Ireland's Finance Bill 2019 ("the Bill") contains the legislative changes required to give effect to the Budget Day announcements made last week, as well as some supplementary provisions not specifically addressed by the Minister in his Budget 2020 speech. From a Financial Services ("FS") perspective, the most significant measure will likely be the introduction of the anti-hybrid rules which comprise of 18 pages of new legislation. The complexity of the rules when applied to cross-border FS business should not be underestimated.
The expansion of Irish transfer pricing rules is also a significant piece of legislative reform. The extension of Irish transfer pricing rules to certain non-trading transactions will clearly be a key area of the proposed reform to be considered by all taxpayers but we would expect the impact to be limited from a FS perspective. Helpfully, the expansion of the TP rules have not been extended to regulated funds or PPL/Ns issued by Section 110 companies. However, additional anti-avoidance provisions are being introduced with respect to Section 110 companies in order to strengthen the existing protections included in this regime. These additional anti-avoidance provisions will need to be considered in detail by all asset managers managing such vehicles.
The Bill contains a provision which disallows a deduction for "any taxes on income" as a trading deduction under general tax principles. This has been the long standing Irish Revenue view which they have now put onto a legislative footing. Furthermore, while most of the property related measures were announced on Budget day and given immediate legislative effect by way of Financial Resolution, the Bill includes further proposed anti-avoidance provisions today with respect to "holders of excessive rights" being unitholders who hold 10% or more of the units in an IREF.
The Bill also contains legislation required to implement the EU Directive 2018/822 ("DAC 6") and a number of other broadly welcomed clarifying provisions that we have considered below.
The Bill introduces anti-hybrid rules into Irish legislation. Importantly, the rules apply to payments made or arising after 1 January 2020 therefore, unlike other ATAD measures, the rules will be effective for all taxpayers from the referenced date irrespective of the adopted accounting period. The legislative change is required for Ireland to comply with the EU's anti-tax avoidance directive, specifically ATAD II ("the Directive"). The anti-hybrid rules are aimed at preventing companies from benefiting from differences in the tax treatment of payments on hybrid financial instruments and on payments by or to hybrid entities.The new rules will deny deductions for such payments or, in certain circumstances, will subject the referenced payments to tax in Ireland.
The anti-hybrid rules are very complex and introduce some important new definitions and concepts into Irish tax legislation. Equally, the introduction of these rules has necessitated the need for some other statutory provisions to be introduced into the Irish tax code. For example, the tax treatment of stock lending transactions is being put on a statutory footing for the first time. Furthermore,the cross border nature of the rules will mean that the Irish tax treatment of certain entities or instruments will be determined by reference to treatment in a foreign jurisdiction, and hence a more detailed understanding of foreign tax treatment will therefore be required. This will undoubtedly lead to a greater administrative burden on taxpayers. We have considered some of the key concepts below:
A significant portion of the anti-hybrid rules do not apply unless the payment is made to an "associate enterprise". At a high level, two entities shall be 'associated entities' of each other if:
In line with the Directive, debt relationships are not explicitly included within the definition. The definition of significant influence will therefore be very important for FS entities that sit outside a group relationship. Significant influence is a new concept in the Irish tax code and has been specifically defined in the Bill for anti-hybrid rules purposes. Broadly significant influence is defined as the ability to participate in the financial and operating policy decisions of an entity by virtue of board, or an equivalent governing body, representation.
Another very important concept is that of "inclusion". Provided the payment is included in the recipient jurisdiction, the referenced deductibility restrictions do not apply. The definition of inclusion is broadly drafted and covers both payments that are subject to tax in the overseas jurisdiction as well as payments to exempt foreign entities such as pension funds and government bodies. Furthermore, payments to entities that are located in a jurisdiction that does not impose tax are treated as included, provided that the profits or gains are treated as arising or accruing to that entity. A payment that is subject to a CFC-type charge imposed under the laws of another territory will also be treated as included.
In situations where a payment by a hybrid entity or a double deduction arises, a restriction will not arise as long as the payment can be offset against "dual inclusion income". This is income which is included in both Ireland and the jurisdiction where the mismatch situation arises. Ireland has sought to introduce a reasonable definition of "dual inclusion income" by introducing a jurisdiction test as opposed to an entity by entity test but nonetheless it is an area that needs significant consideration.
Imported mismatches, essentially payments which indirectly fund hybrid mismatches outside of Ireland, can also result in restrictions being imposed locally. Notably, the Bill prescribes that these rules do not apply where payments are made to other EU Member States which is a very positive development.
