Budget 2020 will have a significant impact on the Financial Services ("FS") industry. It is reassuring to hear Minister Donohoe reaffirm his commitment to Ireland's corporation tax rate. However, the introduction of anti-hybrid rules and expansion of Irish transfer pricing rules are two key areas of legislative reform that need to be considered. Many FS taxpayers will be eagerly awaiting further detail on these topics when the Finance Bill is released later this month.
There are also a number of Irish property-related anti-avoidance measures that will need to be carefully considered by FS companies that have investments in Irish real estate. Tax rate changes in relation to stamp duty on non-residential property, dividend withholding tax and the bank levy were also announced.
I have long been an advocate of the clear signposting of upcoming tax reform to provide as much certainty as possible for taxpayers in an increasingly complex operating environment. It was refreshing to hear Minister Donohoe refer to the corporation tax roadmap and assuring taxpayers during his Budget 2020 speech.
In my view, the consultative approach taken to the development of the new anti-hybrid rules is an excellent example of up-front engagement from the legislature and the FS industry. The rules are extremely complex when applied to multi-tiered, multi-jurisdictional structures that FS companies tend to operate in due to the global nature of their business. However, a transparent process around the drafting of the rules has led to what I believe will be a considered piece of legislation that is seeking to provide certainty for taxpayers. I would commend the Department of Finance and Irish Revenue for their approach.
Minister Donohoe confirmed the planned reform to Ireland's transfer pricing provisions, and the expansion of the transfer pricing rules to non-trading transactions is likely to have a significant impact on the FS sector. This change was signposted, and there is broad agreement that bringing Ireland's transfer pricing rules in line with the 2017 OECD guidelines is necessary. The Feedback Statement on the proposed transfer pricing reform which issued in September did not specifically consider the nuances of particular FS business. Consequently, many FS taxpayers will anxiously await the details of the extension of Irish transfer pricing rules in the Finance Bill.
A number of new anti-avoidance measures targeted at Irish Real Estate Investment Funds ("IREFs") and Irish Real Estate Investment Trusts ("REITs") were announced which will have an impact on international funds investing in Irish property. Furthermore, there is an increase in the stamp duty rate on the purchase of non-residential property from 6% to 7.5%. These updated anti-avoidance measures generally take effect as of today with transitional rules applying on the 1.5% stamp duty rate increase referenced above. Please see our Budget 2020 property insights for further details.
Budget 2020 tax policy documents note that anti-avoidance provisions for Section 110 companies are also being strengthened to ensure that they operate as intended. These changes will be introduced as part of Finance Bill 2019, and many will anxiously await the detail in this regard.
As well as the stamp duty rate changes, Budget 2020 introduces a new 25% rate of DWT with effect from 1 January 2020. The introduction of the new rate is part of a two-stage process to align better the amount of tax remitted by companies with the tax that is ultimately payable by the individual taxpayer. Specific reference is made to Irish personal tax charges. In this way, albeit of equal application to all industry sectors, the impact may be lessened in the international financial services sector given the existing domestic exemptions which are typically relied upon by international investors. The Budget also increased the bank levy rate from 59% to 170% (effective from midnight on budget day), but this was merely to maintain the tax raised at a level of €150 million per annum.
Of equal interest was what was not referred to in Minister Donohoe's Budget speech. In this regard, I was disappointed not to see a consultation on a territorial regime be noted in the Minister's speech. This consultation was signposted in the corporation tax roadmap and was a key recommendation in the Coffey report, which is referred to in the supporting budgetary documentation. With the onset of interest limitation rules and the possibility of BEPS 2.0, Ireland needs to be innovative but fair in shaping domestic tax policy. While I believe the introduction of a territorial regime would be of great benefit to Ireland, I am not hopeful of seeing any movement on this topic as the Finance Bill progresses through the Oireachtas.
Finally, due to the rate of tax reform over the past number of years, there is an increasing need for several technical provisions, which have become outdated, to be modernised. Albeit not explicitly referenced by Minister Donohoe in his speech, I hope to see a number of these technical amendments included in the Finance Bill.
“The introduction of anti-hybrid rules and expansion of Irish transfer pricing rules are two key areas of legislative reform that need to be considered. Many FS taxpayers will be eagerly awaiting further detail on these topics when the Finance Bill is released later this month.”