What does Budget 2020 mean for FDI?

08 October, 2019

  • The Minister's re-commitment to Ireland's long-standing 12.5% corporation tax rate for active trading profits was a welcome move. As he noted, the certainty of rate and regime are important factors in promoting investment in Ireland.
  • 2020 will herald fundamental changes to Irish domestic law for companies. However, most of the key measures announced were flagged to companies through a process of close engagement and consultation between the Department of Finance and taxpayers. This evidences the Minister's pledge for stability and certainty of treatment in an evolving international tax environment. 
  • One such change will be the introduction of anti-hybrid rules into Irish tax law for the first time with effect from 1 January 2020. This change is required for Ireland to comply with the EU's anti-tax avoidance directives ("ATAD"). As a result, all inter-company arrangements which involve tax deductions claimed in Ireland will need to be considered carefully for targeted concepts such as "deduction without inclusion", "imported mismatch" or "double deductions". Ireland will also modernise its transfer pricing legislation bringing the regime into line with the 2017 OECD Guidelines. 
  • Our domestic Transfer Pricing rules will also be expanded to bring cross border non-trading transactions, certain capital transactions and previously "grandfathered" transactions into the scope of our domestic provisions.
  • An increase in the rate of dividend withholding tax from 20% to 25% was announced from 1 January 2020, and a new regime of applying withholding tax will apply from 2021 onwards. Practically, this should not be a significant impact on companies in Ireland with a wide range of exemptions being available on such payments. 
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Budget 2020 announced changes in areas of significant interest to the FDI community. These continue the Government's journey in implementing various EU Directives and the OECD BEPS initiatives into Irish law. Most changes have been signalled in advance by the Department of Finance and have been the subject of public consultation and feedback initiatives. The Minister also reaffirmed the 12.5% tax rate and pledged to ensure stability, transparency and legitimacy in an international tax environment which is becoming ever more complex.

I think I'm not alone in the view that there were few surprises in Budget 2020 for companies. In particular, for companies that have been following the Irish Department of Finance public consultation processes around transfer pricing reform and the anti-hybrid regime. The changes referenced are broadly in line with the recommendations and timeline laid out in the Corporate Tax Roadmap.

I also believe it is positive to see the Minister re-affirm the Government's commitment to the 12.5% rate, which is "not changing". His pledge to maintain a corporate tax system which delivers stability and certainty of treatment to the FDI community in an ever-evolving international tax environment is very welcome.

Anti-hybrid rules

In July, the Irish Department of Finance released a Feedback Statement on the proposed implementation of anti-hybrid rules under ATAD following a well-subscribed public consultation process. The Minister confirmed today that the legislation would be implemented in the Irish Finance Bill 2019 later this year, with the rules generally applying from 1 January 2020. 

While the Minister did not provide material detail in his announcements today, the content of the Feedback Statement and subsequent engagement from the Irish Department of Finance suggests that Ireland's policymakers are seeking to transpose the anti-hybrid provisions in a way that will minimise complexity as much as possible. 

Ireland is aiming to provide certainty to taxpayers and put the various definitions on a statutory footing which is compatible and can co-exist with existing Irish tax law. In this way, many of the definitions seek to leverage and interact with existing concepts in the Irish tax code. In my opinion, this is an important starting point on this journey of implementing new ideas which we have not seen before in Irish legislation.

Companies will need to wait for the publication of the full text of the draft legislation in the Finance Bill. In the meantime, I think all companies should be considering any inter-company arrangements which involve tax deductions being claimed in Ireland in the interim, well in advance of 1 January 2020. The anti-hybrid concepts are complex and can result in tax deductions being denied in circumstances which are not obvious, for example, under the "imported mismatch" or "double deduction" concepts. 

Transfer pricing

The Minister also spoke of the proposed reform of the Irish transfer pricing rules in his Budget Day speech. Again, this follows the publication of a Feedback Statement in September, which issued following public consultation with stakeholders on the expected reform.

Based on the Feedback Statement, the proposed changes may include:

  • Incorporation of a direct reference to the 2017 OECD transfer pricing guidelines (and other OECD guidance on topics such as Hard-To-Value Intangibles and Application of the Transactional Profit Split Method) into our domestic transfer pricing provisions, replacing the existing reference to the 2010 OECD transfer pricing guidelines. 
  • Additional concepts such as the ability to disregard and characterise a transaction using a "substance over form" approach may be included in the legislative provisions.
  • The introduction of formal transfer pricing documentation requirements including Master File and Local File requirements, subject to de minimis thresholds.
  • Expanding Ireland's transfer pricing rules to cross border non-trading transactions. The extension of the rules may exclude domestic (i.e. Ireland to Ireland) non-trading transactions subject to the main purpose test.
  • Extending Irish transfer pricing rules to certain larger capital transactions and previously "grandfathered" arrangements (i.e. arrangements where the terms of which were agreed before 1 July 2010).
  • Subject to the execution of a Ministerial Order, our domestic rules may be extended to arrangements involving small and medium-sized enterprises (SMEs). 

The revised rules are expected to apply to companies with a chargeable period beginning on or after 1 January 2020.    

Again, while companies will need to wait to receive the full draft text of the reforming legislation in the Finance Bill, companies should already be considering how the revised rules are likely to impact their business models based on the draft provisions set out in the Feedback Statement. 

Other FDI issues

Other issues of interest to FDI include the increase in the limit for the outsourcing of R&D to third-level institutes of education is increased from 5% to 15% for all claimants. This is a welcome change for companies who often outsource some of their activities to third-level institutions. It should help to encourage more interaction between industry and Ireland's third-level education sector in undertaking R&D. 

Additionally, while a change in the rate of dividend withholding tax was announced, the existing exemptions from it have not changed. As the Minister noted, this change was not expected to give rise to any additional revenue for the exchequer outside of capturing the gap he identified in the taxation of the receipt of such dividends by individuals in Ireland.

Finally, some technical amendments to the exit tax regime which were introduced last year were noted as coming into effect as of 9 October 2019.

One aspect of this amendment deals with bringing the treatment of non-EU countries into line with the treatment for EU countries. Previously, these rules applied in scenarios where you had assets transferred by a company that is tax resident in an EU country (other than Ireland), from a permanent establishment in Ireland to its head office, or to a permanent establishment in another country; or assets transferred by a company that is tax resident in an EU country (other than Ireland) on the transfer of a business carried on by a permanent establishment in Ireland to another country. One of the key changes legislated for today means that the same treatment will apply to both EU and non-EU countries in this context.

The Corporate Tax Roadmap and a strong trend for public engagement meant that the Minister's Budget Day statements around keys areas of proposed corporate tax were already on the radar of most multinational groups. With a nod to global tax reform environment, the minster noted "the challenge... is to build a global and robust tax architecture that works for all into the future."

Companies I think still have action points to take away. They should reflect on their inter-company arrangements in light of the Feedback Statements from the Department of Finance on both Anti-Hybrids and Transfer Pricing. The publication of the Finance Bill in the coming weeks should further inform that review, and any action required.

“Minister Donohoe's pledge to maintain a corporate tax system which delivers stability and certainty of treatment to the FDI community in an ever-evolving international tax environment is very welcome.”

Susan Roche — PwC Ireland

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Susan Roche

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 6290

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