Some additional important definitions which are central to the correct interpretation and application of the anti-hybrid rules will require careful consideration, in terms of their application to FS structures. Notably, the definition of "Payee" which is the entity which must meet the inclusion test, "hybrid entity", which in itself determines the application of the rules in many cases, and the interaction of these definitions with each other will need to be carefully assessed by all taxpayers. The manner in which the definitions have been drafted, particularly the addition of a "participator" concept within the definition of Payee, may result in situations where multiple payees can be identified in one transaction. This is arguably even more relevant in an FS context given the multi-tiered nature of many structures.
In terms of the potential impact of the new legislation on the FS sector, the measures which apply to payments under hybrid financial instruments are likely to have limited application in practice, the one exception being payments under profit participating loans/notes ("PPL/Ns") typically made by Section 110 companies. It is also positive that financial traders have been carved out from certain on market hybrid transfers subject to a number of conditions being met. These companies are already subject to restrictions on interest deductibility under rules which are not dissimilar from the anti-hybrid rules, and have been further strengthened in the Bill (see below for further detail). The new anti-hybrid rules will co-exist with this existing legislation and will therefore need to be considered in conjunction with same. The most significant impact is likely to be on groups or investment structures where US shareholders or investors are involved, due to the US "check-the-box" elections which can give certain entities a specific US tax designation. There are a number of additional anti-hybrid provisions in relation to disregarded permanent establishments, tax residency mismatches, withholding tax and structured arrangements that will need to be considered in certain situations.
Overall, Ireland has sought to introduce the anti-hybrid rules in a form which closely aligns with the wording of the Directive. The rules do not go beyond the requirements of the Directive and this is to be welcomed. Furthermore, the fact that the measures have been transposed in a manner which ensures the provisions can interact and coexist with existing Irish tax concepts will likely provide much needed certainty to taxpayers. Notwithstanding this approach the complexity of the rules should not be underestimated.
As expected, the Bill contains the draft legislation required to align Ireland's current rules with the 2017 OECD Transfer Pricing Guidelines and broaden the scope of transfer pricing in Ireland.
The Bill introduces some new concepts into the Irish tax code. At a high level, these include:
As expected, the Bill delivers an extension of Ireland’s transfer pricing rules to cross-border non-trading transactions. The rules will now apply to taxpayers chargeable to corporation tax in both a trading and non trading context, at rates of 12.5% and 25% respectively. This is a significant extension of the transfer pricing rules, given the regime was confined to trading transactions heretofore, and will bring a significant number of non-trading transactions within the scope of the transfer pricing legislation for the first time.
The provision also provides for the extension of the transfer pricing rules to domestic transactions but only where the transaction was entered into with a main purpose of obtaining a tax advantage, as part of a wider arrangement with a foreign party. This acknowledges that fully domestic non-trading transactions do not pose the same type or level of risks posed by international / cross border transactions.
While the extension of Irish transfer pricing rules to certain non-trading transactions will clearly be a key area of the proposed reform which will need to be considered by all taxpayers, we would expect the impact to be limited from a FS perspective. It is also positive to see regulated funds falling outside the scope of the new regime in its entirety.
The new rules mean that Irish Section 110 companies may fall within the scope of Irish transfer pricing rules to the extent that they engage in related party transactions. That said, while there may be additional documentation requirements to contend with, the fact that Section 110 companies are already obliged to enter into transactions on an arm’s length basis means the formal extension of the transfer pricing rules contained within the Bill will therefore have a lessened impact on these vehicles in practice. The one exception to the existing arm's length requirement relates to payments under PPL/Ns issued by qualifying SPVs. Helpfully, the expansion of the TP rules have not been extended to regulated funds or PPL/Ns issued by Section 110 companies thus ensuring that these collective investment vehicles can continue to meet their policy objectives. However, the Bill introduces additional anti-avoidance provisions with respect to Section 110 companies in order to strengthen the existing protections included within the regime (see below for further detail).
The Bill makes amendments to the Section 110 anti-avoidance provisions, broadening the definition of a "specified person" as well as expanding the scope of specific anti-avoidance legislation.
The definition of control, which is a key factor in determining whether an entity constitutes a "specified person" under the existing anti-avoidance provisions, has been expanded to include persons who have "significant influence" over the Section.110 company. It is important to note that this definition is slightly broader than that contained in the anti-hybrid rules given that the test is not restricted to board, or an equivalent governing body, activity. That said, the new rule contains a two-pronged test whereby, in addition to having significant influence, an entity must also hold more than 20% of the share capital, PPL/N principal value or have the right to 20% of the interest or distribution payable under the PPL/N to fall within the scope of the rules.
