There is a distinct end of year review and outlook aspect to this edition of the Irish Tax Monitor as our contributors assess the batch of important legislative and tax developments that crowded in to the end of the year, not least the passage of the Investment Limited Partnership Act, signed by President Michael D Higgins on December 23rd, and referenced elsewhere in this issue in our interview with the Minister for Financial Services at the Department of Finance, Sean Fleming. Minister Fleming also says in the interview that a key concern of the Government in the IFS sector certainly that the working from home arrangements, have meant the working from home by Ireland;s multinational working force actually moving home to other jurisdictions. The restoration of normality, that we all pray for by the end of 2021 will see a full restoration of tax arrangements in an orderly way. Our panel in this month’s Monitor illustrates some of the issues arising on the ground in Reshma Shah’s contribution for example. The big issues, and the 2021-2023 mission statement of Revenue, as well as welcome reforms in the Oireachtas before end year feature also in the Tax Monitor this month.
Covid and working in other jurisdictions
COVID-19 has created immigration and air travel issues for many companies in many jurisdictions. How has Ireland’s response been to the continuing operation of immigration and embassy services in 2020, and what is the continued plan for 2021?
Reshma Shah, Senior Manager, Immigration Services, Deloitte
: Initially Ireland’s response echoed many countries in that many departments were temporarily closed, including all Irish embassies. There has been a steady increase in operations since reopening in June 2020. There are some limitations in regards to the type of visa applications that will be processed, but employment visa applications continue to be held as higher priority.
In country, Ireland’s departments have continued operations, and have streamlined many of the existing processes from hard copies to electronic versions. This includes the issuance of electronic employment permits, switching of status within Ireland by way of email application and approval and the online renewal of applications without a need for in person appointments or original documents. The move to an online service has been in part due to COVID19 restrictions but also due to a transformation plan set out by the Irish Immigration authorities. Given the current restrictions and anticipated lockdown due to the new COVID-19 variant, it is likely that these interim measures will continue.
In terms of impact on companies and talent attraction and retention, the experience to date would suggest an improvement in overall processing as a result of the switch to electronic processes, and therefore we hope that these changes will continue to be implemented throughout 2021. Companies who may be looking to relocate operations or place key staff in other jurisdictions in light of the challenges posed by Brexit (particularly those in the financial services field) should ensure that they engage early with the immigration process where required to ensure employees can move with as little disruption as possible.
Travel restrictions have also seen a serious impact as a result of COVID-19. All travellers into Ireland are now required to complete a Passenger Locator Form before entry to Ireland, and are required to restrict their movements for 14 days (subject to exemptions). Certain travellers may be able to alleviate the restriction of movement requirement after 5 days, if they receive a negative/’not detected’ PCR COVID-19 test result. We anticipate that these measures may be further extended to all international travel, should this new COVID-19 variant continue to spread at a rapid pace. Companies will need to ensure that where they are engaged in talent attraction into Ireland, they are making ample provision for a period of quarantine for their staff.
The tax aspects of the Investment Limited Partnership Act
With the enactment of the Investment Limited Partnership Bill, Ireland has a new and important vehicle in the funds arena. Can you comment on the tax aspects of the new vehicle, (e.g. its tax neutrality)?
William Fogarty, Partner, Dublin Tax team, Maples and Calder, the Maples Group’s law firm
: The passing of the Investment Limited Partnership Bill represents a tremendously positive step forward for the Irish funds industry. It will allow Ireland to offer a modern limited partnership regime to funds investing in private equity, infrastructure, renewables, and real estate. Partnership structures are the default option for many forms of funds which focus on investments in renewable energy, energy efficiency, technology and healthcare.
The novelty of the Investment Limited Partnership (ILP) lies almost entirely in the fact that Ireland now has a modern regulated form of partnership available to investors and managers who would otherwise have used structures such as UK or Delaware partnerships, or Luxembourg RCPs.
However, from a direct tax perspective, the ILP is not a dramatic change. The concepts of partnership taxation have been a feature of Irish tax law for generations. Returns are allocated to investors and taxed accordingly at investor level. This has been the treatment employed by partners using general partnership structures and limited partnership under the 1907 Limited Partnerships Act. ILPs have taken a more tortured path to the same result. ILPs authorised before 13 February 2013 are taxed under the gross roll–up regime applicable to investment undertakings such as ICAVs. ILPs authorised on or after 13 February 2013 are treated as tax transparent, but partners were taxed in the same manner as those in Common Contractual Funds (CCFs). This was not quite the same as ordinary partnership taxation. The Finance Act 2019 amended this to provide that income, gains and losses in relation to an investment limited partnership authorised after 1 January 2020 are treated as arising to each partner in accordance with the apportionment under the terms of the partnership agreement. This is the classical form of partnership taxation and will be familiar to Irish and non-Irish investors.
