The Roundable this month examines in detail the Finance Bill, and matters arising in last month’s Budget speech, such as the signalled review signalled by Minister Paschal Donohoe of the Irish Government's 2018 Corporation Tax Roadmap. But it has been an important month also internationally, with the US heading towards a regime change that is certain to impact Irish-US corporation tax relationships, Cayman Islands coming off the Annex 1 List of the EU, and, in an important 155 page judicial review issued in the High Court, a judgement on the Perrigo-Tysabri case that brings important, home grown, issues to bear concerning the Irish corporation tax regime.
Irish Government’s Corporation Tax Roadmap
In the new OECD BEPS Inclusive Framework, published the day before the Budget speech, the OECD says: “The proposals would reduce profit shifting and place a floor on tax competition, which would support the ongoing revenue needs of governments, particularly as they seek to rebuild their economies after the COVID-19 crisis.....the introduction of a minimum tax rate would lift the floor on the effective corporate tax rate paid by MNEs to an agreed minimum level”.
Referring to the Framework Report, The Minister for Finance said in his Budget speech that it would be considered as part of the Department’s promised review of the Irish Government’s 2018 Corporation Tax Roadmap.
In view of the Report, would you be confident that the Irish Government going forward could have a chance of winning an argument that that floor on tax competition can be set at 12.5 per cent, Ireland’s rate, which would, for Ireland, have the valuable side effect of copperfastening the often quoted Irish 12.5% rate as a global standard in the process (A 12.5% rate is the rate that the OECD itself has used in its central case econometric simulations to quantify global corporation tax revenue forecasts of alternative scenarios).
Aileen Stephens, Director in Corporate Tax, Deloitte
: The G20/OECD Inclusive Framework on BEPS recently released two detailed Blueprints regarding its ongoing work to address tax challenges arising from a more digitised global economy (Pillar One), as well as to address ongoing base erosion and profit shifting concerns (Pillar Two). Whilst the framework does not have the political agreement, the project is picking up new momentum as it enters into a consultation period which will run until 14th December 2020.
The Blueprints in their current form are very complex and demonstrate some open items to agree. One such open item is an agreed minimum tax rate as relates to the Pillar Two proposals which are designed to ensure that large multinationals pay a minimum level of tax on all profits in all jurisdictions through assessing their jurisdictional effective tax rates. Broadly, where Ireland adopts the relevant rules, which would be the general expectation in order to protect the exchequer tax revenues, a top-up tax payment would be required to be paid by Irish headquartered groups in respect of certain controlled foreign subsidiaries that have an effective tax rate below the minimum set tax rate.
Thus the question of where the minimum tax rate will fall is key and is on the table for discussion, with 12.5% fast becoming the ostensible front runner. Notably, Pascal Saint-Amans, Director of the Centre for Tax Policy and Administration at the OECD, who has been a key player in the negotiations has recently commented that in his view the minimum tax rate should be agreed at 12.5% but there are more hurdles left to meet.
The narrative surrounding this project is ongoing with another ambitious target set to reach agreement by mid-2021 – this is one to watch particularly given Pillar Two does not require all party consensus which could result in implementation on a unilateral basis by a number of countries thereby further complicated open items such as the minimum tax rate.
The Finance Bill 2021
How would you assess and evaluate the main additional measures revealed in the Finance Bill 2021, and not signalled on Budget Day?
William Fogarty, Partner, Dublin Tax team, Maples and Calder, the Maples Group’s law firm
: There was very little in the Finance Bill which was not signalled on Budget Day. However some matters were not clearly announced and attracted attention. These include changes concerning the DAC6 regime and some complex changes to the Irish transfer pricing provisions.
Many practitioners and companies will be grappling with DAC6 given the reporting deadlines in 2021 so the provisions of Section 57 of the Finance Bill will be welcomed. It clarifies that an Irish intermediary does not need to report a transaction where the reporting is carried out by another EU intermediary. The original Irish legislation arguably only provided an exemption from reporting where the other intermediary reported to the Irish Revenue Commissioners. In order to be exempt from reporting, the Irish intermediary must be provided with a copy of the specified information provided to the other EU Member State competent authority and the reference number assigned. The Finance Bill also proposes a statutory list of arrangements which might be considered "white-listed" by virtue of being transactions which are specifically provided for in Irish legislation, such as salary sacrifice arrangements. These should not be reportable under Hallmark A.3 (an arrangement with standardised documents). The eagle eyed will note that the list in the Finance Bill is different from the list in Revenue's July 2020 guidance on the DAC6. The reasoning for this is currently unclear, however Revenue's latest guidance in November 2020 reflects the Finance Bill.
