10 Oct 2018 | 12.18 pm
Budget 2019: International Tax
CFC rules will add to burden on business
10 Oct 2018 | 12.18 pm
KPMG partner Andrew Gallagher (pictured) looks at the detail of international measures
The minister reaffirmed Ireland’s commitment to the 12.5% rate of corporation tax. He also confirmed that Ireland will continue to take the actions needed to meet the highest international standards in tax, whilst offering a competitive tax regime that assists in building the Irish economy.
In September, the Department of Finance released Ireland’s Corporation Tax Roadmap which set out the future of Ireland’s corporation tax regime. The roadmap reflected stakeholder feedback to recommendations that were made in the Review of Ireland’s Corporation Tax Code that was undertaken by independent expert Seamus Coffey (the Coffey Review).
The roadmap detailed Ireland’s adoption of measures that all EU member states are required to implement under the European Union Anti-Tax Avoidance Directive (ATAD) which was agreed by the member states in July 2016. The minister noted some of these proposals in his budget speech.
Under the ATAD provisions, member states are required to introduce an exit tax for corporates, or to bring existing exit taxes for corporates into alignment with the EU provisions, no later than 1 January 2020.
The minister confirmed that Budget 2019 would introduce a new ATAD compliant exit tax regime. Financial Resolutions passed by the Dáil on Budget Day brought this regime into effect from midnight on Budget night. The minister considered that early introduction of this measure will provide certainty to businesses currently located in Ireland and to those considering investing in Ireland in the future.
- The regime will tax unrealised capital gains on capital assets where:
- There is a transfer of assets by a company resident in a member state from an Irish permanent establishment to another territory,
- There is a transfer by a company resident in a member state of a business carried on by a permanent establishment in Ireland to another territory, or
- a company ceases to be tax resident in Ireland.
- The tax rate for the exit tax is set at 12.5% – which is equivalent to the Irish corporation tax rate on trading profits.
- There are some additional provisions relevant to this measure:
- There are specific anti-avoidance measures which seek to deny the 12.5% rate where the charge arises as part of a wider transaction to dispose of the asset where a gain would otherwise be taxable at a rate of 33%.
- There is no charge when the assets are situated in Ireland and the company continues to use the assets as part of a trade in Ireland or continues to hold the assets as part of a permanent establishment in Ireland after the relevant transaction. This is because such assets remain within the charge to Irish tax.
- There are no changes to the provisions which deny the availability of the substantial shareholdings exemption when there is a deemed disposal of shares under an exit tax event.
- The measures allow for a harmonised approach on intra EU transfers of assets. They deem the market value of assets subject to exit tax in another EU member state to be the acquisition cost in Ireland. These provisions do not apply to treat the asset brought into Ireland as acquired at market value for capital allowances purposes.
- The resolutions adopt permitted exceptions for temporary transfers of assets in certain financial services transactions.
The ATAD provisions require that Ireland shall allow the company to spread the exit tax charge over five years. It is hoped that the legislation will clarify that the tax spreading provisions in Ireland’s existing exit charge provisions, apply to tax liabilities arising under the new exit tax provisions.
Capital gains tax principles apply in measuring the exit gain. This means that foreign currency movements during the holding period of the asset may result in an increase or decrease in the gain as measured in euro terms.
Controlled Foreign Company Rules
The minister confirmed that the Finance Bill will provide for the introduction of a Controlled Foreign Company (CFC) regime in Ireland for accounting periods commencing on or after 1 January 2019.
CFC rules are an anti-abuse measure for corporates that are designed to limit the artificial deferral of tax through the use of low-tax or no-tax offshore entities. The roadmap confirmed that Ireland would introduce ATAD compliant CFC rules in Finance Bill 2018 to take effect for accounting periods beginning on or after 1 January 2019.
The CFC rules will introduce an additional compliance burden on Irish headquartered groups and on international groups that have located their regional headquarters and holding structures in Ireland. However, it is hoped that the final legislation and related guidance will be drafted in a manner that ensures the regime is clear, unambiguous and operable in practice.