In a post-BEPS and Brexit world, it is useful to consider the benefits and opportunities of having an Irish partnership vehicle. In many contexts, the ILP will use a holding company to hold its investments. There is a strong tendency towards such entities being formed in the same jurisdiction as the fund partnership. This aligns with OECD guidance on "substance" and the trend is likely to see an increased use of taxable Irish companies to act as holding companies. The UK has taken steps to investigate reform of its tax laws in order to facilitate the use of UK-based companies to accompany their well-developed partnership fund industry. Similar work might be beneficial from an Irish perspective, examining how the use of Irish holding companies could be encouraged, for example by simplifying the dividend withholding tax regime. Overall, this would be a net positive for the Irish industry and would likely result in greater economic activity and related tax receipts. There already appears to be some appetite for reform, and it was notable that in December 2020, the Department of Finance launched a consultation on the Employment Investment Incentive (EII) Scheme. One of the issues being reviewed is opening EII Funds to other relevant regulated fund structures.
This would facilitate the use of the ILP for Irish investors to invest in SMEs based in Ireland under the existing legislation, which could provide a welcome source of capital to Irish SMEs in the current climate.
John Perry, Director, Financial Services, Deloitte
: The signing of the Investment Limited Partnership (Amendment) Bill 2020 on 23 December 2020 will bring Ireland’s ILPs offering in line with similar partnership vehicles in other jurisdictions and improve Ireland’s attraction as a location for establishing private equity, real assets and infrastructure funds. The Bill amended and extended the Investment Limited Partnership Act 1994, the Irish Collective Asset-management Vehicle Act 2015 and the Investment Funds, Companies and Miscellaneous Provisions Act 2005.
The main changes introduced by the Act are legal and regulatory in nature and do not impact the tax status of an investment limited partnership (“ILP”) established under Irish tax legislation since 2013. ILPs authorised before 13 February 2013 are taxed under the gross roll-up regime. ILPs authorised on or after 13 February 2013 are treated as tax transparent. Their unit holders are taxed in the same manner as those in CCFs.
Therefore, an ILP is not chargeable to tax and the income, payments, gains and losses arising to an ILP are treated as arising directly to the partners in the partnership, in proportion to their interests in the partnership. This is the principle of tax-transparency. An ILP must make an annual return to Revenue, by 28 February in the year following the year of assessment, providing information regarding the relevant income, gains and losses of the ILP and specified details in relation to the partners in the ILP. An ILP is exempt from deposit interest retention tax (DIRT) as is the case with other investment undertakings. As a tax transparent vehicle the ILP structure is particularly suitable as an investment vehicle for investment which intends to rely on domestic or treaty benefits of the investments and the partners.
The legal and regulatory amendments to the ILP are long awaited and a very welcome addition to strengthening Ireland’s suite of fund structures. The ILP enhances the legal forms that an Irish investment undertaking can take to promote investment, secure Ireland’s competiveness and enhance its regulatory environment in international financial services.
What, in your view were the most significant developments in the global corporation taxes landscape in 2020?
Adam Trundle, Assistant Manager, Corporate Tax, Deloitte
: 2020 was a year that will not be soon forgotten, for reasons that are now all too familiar to each of us. In the midst of such “unprecedented times” many tax practitioners could take solace from the fact that their chosen field remained one of life’s two certainties. That is not to say that the global corporation tax landscape itself remained unchanged for the duration of the year, however.
In Ireland, domestic legislation was updated with effect from 1 January 2020 to bring domestic Anti-Hybrid rules in line with the EU Anti-Tax Avoidance Directive (“ATAD2”). In addition, there were very significant changes to the Irish Transfer Pricing rules. These rules have resulted in many MNEs reviewing their historical structures and arrangements, and in some cases restructuring their operations in order to remain compliant with the new rules.
