Following the recent Irish budget statement (the "Budget"), the Finance Bill 2015 (the "Bill") has been published and it implements the changes announced by the Irish Minister for Finance (the "Minister"). The Bill includes additional detail on:
- the new knowledge development box ("KDB"); and
- Ireland's implementation of country by country reporting ("CBCR").
In addition, it makes a number of other changes that will affect international companies and financial institutions operating in Ireland:
- implementation of the changes made to the EU Parent Subsidiary Directive ("PSD");
- introduction of a new exemption for expenses reimbursed to non-executive directors;
- ratification of a number of double tax treaties and tax information exchange agreements;
- new provisions for the deductibility of interest paid on additional tier 1 ("AT1") instruments;
- technical changes to the treatment of investment funds; and
- implementation of the EU Directive on the common reporting standard ("CRS").
Ireland's new knowledge development box
Ireland's KDB was announced in last year's budget statement. The Minister's intention was that the KDB would be a 'best in class' offering. Over the course of the past year, developments under BEPS Action 5 have established parameters within which the KDB can operate. In the Budget, the Minister announcing the KDB stated "the KDB adds a further dimension to our 'best in class' competitive corporation tax offering, which includes the 12.5 per cent headline rate; the R&D tax credit; and the intangible asset regime."
The Irish Department of Finance held a consultation on the KDB earlier this year. You can read Matheson's submission here.
With effect from 1 January 2016, the KDB will be available. In summary:
- Profits derived from qualifying intellectual property ("IP") will be subject to an effective rate of corporation tax of 6.25%.
- The relief will apply to income derived from two main categories of IP:
(i) computer programs protected
by copyright; and
(ii) inventions protected by patents, supplementary protection certificates (a form of short term patent) and plant breeders' rights.
A somewhat broader range of IP can qualify for the regime where the taxpayer is a 'small company' and not a member of a large group;
- The 'nexus approach' will be incorporated into the regime by applying the OECD's nexus formula. Accordingly, only Irish taxpayers who undertake the research and development ("R&D") required to develop the IP in Ireland (or, in very limited circumstances, the EU) will obtain any significant benefit from the regime. Helpfully, R&D outsourced to unconnected parties (anywhere in the world) will be treated as undertaken by the taxpayer under the regime. In line with OECD guidance, limited relief will be available to taxpayers who outsource R&D to connected parties.
Although the nexus formula must generally be applied on an IP asset by IP asset basis, in some circumstances taxpayers are permitted to apply the formula by reference to a family of IP assets. This should relieve the administrative burden associated with the regime to some degree.
Taxpayers availing of the relief will be required to maintain records to support their application of the nexus formula (known as 'tracking and tracing'). These tracking and tracing requirements apply from 1 January 2016. The relief is stated to expire on 1 January 2021, however, over the past number of years when Irish tax reliefs have been introduced with expiration dates, they have often been extended in later years.
Country by country reporting
As announced in the Budget, the Bill contains legislation to implement CBCR as recommended in the final report issued by the OECD under BEPS Action 13 (the "Action 13 Report").
The OECD recommended that three documents would be prepared to comply with CBCR:
- a 'master file' which sets out the high level information relating to the global business operations and transfer pricing policies of multinational groups;
- a 'local file' specific to each local jurisdiction, identifying material related-party transactions entered by entities in that jurisdiction and the transfer pricing analysis in respect of those transactions; and
- a 'country by country report', which provides, on a country by country basis in respect of each country where a multinational group has a presence, details of revenue, profit before tax, tax paid and accrued, number of employees, stated capital and tangible assets.
Currently, Irish transfer pricing documentation requirements are for the most part dealt with under guidance issued by the Irish Revenue Commissioners ("Revenue"). It is anticipated that Revenue will issue updated guidance on Irish transfer pricing documentation requirements reflecting the increased standards recommended under the Action 13 Report and in particular requiring Irish entities to prepare the information that ought to be included in the master file and local file. Although, the Action 13 Report recommended that master files and local files should be prepared and filed in each jurisdiction, for now, there is no explicit requirement to submit master files or local files to Revenue.
CBCR for Irish headquartered groups
As anticipated, the Bill requires preparation and submission of a country by country report containing the information identified in the Action 13 Report. The requirement to submit a country by country report applies to Irish headquartered multinational companies with consolidated group revenue exceeding €750 million a year. The reporting requirement applies for accounting periods beginning on or after 1 January 2016. Revenue will issue regulations with respect to the manner and form of the country by country report ("CBCR Regulations"). The CBCR Regulations will contain a substantial proportion of the relevant detail, including the timeline within which the country by country report must be filed.
