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More activity to come on the tax front

Although 2019 has been a busy year to date, you can expect more activity and a bumper Finance Act in the second half of the year.

There seems to be no let-up in developments across the global tax world, with the first half of the year likely to be trumped by an even busier second half. It is not possible to cover everything, but let’s look at some of the key developments so far and what is coming down the tracks.

Interest deductibility

Earlier in the year, the Department of Finance completed its consultation phase in respect of changes to interest deductibility (and hybrid) rules. Following ATAD1 (EU Directive), Ireland is obliged to amend regulations governing interest deductibility, with interest capped at 30% of EBITDA subject to certain conditions. It looks increasingly likely that the new legislation will be introduced well before the initially proposed date of 2024, with its inclusion in October’s Finance Bill now a possibility (and effective 1 January 2020).

Transfer pricing

A consultation process also took place earlier in the year in respect of transfer pricing (TP). We can expect significant changes in this year’s Finance Bill to our existing TP regime. It is almost guaranteed that TP will be extended to non-trading transactions such as the provision of interest-free loans, which are currently outside the ambit of the TP legislation.

What is not so clear-cut is whether TP will also be extended to small- and medium-sized enterprises (SMEs), which would place an extra administrative burden on smaller companies with potentially little additional tax revenues raised. It is possible that a compromise solution will be reached, with the new rules extending to SMEs but with more relaxed documentation conditions, as is the case in some other countries.

For companies already within TP, the introduction of 2017 OECD TP guidelines into Irish legislation will see more onerous documentation requirements, with both a master file and local file required at the head office and local country subsidiary level respectively.

Transfer pricing audits are also likely to be a more prominent feature of our tax landscape in the future.

Digital taxes

The good news is that the European Union (EU) has, for the moment, dropped its Digital Services Tax proposals – although several member states have unilaterally introduced their own such taxes (for example, the UK, France and Austria).

However, the digitalisation challenge has instead been picked up by the OCED which, in February, launched a public consultation on ‘Addressing the Tax Challenges of the Digitalisation of the Economy’. This consultation seeks to build on previous reports on the area and agree on a consensus-based, long-term solution between OECD members by the end of 2020.

The OECD’s proposals potentially go much wider than just digital companies, with the concept of “marketing intangibles” bringing many more companies within scope.

While there is as yet no clear consensus amongst OECD members as to the best way forward, many countries favour the concept of linking value creation to the customers’ location.

If ultimately consensus is reached that sees a portion of profits allocated to where consumers sit, this will undoubtedly dilute the benefit of our 12.5% corporate tax rate. We can expect further developments in this vital space over the coming months as negotiations progress.

More recent consultations 

In recent weeks, the Department of Finance has launched separate consultation phases in respect of Entrepreneur Relief, EIIS, research and development (R&D) tax credits and the KEEP (share option) scheme. While there is a different rationale for each consultation, the fact that they are taking place indicates that we may see changes in the future.

The legislative provisions governing EIIS and KEEP in particular have proved problematic for taxpayers attempting to access the reliefs.

The Department is also looking 

closely at Entrepreneur Relief. While further changes to this relief may be made, it is optimistic to believe that the €1 million lifetime limit will be increased to €10 million, certainly in the immediate future.

The R&D tax credit was the subject 

of a previous review, which showed that the credit was working as intended with the additional jobs created by the credit trumping the cost to the Exchequer of funding the credit. The Department is now seeking to reaffirm this finding and determine whether the relief remains fit for purpose.

Unwinding of “Double Irish” structures

Grandfathering provisions for so-called Double Irish structures will come to an end on 31 December 2020. As a result, intangible assets currently held in tax havens have in recent times been “on-shored”, in many cases to Ireland. We expect this to continue for the remainder of the year and next year, with many groups keen to execute the migration before the law changes in the countries where the intangible assets currently sit.

Due to the mechanics of the tax relief for intangible assets, any such acquisitions should see additional tax revenues flow to the Exchequer. Indeed, with intangible assets increasingly aligned with substance, additional payroll taxes may also accrue in due course.

The US tax reform package has, in many cases, made it more expensive for groups to house their intangible assets outside the US. Notwithstanding this, we expect to see further significant migrations of intellectual property to Ireland.

Minimum tax rate in Europe?

In recent European Parliament election debates, the notion of a minimum corporation tax rate (18%) across the EU was raised. The abolition of the right to veto any tax changes has also been mooted.

While both of these ideas are likely to get more air time for the remainder of the year, for the moment, we would assess the likelihood of either happening as remote.

So in summary, a lot has happened already this year, and we can expect at least as much activity in the second half with a bumper Finance Act likely to wrap up the year.

Paschal Comerford FCA is a Tax Director at Grant Thornton.

Peter Vale FCA is Tax Partner at Grant Thornton.

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