The Department of Finance’s recently published Tax Treaty Policy asserts that Ireland’s Double Taxation Treaty Network remains a key tool for Ireland in promoting trade and investment and will continue to be so when BEPS comes into force. The Tax Treaty policy and when BEPS will be come into force are among the subjects covered in this month’s ITM, as is how BEPS could affect international banking operations, DEBRA, and key new calls by the TAC.
The implementation of BEPS is currently stumbling in Europe and the United States, with Deloitte’s Laura Armstrong writing ‘over the last six months the work around Pillar 1 has been progressing with the release of several consultations, which the OECD are describing as ‘Pillar 1 Building Blocks’. Certainly many important technical issues do remain to be resolved and this together with the US stagnation on Pillar 1, may present a challenge to the achievement of the 2023 goal. She adds that the EU is struggling to reach agreement on a draft Directive to implement Pillar 2 while in the US there is also a lack of clarity around the passage of tax reform needed to implement Pillar 2. Not surprisingly, she concludes that the proposed implementation timeline ‘will not be met without difficulty’.
Meanwhile, the release of Ireland’s Tax Treaty Policy is a welcome development, giving, as it does, a pathway forward for Ireland to enhance its tax regime and lowering barriers for trade and investment with partner countries. The Update to Ireland’s Corporation Tax Roadmap, published in January 2021, committed to publish such a policy. The formal approach outlined in the policy, explained in detail by BDO’s Angela Fleming and Deloitte’s Karen Clarke in this month’s Roundtable outlines Ireland’s three main priorities with regards to the growth and development of its network of tax treaties – targetting G20 members, targetting OECD members (and OECD accession countries) and; renegotiating and modernising some of Ireland’s oldest tax treaties. Fleming says: ‘The policy statement acknowledges both the need to continue to enhance Ireland’s tax treaty network, as well as focussing resources in order to maximise the potential benefit of prospective tax agreements.’
The publication also formalises Ireland’s tax treaty policy approach to least developed countries (LDCs), outlining the core principles to be adhered to including a rule that Ireland will not make approaches to LDCs.
The EU’s attempts to level the tax playing field for debt vs equity finance is also covered in this month’s Roundtable with BDO’s Yvonne Diamond writing that in certain cases: ‘The main advantage of debt financing over equity financing, is the availability of a tax deduction for interest arising on the debt (subject to meeting the various requirements, and avoiding the many anti-avoidance provisions, in Irish tax law)’. The return on equity meanwhile, that is, profit distributions by way of dividends, are not tax deductible, she adds. The EU is aiming to reduce this bias towards debt in the tax system through the proposed Debt Equity Bias Reduction Allowance (DEBRA) Directive. Deloitte’s Emma Arlow writes the allowance provides for a form of notional interest deduction on equity, combined with a new interest limitation rule. The allowance on equity would be granted for 10 years, limited to a maximum of 30% of the taxpayer’s earnings before interest, taxes, depreciation and amortisation (EBITDA).
The allowance on equity is coupled with an additional limitation on interest deductibility to 85% of the taxpayer’s net borrowing costs.’ However, she adds, the proposed new rules (which could come into force from the start of 2024) risk being ineffective in reducing bias in the medium to long term given the move to the BEPS minimum effective tax rate for large MNCs.
On BEPS, Deloitte’s Cian McKenna looks at the possible impact on international banking and the criteria that need to be met for such entities to be considered outside the scope of Pillar 1 requirements, while two significant TAC determinations, on loan waivers and section 811 TCA, are examined as is the technology driving the transformation of the tax function.
Separately, Zarene Viljoen writes on the need for Transfer Pricing policies to be reviewed and, if required, revised to take into account how ESG policies are impacting business practices and models.