & International Tax, Deloitte Ireland LLP: An updated General Scheme for the Land Value Sharing and Urban Development Zones Bill was published on 14 April last and provides for a new Land Value Sharing (LVS) contribution of 30% of the uplift in value caused by the zoning of land. The aim of the LVS contribution is to ensure that local authorities and communities benefit from a fairer share in land value increases caused by zoning. The LVS contribution also aims to indirectly reduce land price inflation. A previous version of the General Scheme had been published in December 2021 but the updated General Scheme has introduced some significant changes.
Scope
LVS was previously only to apply to land “newly zoned” for residential use. However, it is now proposed that LVS will apply to existing and newly zoned land (including commercial/industrial zonings by 2026).
Certain exemptions/exclusions are available, particularly in relation to the building of cost-rental/social housing and also for small scale developments.

Operation
Transitional arrangements are proposed such that LVS will apply to:
• Lands which have been acquired post 21 December 2021, with respect to planning applications lodged from 1 December 2024.
• Lands which have been acquired before 21 December 2021, with respect to planning applications lodged from 1 December 2025.
• Planning applications to develop lands zoned Commercial or Industrial will fall within scope from March 2026 and applications lodged from December 2026 will be subject to the LVS regime.

The LVS contribution will be a condition of a grant of planning permission and a statutory charge on the land until it is paid. Development cannot commence until the contribution is paid.

It is proposed that the LVS will apply in addition to existing Part V obligations and development levies, such that the overall share of the State may be upwards of 50% of the uplift in value.

Calculation
This is based on the uplift between the existing use value of the land and the market value of the land at the point of the most recent zoning (but ignoring the value of any existing planning permission on the land).
Owners of ‘substantially undeveloped’ land falling into scope for LVS will be required to submit self-assessments of the relevant values by 1 July 2024 for inclusion on a Land Value Sharing Register.

Summary
The proposed changes add to the air of uncertainty in the market while the inclusion of existing zoned land is likely to be the most contentious change provided for in the updated General Scheme. While, in principle, there are arguments for a form of LVS contribution, applying LVS to land that is already zoned would not seem equitable, as such lands would have been purchased at a price that did not take into account the impact of the LVS contribution.

The proposals are at an early stage of the legislative process and contributions from industry participants will be critical in arriving at a fair and equitable LVS regime going forward.

Tax Appeals Commission on proper books of record

Can you comment on the importance of keeping proper books in recent determination of the Tax Appeal Commission?

Feargal Kenzie, Tax Director, Tax Controversy, Deloitte Ireland LLP: The importance of keeping proper records was evident in Determination 11 TACD 2023. In the main the dispute centred on numerous discrepancies between the figures returned on the Appellant’s Income Tax returns and those shown on source records. On the basis of the incomplete information available to the Revenue, even after issuing s900 TCA 1997 notice (this is notice under the Taxes Act which requires a taxpayer to make available all tax related records to the Revenue within a stipulated timeframe), using best judgement they prepared estimates to tax which formed the basis of the appeal. The provisions of s886 TCA 1997 require a taxpayer to maintain proper records which correctly record and explain the transactions of their business.

As the taxpayer is the person who has access to all of the facts and documents relating to their affairs, they must produce such documentation as may be required in support of any appeal. Post the decision in Menolly Homes V Appeal Commissioner it is now well-established that in all taxation appeals the burden of proof rests with the taxpayer. In the absence of supporting records the Commissioner saw no basis to vacate the assessments subject to the quantum of the assessments being determined in accordance with the provisions of the Taxes Act. In relation to the quantum, noting the Appellant did not present any evidence which warranted a reduction, the Commissioner determined that the assessments issued should stand without modification.

At times the challenge with producing records goes beyond the obvious shortcomings as per the circumstances in the above case. Such scenarios can include accessing records to support claims for losses forward which have accumulated over many years and claiming deductions for the costs/expenses relating to an asset which has been sold. In many instances the level of supporting documentation may not stand scrutiny and this places a question mark over the ability to make the necessary claim or deduction.

Taxation of unit trusts

The Revenue Commissioners has updated rules relating to the tax treatment of an authorised unit trust, as a result of changes introduced in Finance Act 2022. Can you outline the background to this update?
Lee Kavanagh, Assistant Manager, Financial Services Tax, BDO: An interest in a unit trust scheme, the trustees of which are non-resident, can be considered a material interest in an offshore fund. As the concept of tax residence does not apply to a branch, but only to a company. Therefore, on a technical reading of the legislation, an Irish unit trust, with an Irish-based trustee operating via a branch structure, may be considered an offshore fund. While it was a generally accepted principle that this should not be the case, prior to the amendment introduced by Finance Bill 2022, an authorised unit trust would have to seek written confirmation from Revenue that they would not be treated as an offshore fund in such circumstances.

In order to clarify the position, Finance Bill 2022 introduced a key amendment to section 743 of the Taxes Consolidation Act 1997 (“TCA 1997”). This amendment confirms that a unit trust scheme should not be considered a material interest in an offshore fund provided that the general administration of the unit trust is carried on in Ireland and the trustee, if not an Irish resident company, is an Irish branch of a company resident in another EU or EEA Member State.

Overall, this is very welcome development, providing clarity on the issue, ending any uncertainty about the classification of such funds as domestic or offshore, and removing the burden of having to seek written confirmation from Revenue on the matter.

Offshore Funds

The Revenue Commissioners has updated rules concerning the taxation of income and gains for Offshore Funds. Can you outline the changes and the implications for investors in such funds?

Aine Gibney, Senior Tax Manager, Financial Services Tax, Deloitte Ireland LLP: Revenue eBrief No.081/23 confirmed updates to TDM Part 27-04-01 and TDM Part 27-02-01 concerning the taxation of Offshore Funds.

Paragraph 2.1.1 of TDM Part 27-04-01 was updated to provide for a non-exhaustive list of general legal and regulatory criteria that should be considered when determining if the threshold of “similar in all material respects” is met, when considering the equivalence of an offshore fund to its Irish counterpart. An equivalent fund is one which is similar in all material respects to an Irish regulated fund, that is, the funds which are taxed under the ‘gross roll-up regime’. The analysis of whether an offshore fund is an equivalent fund is essential as it determines the rate of taxation to be applied to incomes and gains arising.

TDM Part 27-02-01 was also updated in light of recent Finance Act changes; FA22 clarifying the tax treatment of an authorised unit trust (where particular conditions are satisfied) and FA20 clarifying the interaction of the offshore fund legislation with respect to the migration of Irish securities from the CREST system to Euroclear Bank in March 2021 following Brexit.

FA22 contained an important amendment clarifying that an authorised unit trust, the general administration of which is carried on in Ireland, will not be treated as an offshore fund, solely on the basis that its trustee is an Irish branch of a company resident in another EU/EEA Member State.

An interest in an offshore fund may be considered or construed as any arrangement which broadly creates legal rights of a kind with co-ownership. FA20 clarified that rights in the nature of co-ownership do not include any arrangement in the nature of co-ownership that arises as a result of migration of Irish securities from the CREST system to Euroclear Bank in March 2021.