In relation to transfer pricing, a number of technical changes were made. In particular, the Finance Bill outlines how certain interest-free loan transactions are to be treated, and when the exemption from transfer pricing will apply to such arrangements. This is welcome as it was highlighted as an area of some confusion under the existing rules. It is expected that further Revenue guidance on transfer pricing will be released before the end of the year.
Anna Holohan, Senior Manager in Corporate Tax, Deloitte
: Finance Bill 2020 contained some matters which were not signalled on Budget Day.
A number of the updates included were clarifications to the operation of certain provisions which were previously introduced. For example;
• Amendments were included in relation to the anti-hybrid rules introduced in Finance Act 2019. As the provisions are complex in nature and the practical application of same can be challenging it was unsurprising that certain clarifications were introduced to ensure the rules operate as intended.
• A number of the exemptions available from the Controlled Foreign Companies (CFC) rules introduced in Finance Act 2018 will now not apply where the CFC is resident in a jurisdiction which is listed in the EU list of non-cooperative jurisdictions.
• A number of amendments to the legislation governing EU Mandatory Disclosure Reporting (DAC 6) were introduced including clarification on reporting exemptions for intermediaries and guidance regarding arrangements that may use standardised documentation but which are not reportable under Hallmark A.
Finance Bill 2020 also introduced significant changes to transfer pricing provisions, specifically with respect to the domestic exclusion for certain non-trading transactions. This was a surprise addition that was not subject to period of consultation in advance.
Finance Bill 2020 also included some amendments to broaden the reporting requirements of employers regarding share awards. Employers are already required to report in relation to share option awards on Form RSS1 and as such the extension of mandatory electronic reporting to other share awards was unsurprising and a further step in the digitisation of Ireland’s tax system.
Changes were also revealed in Finance Bill 2020 in the area of encashment tax and while such amendments were unexpected, they do provide some clarity, particularly in the context of certain financial institutions who may be moving to Ireland as a consequence of Brexit and may now be within the remit of encashment tax.
Where have there been proverbial ‘missed opportunities’, in your estimation?
Anna Holohan, Senior Manager in Corporate Tax, Deloitte
: Measures to introduce interest restriction rules as required by the EU Anti-Tax Avoidance Directive were notably absent from this year’s Finance Bill. This was a welcome development given the potential impact of the cost of borrowing for businesses.
However, there were some other items notably absent from Finance Bill 2020 which were ‘missed opportunities’.
The rules introduced in respect of stock borrowing and repurchase agreements in Finance Bill 2019 led to some unintended consequences and the financial services industry expected that amendments would be provided in Finance Bill 2020 and the lack of inclusion of such clarifications is disappointing.
It was noticeable that there was no inclusion of provisions regarding the review of the employment incentive and investment scheme which the Minister had mentioned in his Budget speech.
In relation to employees, it was also disappointing that the various employment related Covid concessions which have been available in recent times were not included in the Finance Bill. Amid all the uncertainty created by Covid, clarity for both employers and employees would have been a welcome addition.
VAT: e-commerce rules
The European Council has confirmed the postponement of the new VAT e-commerce rules until 1 July 2021, as earlier indicated by the Commission, on account of Covid -19.
The future VAT rules for e-commerce are complex and will require careful consideration by companies affected. Given this postponement, what advice can companies avail of?
Richard Concannon – Assistant Manager, Indirect Tax, Deloitte
: The implementation of the new e-commerce regulations with effect from 1 July 2021 will give rise to significant changes for businesses (e-retailers and online platforms) established both in the EU and outside of the EU.
Rather than summarise these changes, the purpose of this message is to briefly comment on the steps that businesses should be taking to ensure that they will comply with these regulations from this date.
In particular, affected businesses should:
i Become familiar with the new requirements and consider securing advice from a trusted tax advisor.
ii Ensure that the accounting package in place within the business is capable of dealing with these changes.
In this regard, the accounting package employed by a relevant business must be able to track the various VAT rates and exemptions for all of its products across the EU.
A new accounting package may be required by some businesses in order to be able to employ a tax determination engine that can report in real time and ensure the accurate reporting of VAT liabilities across the EU.
iii Make sure that the business is registered for One-Stop-Shop with a relevant EU tax authority in advance of 1 July 2021, to be in a position to report VAT liabilities (as above).