In a wider European context, the introduction by the EU of DAC6 reporting requirements was arguably the most notable development in 2020 (although it should be noted that in many member states the first reporting deadline was postponed to the early part of 2021). DAC6 creates a reporting obligation for professional services firms, including tax practitioners and legal firms etc, where they are involved in cross-border transactions to which certain characteristics, known as “hallmarks”, apply. Some of these hallmarks are generic in nature and rely on the ‘main benefit test’ being met. The main benefit test is met if the main purpose, or one of the main purposes, of the transactions is to obtain a tax advantage. Others will apply in the absence of the main benefit test e.g. a cross-border transfer of hard to value intangibles. The stated purpose of DAC 6 is to enhance transparency, reduce uncertainty over beneficial ownership and dissuade intermediaries from designing, marketing and implementing harmful tax structures. Going forward, it will be important to keep these requirements in mind on future projects.
In October 2020, the OECD/G20 Inclusive Framework on BEPS published the long-awaited reports on the Pillar One and Pillar Two Blueprints, which seek to address tax challenges arising from the increasing digitalisation of our economy. Pillar One deals with the issues of profit allocation and taxing rights, whereas Pillar Two addresses a potential Global Minimum Tax regime. In respect of each blueprint, a public consultation was requested in December 2020, with results and further comments expected to be published in January 2021. These developments, and the implementation of any new rules, will likely shape part of the future corporation tax landscape.
What, in your view could be the most decisive developments in the global corporation taxes landscape by the end of 2021? (In your answer, please just focus on the coming 12 months, rather than on ongoing processes, which will last long after 2021? In this, perhaps, you might also consider the following 3 points – a surprise development, a welcome development, and an unwelcome development.)
Eanna Murray, Senior Manager, Corporate Tax, Deloitte
: A potentially decisive development in the global tax landscape, which will directly impact on corporate tax payers in Ireland during 2021, will be the implementation of the interest limitation rules into Irish Tax Law as part of Finance Bill 2021. The implementation of the interest limitation rules in Ireland will be required in order to conform with Article 4 of the EU Anti –Tax Avoidance Directive (ATAD).
The rules will broadly operate so as restrict corporate tax deductions for interest expenses incurred by a company, which may previously have been deductible for tax purposes. At a high level the ATAD requirements outline that where a company’s interest expense exceeds 30% of its EBITDA, an interest deductibility restriction would be required. Highly leveraged taxpayers will no doubt be keeping a keen eye on the draft legislation and implementation process, with a view to ensuring they understand and are aware the potential tax impacts into the future.
The impact of this development on Irish taxpayers will ultimately lie within the details of how Revenue will seek to transfer and transpose the interest limitation rules, from the wording of the ATAD into Irish Tax Law. The Department of Finance have recently confirmed on their website, that owing to the many potential uncertainties and complexities that may arise on implementing the interest limitation rules, a public consultation period has been opened (which expires on 8 March 2021), inviting submissions to be made to assist with the legislative process. The broad aim is to seek to address, understand and clarify any potential difficulties which may arise as part of the implementation.
Elsewhere, the potential for additional US tax reform during 2021 has increased, given the Democrat majority which will be present in the US House and Senate, alongside Joe Biden being elected as President.
Finally, while global tax reform at an OECD level will not be implemented in 2021, we may potentially see additional Digital Services Tax Regimes being analysed and introduced. As global tax trends are moving increasingly towards enhanced transparency, there may also be increased focus on the area of Transfer Pricing and for companies to seek and develop enhanced analytical and comparative tools and data backups to affirm their transfer pricing positions, in light of the recently expanded Irish Transfer Pricing Rules scope. Also, given the recent extension of the DAC 6 reporting deadlines as a result of the COVID - 19 pandemic, the new date for the sharing of reportable cross border arrangements under DAC 6 between EU Member States will commence during 2021. It will be interesting to monitor how these reportable arrangements may start having an impact on wider tax policies, both at an Irish, EU and Global Level.
Brexit’s myriad tax consequences begin to materialise
Brexit. What are the consequences from a tax perspective of the final regime applying on Jan 1st.?
Dan Morrissey, Manager, Corporate Tax, Deloitte
: The Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Act 2020 has sought to maintain the status quo in a number of areas particularly with regards to the treatment of capital gains tax groups and the reclassification of certain interest payments as distributions. This should be beneficial from a tax perspective for Irish companies transferring assets to/from UK tax resident associated companies and for Irish companies paying interest to their UK resident parent company.
