Following on from the OECD's Base Erosion and Profit Shifting (BEPS) action plan the European Union adopted an anti-tax avoidance package in 2016 including Anti-Tax Avoidance Directive (ATAD). ATAD aims to set minimum standards for EU Member States, requiring them to change their corporate tax laws within a certain frame.
Ireland's legislators have been busy over the last 18 months dealing with the changes to Irish tax legislation required under ATAD. In 2018 there was an announcement of the details of Controlled Foreign Company (CFC) rules which were introduced in Ireland for the first time and a significant change to our Exit Tax regime. The effective date for the CFC rules was 1 January 2019 as required under ATAD and 10 October 2018 for Exit Tax (more than a year earlier than required).
The new Exit Tax applies to unrealised capital gains, where companies migrate their tax residence or transfer assets offshore and leave the scope of Irish tax. The rate of tax is 12.5% except in cases of tax avoidance when the capital gains tax rate of 33% applies.
The CFC regime applies to undistributed profits of "low taxed" foreign subsidiaries of Irish companies where the income arises from non-genuine arrangements put in place for the purpose of obtaining a tax advantage. The rate of tax applicable depends on whether the income is trading (12.5%) or non-trading (25%) in nature.
So far in 2019 the details of Ireland's implementation of the Anti-Hybrid rules has taken centre stage, while legislators have also been working on changes to our transfer pricing rules which, although not required under ATAD, are linked to the OECD BEPS project.
The Irish Department of Finance has taken the approach of consulting and engaging with stakeholders in advance of enacting the legislation required to adopt the rules required under ATAD. With the exception of the surprise announcement of the new Exit Tax regime in October 2018, the Department's implementation of ATAD has taken the form of a public consultation followed by the publication of draft legislation with an opportunity for stakeholders to provide their feedback. This process has generally worked well to date, with significant engagement between the department and stakeholders on the detailed technical aspects of the adoption of ATAD.
The initial draft Anti-Hybrids legislation which was published in July 2019 followed the directive closely and will be implemented with effect from 1 January 2020 as required by the directive (other than the provisions on reverse hybrids which is due for implementation by 1 January 2022).
One area of specific interest in the context of the Anti-Hybrids rules was the classification of foreign entities for Irish tax purposes. Ireland currently has no statutory basis for determination of the classification of a foreign entity as being opaque or transparent for Irish tax purposes and instead the determination is made by following case law principles and in some cases by seeking specific Irish Revenue confirmation.
As part of the introduction of the Anti-Hybrids rules, the department considered that it would be appropriate to put the classification on a statutory footing and initially proposed that Ireland should follow the tax classification of the territory in which the entity is established. However, following the recent consultation, and concerns around the effect of transition from the current case law approach, it now appears likely that the case law approach will be retained. While it is possible that a further draft of the legislation will be made available prior to publication in the Finance Bill for consideration by the Irish parliament, this is uncertain.
The two remaining aspects of ATAD are General Anti-Avoidance Rules and the more contentious Interest Limitation rules. Ireland's Department of Finance considers that no further action is needed in respect of the former given the robustness of Ireland's longstanding General Anti-Avoidance Rules and this appears to have been accepted by the European Commission.
The position with regard to Interest Limitation rules is less straightforward. The ATAD Interest Limitation rule operates by limiting the allowable tax deduction for interest costs, in a tax period to 30% of EBITDA.
The implementation date for the ATAD Interest Limitation rule was 1 January 2019. A derogation was available for Member States with existing rules which are "equally effective" as the ATAD Interest Limitation rules. This derogation allows a Member State to defer implementation until 1 January 2024. Although Ireland's interest regime does not have a specific EBITDA cap it is quite a restrictive regime and Ireland initially took the view that the derogation should be available. The Minister for Finance announced an intention therefore to defer implementation to 2024. However, the European Commission disagrees with this view and Ireland is now under pressure to bring forward the transposition date.
The Department of Finance provided the following update in July 2019
"Ireland remains of the view that our national targeted rules for preventing BEPS risks are equally effective to the ATAD Interest Limitation rule, however work has commenced to examine options to bring forward the process of transposition from the original planned deadline of end-2023."
Later in July 2019 the European Commission served formal notice on Ireland calling on it to implement the Interest Limitation rules and therefore an announcement on Ireland's intended transposition date is expected shortly.
Given the expected complexity of the transposition of the Interest Limitation rules into Ireland's already complex interest relief legislation, and the general Department of Finance approach in respect of ATAD to consult on the draft legislation prior to the publication of the Finance Bill, it is considered unlikely that the rules would be brought in with effect from 1 January 2020. However, in the absence of a formal announcement there continues to be some uncertainty around this final piece of the ATAD jigsaw.