In conclusion, the new changes to the regulations pose both great challenges (i.e. initial set up costs and significant changes to the VAT compliance process) and opportunities (ongoing efficiencies and less administrative costs) to businesses. The delay in their implementation now affords businesses an opportunity to ensure their compliance with these new regulations on a go-forward basis from 1 July 2021. The key piece of advice is that businesses should ensure that they are in a position to be up to speed with minimal disruption by this date.
VAT: Temporary reduction in the standard rate
As part of the July 2020 stimulus package, the Minister announced the introduction of a temporary reduction in the standard VAT rate from 23% to 21% with the new lower rate to remain in place for six months from 1 September 2020 until 28 February 2021. What advice can be taken by companies to maximise the value of this incentive?
Ciara McMullin, Senior Manager, Indirect Tax, Deloitte
: It is important to point out that for businesses who are fully taxable for VAT purposes and whose customers are also fully taxable businesses there is no benefit to be gained from this reduction apart from a slight cash flow advantage arising from the fact that they are funding 2% less VAT on their standard rated transactions. Businesses which can gain directly from this reduction are those who sell to private consumers or businesses which are not entitled to recover all or any of the VAT charged to it.
The first thing to be alert to is whether the benefit of the reduction in rate is being passed on to you by your supplier. There is no obligation on the supplier to pass on the benefit of this VAT reduction to the consumer and the Government has been surprisingly clear that that is the case in these testing times. So the first piece of advice is to see if your supplier is passing on the benefit of the reduction and to discuss this with them if they are not.
To avoid potential downsides to the rate change you should also ensure that you are fully familiar with the rules concerning when it is and is not possible to charge the lower VAT rate on transactions close to the date of change in the VAT rate. This requires attention both when the rate is reduced and increased again. If you get this wrong and charge the wrong VAT rate you could end up with a VAT assessment which could put a major hole in any benefit to be accrued from the lower VAT rate.
For businesses acquiring goods or services from abroad and which cannot recover all or any of the VAT chargeable on such goods or services applying the correct VAT rate is essential. This can require IT systems changes which cannot be made immediately and indeed in some circumstances changing it and changing it back within 6 months may not be feasible. Manual adjustments may therefore be necessary. Adequate checks and controls on this process are essential.
Businesses with input VAT blockage that must operate a VAT recovery restriction should consider if there are opportunities to maximise the benefit of the temporary VAT rate cut of 2% by advancing purchases so that they occur during the VAT rate reduction. Obviously the greater the value of the purchases the greater the saving. Again it is important to ensure that all VAT reporting requirements are being appropriately met. Partially exempt businesses should also consider acquisition VAT, in particular reverse charge VAT obligations, intercompany agreements and timing considerations.
The key for all businesses during the period of the temporary reduced standard rate of VAT is to ensure that any efficiencies that could be made around the timing of supplies should be made, where permissible and the net impact results in cost savings.
Intangible assets and intellectual property
The Minister announced that he is amending legislation to provide that all intangible assets acquired after October 13th will be fully within the scope of balancing charge rules.
The renewal of the Knowledge Development Box was announced.
How can these and other changes introduced in the Finance Bill be interpreted by firms who need to consider forward tax risk for IP assets?
Paul Geoghegan, Senior Manager, Corporate Tax, Deloitte and Brian McDonnell, Senior Manager, Global Investment & Innovation Incentives Deloitte
: Finance Bill 2020 has amended the rules on the clawback of tax relief on the acquisition of qualifying intellectual property (IP), to ensure that Ireland’s tax regime for IP remains in line with international standards. Previously, where a company disposed of, or ceased to use qualifying IP in the trade, more than 5 years after the beginning of the accounting period in which the asset was first provided for the trade, a balancing charge would not arise. The Bill provides for an amendment to these rules such that disposals of any IP, which were acquired on or after 14/10/2020, will now be subject to a balancing adjustment to effectively claw back relief previously given where the proceeds received exceed the tax written down value, regardless of the how long the asset is in use.
While the impact of the new amendment to our IP allowance regime should not stand as a barrier to companies carrying on activities associated with the effective management of IP, and puts IP on an equal footing with plant and machinery assets, it does represent a tightening of the rules in comparison to previous years and was not previously flagged as a potential change. Nevertheless, Ireland remains a competitive location for the carrying on of activities in connection with IP. It is also welcomed that the new rules will only apply with respect to acquisitions of IP on or after 14/10/2020 as this gives certainty to taxpayers with respect to existing intangible assets.