The Bill also expands the specific anti-avoidance provisions to include all deductible PPN payments and moves this anti-avoidance provision to an objective basis. This has essentially moved elements of the 2018 Section 110 guidance onto a statutory basis and given the Irish Revenue greater ability to challenge situations where they believe transaction was not entered into for bona fide commercial purposes.
While most of the property related measures were announced on Budget day, and given immediate legislative effect by way of Financial Resolution, the Bill contains a number of additional technical provisions.
The Bill includes further anti-avoidance provisions with respect to "holders of excessive rights", being unitholders who hold 10% or more of the units in an IREF. Under this new provision, certain returns made to such unitholders will be deemed as income accruing to the IREF and an income tax liability, equal to 20% of the gross return, will arise at the level of the IREF. In effect, this charge to tax will be borne by all unitholders in the IREF regardless of their proportionate shareholding as it will reduce the profits available for distribution.
Furthermore, it would appear that certain returns made to non-exempt unitholders holding 10% or more of the units in an IREF will now be subject to a charge to tax at both the fund level and investor level. Whether this apparent double charge to tax is intentional remains to be seen.
The Bill introduces the primary legislation which is necessary to transpose the provisions of DAC 6 into the Irish tax code. The draft legislation introduces new obligations for intermediaries and taxpayers relating to the mandatory reporting of certain cross-border tax arrangements. The DAC 6 Directive aims to strengthen transparency on cross-border tax arrangements by requiring individuals, corporate tax payers and intermediaries, such as law firms, financial institutions and other advisers, to identify and report very detailed information on a broad range of cross-border tax arrangements when they meet certain criteria, known as hallmarks (which are very broadly defined).
While the Bill has aligned the domestic rules very closely to the DAC 6 Directive, it has introduced some additional clarity by leveraging the definitions contained in existing domestic legislation, relating to the meaning of "tax advantage" and "arrangements". The Bill also sets out the penalty regimes applying to any failure to comply with the obligations set out in the reporting regime.
While these clarifications are welcome, considerable uncertainty remains with respect to the correct application and interpretation of the rules, given the ambiguity included within the DAC 6 Directive itself.
Consequently, the content of the supplementary guidance notes that we expect to issue in 2020 will be very important in aiding the interpretation and application of the rules in an Irish context. In the meantime, given the DAC 6 Directive will now be on a statutory footing and has effect from 25 June 2018, it is important that all relevant transactions are assessed and documented by reference to the wording contained within the Bill. This will be a very significant exercise for a number of FS companies, who may have reporting obligations both as a taxpayer and as an intermediary.
The definition of "Additional Tier 1 instrument" for the purposes of S.845C has been extended. Under the revised definition, any instrument which satisfies the equivalent conditions of an Additional Tier 1 instrument under Article 52 of the Capital Requirements Regulation, but which has not been issued by a regulated entity, will be treated in accordance with Section 845C. This amendment will have no impact on existing Additional Tier 1 instruments.
As announced in the Budget, the rate of the Bank levy is increased in the Bill from 59% to 170%. This measure, which is effective for payments due in 2019 and subsequent years, has been introduced in order to maintain the tax raised at a level of €150 million.
The Bill introduces welcome amendments to the provisions for the taxation of Investment Limited Partnerships ("ILPs"). The changes amend terminology in the existing legislation which has the effect of providing that the income, gains and losses of the partnership are treated as arising or accruing to each partner in the partnership in proportion to their share in the partnership. These changes apply to ILPs authorised on or after 1 January 2020.
The Bill extends the provisions precluding overseas investment funds from falling within the scope of the Irish tax by virtue of appointing an Irish independent authorised agent. These provisions have been extended to reflect updates to the regulatory provisions by including firms regulated under MiFID Regulations by the Central Bank of Ireland and branches of such entities regulated in other Member States.
The existing practice in respect to stock lending and repurchase agreements has been put onto a statutory footing. The new provisions, subject to anti-avoidance measures, will tax such transactions based on their substance as a lending transaction, as opposed to the legal form, being a disposal and acquisition of the securities in question. In keeping with the existing practice, the provisions are restricted to arrangements not exceeding 12 months.
The Bill contains a provision which disallows a deduction for "any taxes on income" as a trading deduction under general tax principles. This puts the long-standing Irish Revenue view onto a legislative footing. In an FS context, this will impact taxpayers who incur a tax on income and cannot claim relief under the existing double tax relief rules. Any companies taking a tax deduction for foreign tax suffered will need to consider this provision in detail.
A statutory definition of bad debts, specifically "doubtful debts to the extent that they are respectively estimated to be bad", has been inserted, which, for companies, aligns the existing allowable statutory deduction with impairment losses, as calculated under GAAP.