Background to the Review
On 2 September 2016, it was announced that the Government would appoint an independent expert to undertake a review of Ireland’s corporate tax code (“the Review”). Mr Seamus Coffey was appointed in October 2016. This was followed by a six week consultation period which ran from 21 February to 4 April 2017.
The Department of Finance has released the findings of this Review. Whilst the findings are broadly positive noting Ireland’s commitment to a transparent, fair and competitive corporate tax system, it nonetheless recommends a number of changes to the Irish corporation tax code. Whilst there is no legal obligation on the Government to enact any of the recommendations, given the political climate and the increased focus on company taxation, it is likely that some or all will be followed.
In launching the Review, Minister Donohoe stated: “I welcome this comprehensive review which presents an overall positive message for our corporate tax code. The Review provides a clear road map and time frame for Ireland to implement important international reforms”. It is important to note that the Review does recommend a period of consultation in advance of some of the suggested legislative amendments.
This will be very important for companies, particularly in relation to the changes required as a result of the EU Anti-Tax Avoidance Directive (EU ATAD). EU ATAD requires, amongst other legislative amendments, the introduction of Controlled Foreign Company (CFC) legislation in Ireland for the first time.
What is covered in the Review?
The terms of reference of the Review encompassed the following areas:
- Achieving the highest standards in tax transparency including exchange of information
- Ensuring that no taxpayer receives preferential treatment
- Reviews Ireland’s commitments to the OECD’s Base Erosion and Profit Shifting project
- Ensuring the code provides certainty for businesses and maintains Ireland’s tax competitiveness
- Maintains the 12.5% rate
- Reviewing the sustainability of corporation tax receipts which he notes as being the “most volatile” of Ireland’s key taxes.
What are the key recommendations?
The Review recommends a number of changes to Ireland’s domestic transfer pricing legislation. Of key importance is a recommendation to extend the transfer pricing legislation to transactions the terms of which were entered into before 1 July 2010, non-trading transactions, SMEs and capital transactions. It is also recommended that Ireland adopts the transfer pricing documentation requirements outlined in BEPS Action 13 and adopts the 2017 OECD Transfer Pricing guidelines (rather than 2010). However, a period of consultation is recommended and any changes should be made before the end of 2020.
The Review notes the impact of the on-shoring of IP on Ireland’s national accounts in recent years particularly in 2015 with a significant rise in the value of intangible assets held in Ireland. Currently companies can claim tax depreciation on 100% of the capital expenditure incurred on the acquisition of IP. However, the Review recommends the reintroduction of an 80% restriction on the relief (this cap was lifted in Finance Act 2014) to ensure the “smoothing” of corporation tax revenues over time. However, it is not clear whether this should be applied to existing IP or to newly acquired IP. It is likely that this amendment will be announced in the upcoming Budget.
Introduction of a Territorial Regime
The EU ATAD requires Ireland to introduce a CFC regime by 1 January 2019. The Report recommends that Ireland moves to a territorial system (rather than a worldwide basis of taxation) and either introduces a participation exemption on dividends and branch profits or amends Schedule 24 TCA 1997 (double tax relief provisions) with a view to simplifying the calculation of foreign tax credits on dividends, branch profits, interest, royalties and leasing income with a view to maintaining our competitiveness.
Transparency and Openness
The Review also recommends that Ireland should continue to ensure that any future changes are not seen as harmful either by the OECD and EU and that it continues to adhere to the transparency and disclosure initiatives outlined by the EU/OECD.
In launching the Report, Minister Donohoe noted the recommendation for a detailed consultation process stating “the consultation process recommended in the Review is important if we are to reduce uncertainty and have better-informed policy making”. He announced that the consultation process would be launched on Budget Day. The next few years will undoubtedly see significant changes to our corporation tax code.
However, the consultation period provides companies with an opportunity to provide input into the shape of the corporation tax system going forward.