11 Oct 2017 | 08.53 am
Budget 2018: Consultation On Ireland’s Corporation Tax Code
Review of Ireland’s transfer pricing regime
11 Oct 2017 | 08.53 am
Sharon Burke (pictured) and Kevin Cohen, Partners at KPMG, urge businesses to engage with consultation on the Coffey Report
On 12 September 2017 the Department of Finance released the Review of Ireland’s Corporation Tax Code, a government commissioned report which was prepared by independent expert, Seamus Coffey. On Budget Day the Minister for Finance announced a public consultation on the implementation of a number of the Report’s recommendations.
Overview of Recommendations
Although the Report does not make a specific recommendation on the 12.5% tax rate, its findings are broadly positive on the future sustainability of Ireland’s 12.5% regime (though, in his Budget speech, the minister did reaffirm that the 12.5% tax rate will remain and is a core part of Ireland’s corporation tax offering).
The Report does make a number of recommendations for changes to Ireland’s regime. These mainly reflect commitments that Ireland has made as part of multilateral measures to enact further protections against base erosion and profit shifting (BEPS).
These commitments are aligned with those undertaken by other European Union (EU) Member States and with recommendations set out by the Organisation for Economic Co-operation and Development (OECD). In this way, the Report seeks to align Ireland’s tax regime with evolving international standards for corporate income tax regimes while preserving Ireland’s relative competitive position as an attractive location for business.
Other Report recommendations on areas for possible changes include broadening the scope of Ireland’s transfer pricing regime, changes to the tax regime for intangible assets, the introduction of a controlled foreign company regime, and changes to the exit tax regime.
The Report recommends that the transfer pricing rules should be updated to apply the 2017 OECD Transfer Pricing Guidelines (the legislation currently applies the 2010 guidelines). It also recommends that a number of other changes should be considered, including:
• Extending the scope of Ireland’s transfer pricing rules to non-trading transactions, both domestic and cross-border.
• Extending transfer pricing rules to capital transactions if doing so would improve existing provisions which already apply market value rules to disposals of assets within scope of tax on capital gains or incurring expenditure on assets eligible for capital allowances (including allowances for intangible assets).
• Extending transfer pricing rules to some or all Small and Medium-sized enterprises (SMEs), which are currently not subject to transfer pricing (possibly with reduced documentation requirements).
• Ending the exclusion from transfer pricing of arrangements in place prior to 1 July 2010 under existing grandfathering provisions.
An extension of Ireland’s transfer pricing rules to non-trading transactions will likely have significant consequences for business in Ireland, in respect of both domestic and internationally focussed companies, particularly those engaged in intra-group financing.
The public consultation announced by the minister on Budget Day includes a review of Ireland’s transfer pricing regime. Given the potentially significant impact which the recommendations in the Report could have if implemented, it will be important to monitor the impact of potential future changes. In evaluating how you might be impacted, you should consider the following areas:
• Identifying intra-group arrangements (domestic and cross-border) where transfer pricing adjustments are not made because the transaction is non-trading. Common arrangements include the advance of intra-group loans at below market rates or intra-group informal property letting arrangements.
• The need to put in place (additional) transfer pricing policies and procedures and properly document transfer pricing arrangements.
The Report outlines the reliefs under Ireland’s Research and Development Tax Credit (R&D Tax Credit) and Knowledge Development Box (KDB) regimes and does not make any recommendations for changes to these.
Its recommendations for changes to Ireland’s capital allowances regime for intangible assets are confined to reintroducing a cap on the deductibility of allowances and related interest expense – it does not recommend any changes to either the rate of claim or the scope of eligible expenditure for capital allowances on intangible assets.
The cap on deductibility of allowances and related interest expense is recommended to be set at 80 percent of trading profits from specified intangible assets (which are those intangible assets eligible for capital allowances relief).
In his Budget speech the minister announced that this recommendation will be implemented with effect from midnight on Budget Day (and, consequently this does not form part of the public consultation).
Whilst this change will likely slow down the use of allowances (depending on the profitability of the claimant), it is important to note that the total amount of qualifying expenditure will remain fully deductible, albeit the deductible amount may be capped in certain years, but available for deduction in future periods.
The recommendation to update existing transfer pricing legislation to reflect the 2017 OECD Guidelines will also affect businesses with intensive investment in intangible assets. The 2017 OECD Guidelines on pricing of intangible assets are focussed on attributing profits to the value added by functions related to the development, enhancement, management, protection and exploitation (DEMPE) of the intangibles.
In evaluating how you might be impacted by these possible changes, you should consider the following areas:
• If you are claiming allowances on intangible asset expenditure, review the cash tax and accounting income tax effect of capping each current period allowances claim at 80% of relevant profits.
• If planning future expenditure on intangibles, consider the impact of cap recommendations on the timing of relief claims.
• The current OECD guidelines on transfer pricing for intangibles focus on attributing profits to the value added by key decision makers. Understanding where decision makers are located and how key decisions are made at various levels is an important step in understanding if your transfer pricing approach to the recognition of Irish profits from intangible assets is aligned with current OECD guidelines.
Amongst the other recommendations in the Report are proposals to consider introducing both a foreign branch exemption and foreign dividend exemption regimes (in relation to connected company dividends) in tandem with the introduction with a Controlled Foreign Company (CFC) regime.
An alternative proposal suggested in the Report is to consider simplifying Ireland’s existing approach to affording double tax credit relief for foreign taxes borne on foreign income and branch profits. The requirement to introduce a CFC regime arises from Ireland’s obligation to adopt measures agreed at EU level under an EU Anti-Tax Avoidance Directive (ATAD).
Under the EU ATAD, Ireland is required to introduce CFC rules by 1 January 2019 and to revise its exit tax regime by 1 January 2020. The design and approach to implementation of these measures is included in the public consultation which was announced on Budget Day.
In evaluating how you might be impacted, you should consider the following areas:
• Review current Irish group holding arrangements to understand the tax profile and nature of activities conducted by foreign subsidiaries and branches in order to assess (i) impact of a possible adoption of a dividend/branch profit exemption in tandem with a CFC regime; and (ii) which of the two forms of CFC regime permitted under ATAD would be the best fit for your business.
• Consider the impact of a revised exit tax regime from 1 January 2020 if future business plans require a transfer of assets/business from Ireland.
KPMG is actively engaged in debates on tax policy matters in Ireland and will continue to proactively engage in the consultation process to represent the views of business across all sectors in Ireland.
Given the significance of the potential changes to Ireland’s corporation tax code that lie ahead and the impact they will have on business in Ireland, it is imperative that the voice of business is heard during the consultation process.
The consultation period in relation to the Review of Ireland’s Corporation Tax Code will run from 10 October 2017 to 30 January 2018. For more insights on Irish tax policy matters as they emerge, and importantly, to have your voice heard in the consultation on these changes, please get in touch with your usual KPMG contact or any member of your KPMG tax team.