Ireland is moving to stop corporate tax avoidance with plans to limit interest on loans, alongside plans to halt exploitation of multiple tax systems to lower company tax.
“The process of global tax reform is ongoing,” Paschal Donohoe, Ireland’s minister for Finance and Public Expenditure and Reform, said Oct. 8 during his Budget 2020 speech. “I believe that it is in Ireland’s interest that this work is successful at ensuring the continuation of a stable and consensus-based international tax framework into the future.”
Ireland has come under pressure in recent years to reform its corporate tax rules, which have allowed corporations, including Apple Inc., to avoid large tax bills through complicated tax arrangements.
The latest measures—set to limit multinationals’ aggressive tax planning with existing tax rules that involve contrived structures—include new anti-abuse rules for transfer pricing, or pricing of intercompany transactions and services, as well as adoption of the EU’s Anti-Tax Avoidance Directive.
Transfer Pricing, ATAD
The government wants to extend transfer pricing rules to cover more cross-border transactions and material capital transactions. The legislation will also expand the application of transfer pricing rules to small and medium size enterprises. Updating its transfer pricing rules brings Ireland in line with the latest robust rules set by the Organization for Economic Cooperation and Development.
These measures are expected to yield an additional 10 million euros ($11 million) for the Irish finance ministry, the government said in its Oct. 8 budget documents.
Ireland is finally adopting the EU’s anti-abuse rules (ATAD), following censure by the European Commission July 25 for slow implementation of the rules, which include controlled foreign company, or CFC rules, hybrid mismatch rules, and an interest deduction limitation rule.
CFC rules are designed to prevent companies using artificial or contrived arrangements involving foreign subsidiaries they control to lower tax. To mitigate tax, companies commonly arrange intercompany loans with high interest rates, creating an an artificially high cost which is then deducted to offset tax.
To tackle aggressive tax avoidance by real estate funds, the government said it would implement an interest deduction limitation rule and set a limit on relief for capital disposal.
“Following review of the first financial statements filed this year by Irish Real Estate Funds (IREFs), Revenue has identified that some IREFs have engaged in aggressive behavior to avoid tax. Therefore, I am introducing a number of new anti-avoidance measures to take effect via Financial Resolution this evening”, Donohoe said in his speech Oct. 8.
The anti-hybrid provisions seek to prevent corporate taxpayers exploiting differences in the tax systems among the different countries in which they do business, to give rise give rise to expenses that are then deductible for tax purposes, more than once.
Ireland may have been late in applying these ATAD rules, but it hasn’t given companies long to comply with them, said Louise Kelly, tax partner, Deloitte Ireland.
“There is a large amount of work for companies to do in a relatively short space of time. The January 1, 2020 deadline set in today’s budget means that companies will have only three months to figure out if they are caught and make changes to their structures,” she said.
The companies will also have to wait until next week’s finance bill to get the full details they need to comply with the new anti-avoidance measures, said Susan Roche, partner in international tax and inward investment at PwC Ireland.
“No specifics were announced today, with the full details to be outlined in the Finance Bill legislation as to how Ireland intends to transpose the Directive into Irish law. The introduction of these rules will mean Irish companies will have to review their existing arrangements to consider whether or not the new legislation could impact on them,” she said.