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Department of Finance - Corporation Tax - Tax Strategy Group 22/03

  • Ireland
  • Tax planning and consultancy

02-09-2022

The following briefing is intended as a summary of key points of note regarding the Tax Strategy Group (“TSG”) Corporation Tax paper of August 2022 (the “TSG Paper”). The TSG Paper outlines the TSG view of the current Corporation Tax (“CT”) regime, and its view of what the future may hold for reform. The headings used are the same as those contained in the TSG Paper for ease of reference.

1. Corporation Tax Trends

• 2021 saw net CT receipts exceeding the previous year standing at €15.32 billion (2020 receipts were €11.8 billion). CT was the third largest tax-head, accounting for 22.6% (20.7% in 2020) of total net tax receipts.

• The proportion of CT receipts derived from Small and Medium Sized Enterprises (“SMEs”) fell in 2021 due to the predominance of Multi National Companies (“MNCs”) in the market, however, this masked the strong recovery of SMEs with increased CT receipts of 60% year-on-year compared to a 25% increase for MNCs. SMEs paid €2.4 billion (16%) of net CT receipts while large companies accounted for €12.9 billion (84%).

• The ten largest CT payers in 2021 accounted for €8.2 billion (53%) of net CT receipts.

2. Update on the Implementation of other CT Roadmap Commitments

• The publication of Ireland’s Corporation Tax Roadmap (the “Roadmap”) in September 2018 represented a significant milestone in Ireland’s implementation of international tax reform. An update to the Roadmap was published in January 2021 reinforcing Ireland’s previous commitments to ensuring its corporation tax code remains competitive, fair and sustainable. Seven of the 12 commitments have been met, with the remaining five under review.

• Existing commitments which have been actioned include:

i. Introduce EU Anti-Tax Avoidance Directive (“ATAD”) compliant interest limitation rules;

ii. Legislate for reverse hybrids aspect of ATAD anti-hybrid rules;

iii. Consultation on possibility of moving to a territorial regime;

iv. Apply defensive measures in the Controlled Foreign Company regime to countries on the EU’s list of non-cooperative jurisdictions;

v. Adopt the authorised OECD approach to transfer pricing branches;

vi. Proactively respond to the outcomes of international reform efforts; and

vii. Publish a tax treaty policy statement taking account of international developments.

• Further commitments to action, consideration and consultation:

i. Progress the International Mutual Assistance Bill;

ii. Consider additional defensive measures regarding countries on the EU’s list of non-cooperative jurisdictions;

iii. Consider actions that may be needed in respect of outbound payments;

iv. Continue to meet international best practices on exchange of information and support efforts to enhance information exchange; and

v. Continued engagement in international fora and develop a new framework for domestic stakeholder engagement.

3. Tax Expenditure Reviews

Research and Development Tax Credit (“R&D credit”)

• Recent attention has been drawn to support progressing R&D policy aimed at small innovative companies. Progressions would aim to take into account changes to the economy since the introduction of the R&D credit.

• The TSG is considering changes which may allow for the R&D credit to continue to encourage innovation and productivity in Ireland as part of the ongoing review, but policy adjustments may need to be introduced to anticipate new Pillar Two standards.

Knowledge Development Box (“KDB”)

• To qualify for the KDB, the qualifying assets must meet the OECD’s ‘modified nexus standard’ which provides that a taxpayer may only benefit from an IP regime to the extent it can show it incurred expenditure which resulted in the creation of the qualifying assets. Uptake on the regime has been low, largely due to the restrictive requirements to meet the modified nexus standard. Administration requirements have also reduced the uptake on this relief.

• Finance Act 2020 extended the KDB to 31 December 2022. The current review of the regime requires consideration of the Global Anti-Base Erosion (“GloBE”) minimum tax rules and OECD Pillar Two including the Subject to Tax Rule (“STTR”). STTR allows imposition of a limited source taxation on payments subject to tax below a minimum rate of 9%. STTR is not confined to corporations with turnover in excess of €750 million and therefore could trigger a request that the treaty be applied bi-laterally.

• The TSG has been invited to consider the below options for the future of the KDB regime including:

o maintaining the KDB at the current effective rate of 6.25%;

o increasing the effective tax rate to 9% or above for the KDB; or

o ceasing the KDB ahead of the introduction of the STTR.

4. Supporting Investment & Activity in Ireland

Tax credit for the digital gaming sector

• Finance Act 2021 provided for the introduction of a tax credit for the digital gaming sector which has not seen the same exponential growth in Ireland as has been seen globally in the past decade. The credit applies to qualifying expenditure incurred on design, production and testing of certain digital games and will amount to 32% of the lowest of:

o the eligible expenditure amount;

o 80% of the total cost of development of the digital game; or

o €25 million.