Country by country reports may be exchanged with other countries with whom Ireland has entered a double tax treaty or a tax information exchange agreement, and countries that have also ratified the Convention on Mutual Administrative Assistance on Tax Matters, once the necessary competent authority agreements are concluded. It is anticipated that the first country by country reports will be exchanged by 30 June 2018.
CBCR for Irish subsidiaries of non-Irish headquartered groups
Irish companies that are members of multinational groups that are headquartered outside Ireland may opt to file the country by country report in Ireland if the jurisdiction of residence of the ultimate parent of the group has not implemented CBCR. It is not clear yet whether those Irish companies must file their country by country report in Ireland if it is not filed in any other jurisdiction. This will be confirmed in the CBCR Regulations. At this stage, it is anticipated that where the obligation to so file is confirmed Irish companies will be required to file a CBCR in respect of its subsidiaries (direct and indirect) only. We anticipate that the CBCR Regulations will be issued later this year.
EU Parent Subsidiary Directive
Changes were made to the EU Parent Subsidiary Directive ("PSD") in December 2014. In line with those changes, the Bill amends the Irish law implementing the PSD and incorporates a new anti-avoidance provision which will deny the relief available under the PSD where an arrangement was not put in place for valid commercial reasons. It is not expected that this change will have significant impact on Irish companies paying and receiving dividends.
Expenses reimbursed to non-executive directors
The Irish income tax treatment of expenses reimbursed to non-executive directors who travel to Ireland to attend board meetings is unclear and in some cases, it was argued that reimbursement of those expenses was a benefit in kind that should be subject to payroll taxes.
The Department of Finance held a consultation earlier this year on the tax treatment of expenses reimbursed to directors and employees. Matheson participated in that consultation and recommended that expenses reimbursed to non-executive directors should not be taxable. You can read our submission here.
The Bill now provides for an exemption from income tax for expenses of travel and subsistence paid by or on behalf of non-Irish resident directors who act in a non-executive capacity. The exemption is limited to expenses incurred solely for the purposes of attending board meetings.
Ratification of double tax treaties
The Bill ratifies a new double tax treaty agreed with Ethiopia. In addition, protocols to double tax treaties agreed with Germany, Pakistan and Zambia will be ratified. Tax information exchange agreements with Argentina, the Bahamas and Saint Kitts and Nevis will also be ratified.
A small amendment was made to the provision permitting Ireland to enter double tax treaties. Under the change, a double tax treaty can be agreed with an authority other than a government. This may be taken to indicate that a double tax treaty with Taiwan may be envisaged.
Treatment of Additional Tier 1 instruments
A new provision on Additional Tier 1 ("AT1") instruments was included in the Bill. In general terms, AT1 instruments are a form of loss-absorbing capital issued by banks also known as contingent convertible capital. They are similar in nature to debt instruments but convert to equity or can be written down if bank regulatory capital falls below a specified level.
The Bill confirms that AT1 instruments qualifying as such under the Capital Requirements Regulations will be regarded as debt instruments. We understand that it is intended that the return paid on AT1 instruments will now be deductible. This involves a change to the long-standing practice of Revenue which to date has been to deny deductions for interest paid on all Tier 1 instruments. It is unclear from when this change in practice will apply and whether it will affect AT1 instruments already in issue.
In addition, the Bill provides that the return paid on an AT1 instrument shall be treated as interest for Irish tax purposes and that the AT1 instrument will be treated as akin to a quoted Eurobond for withholding tax purposes and accordingly, as a general rule, should be exempt from Irish withholding tax (subject to satisfying some additional conditions).
Technical changes for investment funds
A new Irish investment fund vehicle, the ICAV, was launched earlier this year under the Irish Collective Asset-management Vehicles Act 2015. The Bill now expressly lists ICAVs as one of the types of 'collective investment undertaking' for Irish tax purposes. This provision is intended to confirm the ICAV's entitlement to be treated as an automatic 'resident of Ireland' under the Ireland / US double tax treaty.
The Bill also expands the Irish 'investment management' exemption to cover AIFMD (the Alternative Investment Fund Manager Directive). As a result, a non-Irish alternative investment fund will not be subject to Irish tax by reason only of the appointment of an Irish alternative investment fund manager.
Common reporting standard
The OECD's common reporting standard ("CRS") was transposed into Irish law in Finance Act 2014. Subsequently, the European Union issued a Directive to implement CRS within the EU. This Bill now transposes the CRS Directive into Irish law. The provisions contained in the Bill implementing the CRS Directive will apply in priority to the earlier provisions contained in the Finance Act 2014.
Over the coming weeks, the Bill will be debated by the Irish Parliament and additions / changes may be made to the legislation during that time. The final legislation is due to be enacted before the end of 2015.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.