The Bill also provides for the extension of the Knowledge Development Box (KDB). When originally introduced, KDB was to apply to accounting periods which commence on or after 1/1/2016 and before 2021. However, with the low uptake of the scheme resulting in a lack of meaningful data and the diversion of resources due to Brexit and Covid-19, it has extended the “sunset clause” to apply to accounting periods ending before 2023.
Originally welcomed as one of the first OECD compliant patent box regimes, the scheme enables qualifying profits to be taxed at a rate of 6.25%. However, uptake for the scheme has been disappointing. Revenue’s latest analysis showed that less than 10 claimants availed of €9 million tax benefit in 2018. This can be largely attributed to restrictive criteria for IP to qualify for inclusion in the scheme and the burdensome challenges of identifying and tracing profits that can attributed to the “specified trade relevant to the qualifying asset”. An ex post review of the KDB is anticipated in 2022. We would hope that this will lead to sufficient amendments to the scheme to create a substantive incentive for companies to invest in high value add roles which lead to the development of IP in Ireland and further developing the knowledge economy as we move into a post COVID-19 world.
Cayman leaves the EU’s ‘Annex 1 List’
On Oct. 6, the EU finance ministers comprising the Economic and Financial Affairs Council (ECOFIN) affirmed that it considers the Cayman Islands to be a fully cooperative jurisdiction for tax purposes by removing it from its Annex 1 list of non-cooperative jurisdictions (the Annex 1 list). This indicates the growing spirit of cooperation between jurisdictions of recent years, and has been widely welcomed e.g. in the alternative investment industry.
Can you indicate what some of the practical consequences of this may be in the coming year?
Andrew Quinn, Partner and head of Dublin Tax team, Maples and Calder, the Maples Group’s law firm
: The ECOFIN decision followed a detailed technical assessment by the EU of various legislative measures brought in by the Cayman Islands in response to the Cayman Islands' commitments to the EU.
In particular, the EU had required that the Cayman Islands put "appropriate measures in place relating to…collective investment vehicles". This was done by the Cayman Islands by enacting certain private funds legislation earlier this year and registering over 12,300 private funds with the Cayman Islands Monetary Authority by 7 August 2020.
There are a number of practical changes arising from this for business engaged in transactions with Cayman Island entities, which is particularly relevant to the alternative investment industry and to US corporate structures.
Firstly, this development is important for intermediaries reviewing transactions with the Cayman Islands under the new DAC6 regime. DAC6 is, of course, the new EU Mandatory Disclosure Regime requiring disclosure of certain cross border transactions which are considered to involve potentially aggressive tax planning arrangements by intermediaries assisting in those transactions.
The reason is because one limb of Hallmark C1 of DAC6 ("Hallmarks" are the triggers for reporting) applies to an arrangement that involves tax deductible cross-border payments made between two or more associated enterprises where the recipient is resident for tax purposes in a jurisdiction that is on the EU Annex I list. This would have been relevant to certain payments between EU based companies and investment entities associated with a Cayman recipient.
It is important to note that this particular Hallmark C1 does not require that the "main benefit" test (or business purpose test) also be met. Effectively, this means that any arrangements falling within the terms of this limb of Hallmark C1 are automatically reportable, regardless of whether obtaining a tax advantage could have been one of the main benefits for the participants in entering into the arrangement. This is no longer the case, although such payments must still be tested under a different Hallmark where the "main benefit" test applies.
Secondly, Irish corporate taxpayers filing their corporation tax returns in Ireland this year will have noticed a new information seeking section included in the Irish Revenue CT1 form online. The new section asks whether, during the accounting period in question, the taxpayer entered into any transactions involving the payment of royalties, interest or dividends to a person in any jurisdiction which is currently (i.e. at the time of the return filing) considered as a non-cooperative jurisdiction for tax purposes.
Companies with a 31 December 2019 year end, filing their returns by 23 September 2020, will have been required to consider the jurisdictions on the Annex I list at that time, but this will no longer be applicable to the Cayman Islands going forward.
Finally, at the end of 2019, the European Council issued guidelines encouraging all EU Member States to implement legislative "defensive tax measures" with respect to jurisdictions on the Annex I list and which should be in force by 1 January 2021. Again, this will not now be relevant to the Cayman Islands. It should be noted that many of these defensive measures have in fact long existed in Irish tax legislation in respect of countries with which it does not have a double tax treaty, so the impact would be more significant, for example, in EU countries that do not impose withholding tax on interest.