However, the Withdrawal Act does not provide for complete equivalence on all tax matters relating to the UK and there will still be some important changes for transactions with UK entities. In particular, from 1 January 2021, the EU DAC6 Directive ceases to apply to the UK. While HMRC have announced that reporting will still be required for a limited time for arrangements meeting hallmark D, the impact of this will be felt in remaining EU Member States who may now have to pick up on reporting obligations otherwise met in the UK.
Another key impact which will be felt by multinational corporations focusses on double tax relief. In particular, additional foreign tax credit will no longer be available to Irish companies in respect of dividends received from shares in UK tax resident companies. Therefore, consideration may need to be given to the tax efficiency of dividends from UK tax resident companies. The end of the transition period also signals the end of relief ordinarily available under the EU Parent subsidiary directive and the Interest and Royalties Directives which would otherwise have allowed certain payments to be made free of withholding tax. While domestic provisions should overall still provide for no withholding tax to be applied to payments from Irish companies, the change from 1 January 2021 may necessitate advance declarations and paperwork to be completed in advance which companies need to be mindful of.
Lastly, the VAT and customs impacts post 1 January 2021 with respect to the end of the Brexit transition period are likely to be of significant interest to companies. From 1 January 2021, goods supplied from Ireland to the UK will be regarded as exports, while goods purchased from the UK which are delivered into Ireland will be treated as imports. There are various changes in VAT rules on supply chains involving the UK (availability of triangulation relief, the margin scheme and call-off stock relief), therefore any company whose supply chain involves the UK should review the potential VAT/customs implications immediately if not already reviewed.
Revenue’s ‘Strategy for 2021-2023’ statement
The Revenue Commissioners have published their updated Strategy for 2021-2023, which includes as part of its mission “Our vision: to be a leading tax and customs administration, trusted by the community, and an employer of choice”. Can you comment on the mission statement, and its value and relevance. Are there any omissions that you would like to have seen included ?
Emma Arlow, Director, Corporate tax, Deloitte
: The strategy document released by the Revenue Commissioners, while relatively short, is helpful to taxpayers and advisors as it sets out the areas of focus in the medium to long term. The work undertaken by the Revenue Commissioners in response to the COVID19 situation may be described as transformative, illustrated by the rapid shift in focus to the operation of the various support schemes since March 2020. The mission statement and 2021 – 2023 strategy document issued is therefore helpful in refocussing on areas of priority going forward as we move into a post COVID world.
While the strategy document is helpful to identify upcoming areas of focus, further clarity on specific measures would have been welcome. In the first instance, a central pillar of Revenue’s strategy has been on “Maximising Timely Compliance” by enhancing real time engagement and responses to risk. This suggests that we will see further efforts by the Revenue at encouraging self-review and correction. Taxpayers should expect to see revised compliance interventions, and should be mindful of this when filing returns – as such, advisors should be prepared to support their clients in event of such interventions.
Further clarity would have been welcome as to the status of the Dividend withholding tax (DWT) real time reporting which was originally expected to come into operation on 1 January 2021, particularly for taxpayers engaged in the payment of dividends to a significant number of shareholders on a regular basis. The use of technology was also noted as a central pillar of the Revenue Commissioners future strategy. In particular, the strategy document notes a focus on process automation, digitalisation and personalisation of services with a view to modernising taxes. In line with trends in recent years, taxpayers can expect technology to feature more heavily in audit and queries from the Revenue Commissioners with increasingly sophisticated methods of identifying risk.
A welcome addition to the strategy statement would have been a further reflection on the efficacy of the Cooperative Compliance Framework (CCF, addressed in more detail in this roundtable by Feargal Kenzie); while the benefits to companies on entry to the CCF are vast and include greater collaboration and support from the Revenue, some taxpayers may be unwilling to take on additional self-review requirements under the framework. An indication in the strategy document of a willingness to review the framework’s attractiveness would have been a welcome addition and would have served to demonstrate Revenue’s willingness to collaborate and engage with taxpayers.
Tax appeals reform welcome
The Finance Act introduced changes in Tax Administration and Appeals. Can you comment further on these, notably on what have been the most significant and promising of these from a Tax Administration perspective. And, how can firms see benefits going forward?
Feargal Kenzie, Director, Corporate Tax, Deloitte
: Section 58 of Finance Act 2020 made certain amendments to the Taxes Consolidation Act 1997 to facilitate improvements in the tax appeal process. Broadly speaking the changes can be summarised as follows:
• An appeal can be dismissed where the appellant fails to comply with a direction to submit a ‘statement of case ‘or ‘outline of arguments’.