• A minimum of amount €100,000 must be spent on production to qualify for the credit and a cultural certificate must also be issued from the Minister for Tourism, Culture, Arts, Gaeltacht, Sport and Media. To the extent that the relief due is greater than the CT due for a qualifying period, the excess will be paid to the company by Irish Revenue.

• The implementation of this relief remains subject European Commission approval with Department of Finance officials currently engaged in the State Aid notification process. Minor technical amendments to the legislation will be required in Finance Bill 2022 to ensure the credit is compliant with State Aid rules.

Non-Euro currency transactions (“NECTs”)

• Any currency other than the state currency is treated as an asset for capital gains tax (“CGT”) purposes. This means that gains or losses on NECT will be subject to CGT treatment including the applicable 33% rate in accordance with the Taxes Consolidation Act 1997 (“TCA”).

• There are exceptions to this rule including under section 79, TCA which sets out that NECT movements are treated as trading in nature and subject to CT treatment at the 12.5% rate.

• Further legislative amendments could extend the scope of these exemptions and the TSG has been invited to consider the treatment of NECT with the upcoming finance bill in mind in relation to the:

o treatment of trade debtors in the same way that trade creditors are treated; and

o treatment of non-Euro currency held in trading bank accounts being treated in the same way that non-Euro cash is treated.

Consideration of a territorial system of taxation

• The Roadmap contained a commitment to introduce a territorial tax regime. Ireland’s current CT regime considers all profits both domestic and foreign of resident entities to be within the scope of the Irish tax regime. Ireland allows for double taxation relief via a credit method with respect to foreign taxes paid on foreign profits, however, this gives rise to significant administrative burdens for businesses.

• A public consultation was opened to consider stakeholder input on the desirability of a territorial regime. Whilst there are considerations of a territorial regime in Ireland, they mainly focus on options of a participation or branch exemption and a fully territorial regime is not seen as a favourable. With the introduction of the Pillar Two global minimum tax rate, any move towards changes to the current worldwide system of taxation may be progressed with the introduction of the GloBE rules being considered in Finance Bill 2023.

Interest Limitation Rule (“ILR”)

• Finance Act 2021 introduced the ILR as required by ATAD which applies to all accounting periods beginning on or after 1 January 2022. The ILR imposes a restriction on the interest deductibility of corporate entities within charge to Irish CT up to a limit of 30% of a taxpayer’s taxable EBITDA.

• The legislation provides exemptions for borrowing in respect of ‘qualifying long-term public infrastructure projects’ to provide, upgrade, operate or maintain large-scale assets with a minimum life span of 10 years. The projects must meet the following conditions:

o the project operator must be established and tax resident in an EU Member State;

o the asset must be situated in an EU Member State; and

o the income and deductible interest equivalent costs must arise in an EU Member State.

• Section 835AAA, TCA outlines that assets cannot be specified by the Minister to qualify for the exemption unless:

o specifying the asset would not give rise to a breach of EU State Aid rules;

o the purpose of the asset is to enhance general public interest;

o it is in the public interest to specify the asset; and

o the financing arrangements present special features which justify the specification of the asset.

• No regulations have yet been made by the Minister under section 835AAA, TCA. However, it has been proposed that an objective and transparent administrative process to fairly evaluate assets for specification under the section are sought and the TSG view’s will be considered in developing this process.

5. International Developments

• Ireland is a member of the OECD/G20 Inclusive Framework on base erosion and profit shifting (“BEPS”) (the “Framework”). The actions under BEPS have largely been implemented as part of the Framework with the exception of challenges which arose from digitalisation. In July 2021, the Framework reached agreement but not consensus.

• Whilst Ireland broadly supported Pillar Two, it was reserved on the proposed minimum of an ‘at least 15%’ global effective tax rate. Following further discussions, Ireland joined the agreement on 8 October 2021.

• The agreement includes:

o Pillar One – a reallocation of 25% of residual profits to the jurisdiction of the consumer; and

o Pillar Two- a minimum effective tax rate of 15% for MNCs with over €750 million revenue.

• The agreement allows for Ireland to retain its 12.5% corporation tax rate for companies with a turnover of less than €750 million.

6. EU Tax Developments

• The EU Commission has also introduced various legislative proposal for the period 2021 to 2023 including:

o setting out union rules to prevent the misuse of shell entities for tax purposes (published December 2021);

o creating a Debt Equity Bias Reduction Allowance (known as DEBRA) (published May 2022); and

o a proposal for a Business in Europe: Framework for Income Taxation (expected to be published early 2023).

• The proposal to amend the Directive on Administrative Co-operation (known as DAC) to include crypto-assets and e-money is expected to be introduced in late 2022. It is anticipated that the proposal will consider reporting obligations and the exchange of information to ensure tax compliance in the cryptocurrency industry.

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