Chen Zhang, Manager, Corporate Tax, Deloitte
: The removal of the Cayman Islands (Cayman) from the EU non-cooperative tax jurisdictions “blacklist”, is indeed a very welcome move. Although the listing was temporary, the Cayman removal from the blacklist highlights their commitment and co-operation to maintaining the EU’s standards of governance, thereby strengthening the strong economic relationship Cayman has with the EU.
The immediate practical results of the delisting relate to the EU mandatory disclosure regime (DAC6) reporting requirements and the national defensive measures, in particular, the recent Irish Controlled-Foreign-Companies (CFC) rules.
With regards to DAC6, the inclusion of Cayman on the blacklist meant that any arrangement that involved deductible cross–border payments made between two or more associated enterprises where the recipient of same was resident in Cayman, caused the arrangement to become immediately reportable. Given recent developments, these transactions should not be reportable under that specific Hallmark (Hallmark C1(b)(ii)). However, we would note that the remaining Hallmarks should be considered to ensure that the arrangement does not fall under any other Hallmark.
Separately, the European Council issued guidance in 2019, which invited EU Member States to introduce legislative measures to prevent the shifting of profits to countries that are on the blacklist. These national defensive measures are to be effective from 1 January 2021 and consists of the Member States’ choice of the following:
a) Non-deductibility of costs,
b) CFC rules,
c) Withholding tax measures, and,
d) Limitation of participation exemption on profit distributions.
In Ireland, Finance Bill 2020 introduced an amendment in respect of our CFC rules. S.835YA narrows the available exemptions for assessing whether a CFC charge arises. The below exemptions will not be available for entities where they are resident within a non-cooperative jurisdiction;
• S.835T - Effective tax rate exemption;
• S.835U - Low profit margin exemption; and
• S.835V - Low accounting profit exemption.
The CFC amendment (effective from 1 January 2021) refers to “Where, in an accounting period…” regarding when the presence on the list should be determined. In the absence of further detail, it appears that a presence on the blacklist at any time during the accounting period should trigger the above exclusions in respect of applying the CFC rules to that period. Going forward, the Irish CFC exclusions should not apply to Cayman, as it is currently no longer listed on the EU Blacklist. However, the possibility cannot be excluded that Cayman may again be included on the blacklist in future.
Separately, although not Irish specific, it is noteworthy that other EU member states may adopt different defensive measures. For example, Luxembourg has recently introduced legislation to deny deductibility of interest and royalty payments to entities resident in a non-cooperative jurisdiction. The removal of Cayman from the blacklist may therefore have a positive impact on structures involving Ireland, Luxembourg and Cayman.
On 4 November, the Irish High Court issued a landmark decision with respect to the disposal of intangible assets – what impact does this ruling have for other multinationals with similar operations?
Emma Arlow, Tax Knowledge Manager, Corporate Tax, Deloitte
:In the case in question, the taxpayer sought to appeal an assessment raised by the Revenue Commissioners on the disposal of intangible assets and to treat the proceeds on the disposal of intangible assets as being subject to the 12.5% rate of corporation tax applicable to trading income. This was in contrast to the assessment raised by the Revenue holding that the correct rate of tax to be applied was 33% (applicable to proceeds on disposal of chargeable assets). In this instance, the taxpayer sought to appeal the treatment in two forums – firstly by way of an appeal on the application to the Tax Appeal Commission on matters connected with the technical interpretation and application of the Taxes Acts and secondly by way of judicial review proceedings brought before the High Court.
In the latter, the taxpayer argued (inter alia) that the notice of assessment was in breach of its legitimate expectations regarding the transaction. In addressing such a claim, the High Court considered the various representations which the taxpayer argued had been made to it on which they relied in calculating the tax due. Where reliance is placed on representations leading to a claim for legitimate expectation, it is crucial for the party relying on such representations to meet the, inter alia, pre-conditions established by case law (Glencar Exploration v Mayo County Council), namely:
i. The public authority must have made a statement or adopted a position amounting to a promise or representation;
ii. The representation must be addressed or conveyed to an identifiable group of persons; and
iii. It must be such to create an expectation reasonably entertained by the person to the extent that it would be unjust to permit the public authority to resile from it.
Overall, the court held that the various representations presented in support of the appellants’ claims for legitimate expectation could not be relied upon.
While this decision may not alter the interpretation and understanding of “trading income” from a tax perspective, it outlines some considerations in determining whether a claim for legitimate expectation arises in tax matters.