• Provision is made for various circumstances in the appeal process where an Appeal Commissioner vacates office before the appeal process is complete.
• Sets out the specific circumstances where an appeal against a surcharge for the late submission of a return will be allowed (this will bring clarity to this area and afford the Tax Appeal Commissioners (TAC) the legislative footing to dismiss appeals relating to such surcharges where the grounds for appeal do not relate to certain specified matters set out in s1084 or the date the return was delivered).
The above changes are welcome developments in terms of increasing the speed and efficiency of tax appeal cases. It is hoped that the widening of the grounds to dismiss an appeal will aid the timely progression of cases by either insuring certain key timelines in the appeal process are met or cases can be dismissed, which will lighten the administrative workload of TAC going forward. That said, it would be important that TAC affords sufficient flexibility for taxpayers who may require more time to prepare submissions, and who openly engage and communicate with them. We have, to date, always found TAC accommodating on any such requests.
While the number of Commissioners has recently increased to 6, it is still a small pool. It is reasonable to expect circumstances will arise whereby a Commissioner may be required to vacate their office prior to completing the appeal process. Flexible provisions to enable another Commissioners ‘step in’ as opposed to automatically rehearing the case in its entirety is a welcomed provision, albeit the decision is made by TAC. Similar provisions apply in the case of a ‘case stated’ for an appeal to the High Court, however agreement between both parties is required, noting the High Court’s overriding discretion for a case to be reheard on the basis justice would not be otherwise served. It would be important that a taxpayer consider these provisions should the circumstances of an Appeal Commissioner vacating their office arise.
The benefits of these expediting measures will be most felt in the cost burden of a taxpayer's defence. Costs are often disproportionate to the underlying tax liability, therefore steps to move through the process quicker and avoid potential rehearing of cases is crucial. While the provisions may not reduce the outlay to a taxpayer to defend their position, they should serve not to make it worse. An accessible, efficient and affordable tax appeal process is fundamental to the self-assessment of tax as it affords taxpayers a route to tax certainty.
The Large Corporate Division CCF framework
Revenue has published a new update of its Large Corporates Division: Co-Operative Compliance Framework (see below). What are the implications?
Feargal Kenzie, Director, Corporate Tax, Deloitte
: In December 2020 Revenue published a manual specific to the Co-Operative Compliance Framework (“CCF”).This is very much a welcomed publication as it centralises, for the first time, general information on the procedures and operation of the CCF by the Large Corporates Division (“LCD”) of Revenue. By way of context entry to the CCF, subject to some exceptions, is limited to groups, including one company groups, managed by LCD. Seen as best practice internationally, the objective is to manage relationships with large corporate businesses so that Revenue and participant work together to achieve the highest level of voluntary compliance across all taxes and duties. While the provisions may not reduce the outlay to a taxpayer to defend their position, they should serve not to make it worse. An accessible, efficient and affordable tax appeal process is fundamental to the self-assessment of taxOf particular note is that the annual risk review meetings are treated as profile interviews (under Revenue’s Code of Practice for Revenue Audits and Other Compliance Interventions) and therefore participants preserve the right to make an unprompted qualifying disclosure on issues that may arise/emerge from the process.
Also of note is the importance of a tax control framework and its suitability to the group to facilitate the timely and accurate detection and disclosure of tax related risks.
Finally, and interestingly, it must be borne in mind that Revenue reserves the right to initiate a transfer pricing audit at any time and outside of the formal CCF process of engagement, which falls under CCF’s audit in exceptional cases only approach.
The implications for taxpayers in LCD in the realm of CCF could be summarised into the following three areas:
i. The decision to enter or not – this is a matter of rationalising the pros and cons of entry specific to the tax and duty footprint of the group and any associated tax risk.
ii. The time and resources required to prepare for the annual risk review meetings and self-review topics. This should not be underestimated and assumed to be of LCD Revenue audit standard.
iii. Managing any difference of opinions arising – this may require taxpayer to undergo formal revenue audit or appeal assessments to the Tax Appeal Commission, for example.
While the manual published does not necessarily amend the procedures around CCF, it does serve to reiterate the importance (in Revenue’s mind) of the framework to taxpayers. It puts existing practice on a more secure footing, hopefully providing greater clarity to taxpayers.