2019 will be a critical year in shaping the tax landscape for multinational corporations.
2018 was a busy year on the international tax front, with developments across the globe having an impact on Ireland, directly and indirectly. So, what can we expect in 2019 in terms of tax developments which could impact Ireland, directly or indirectly?
Interest deductibility changes
The Department of Finance has just completed a consultation phase around the EU ATAD (Directive) in respect of both hybrid instruments and interest deductibility rules. The interest deductibility rules are probably of most interest. Broadly, under a binding EU Directive, we are obliged to amend our interest deductibility rules so that allowable net interest will be restricted to 30% of earnings before interest, tax, depreciation and amortisation (EBITDA). As Ireland currently has very limited rules restricting the deductibility of interest, this is a significant change.
It initially appeared that Ireland would have until 2024 before the new interest restrictions would be implemented. However, it now looks likely that the new rules could be in place by the end of this year. Companies may need to adjust existing tax cash flow models to factor in potential disallowable interest in the future. Grandfathering of existing loans will be limited, with loans taken out post-June 2016 within the ambit of the new provisions.
The consultation phase is focusing on a number of issues, including carve-outs for certain activities and sectors, as well as how any de minimis limit (expected to be circa €3 million) will be legislated (for example, how group situations will be impacted). At the moment, there is uncertainty as to how the new rules will be implemented. How will a fully geared company with only rental income be impacted? Will there be a carve-out for infrastructure projects? There is some flexibility as to how countries implement the Directive; the hope is that Ireland chooses a sensible course. We will likely see the outcome of the consultation phase, and the resultant legislation, later this year.
There is a separate public consultation phase due to commence shortly in relation to transfer pricing (TP). This will cover various matters such as how Ireland will implement the updated OECD guidelines and whether TP should be extended to non-trading transactions.
Irish TP legislation currently refers to 2010 OECD guidelines. One of the key changes in the 2017 guidelines is around value creation and the consideration that needs to be given to where value is created in allocating taxable profits. A greater focus on value creation activities could impact companies that carry out significant research and development (R&D) activities outside Ireland, amongst other things. How Ireland implements the new OECD guidelines could impact significantly on a company’s effective tax rate.
One potential outcome of the new guidelines is that countries may compete for taxing rights over the same pool of profits. In the authors’ view, we are likely to face an environment of increased cross-border tax disputes, likely to last for several years. Later this year, in Finance Bill 2019, we will see the output of the consultation phase and the Department’s view on how best to implement the updated OECD guidelines. Regardless of the outcome of the consultation phase, there will be an increasing onus on companies to have appropriate and robust transfer pricing documentation in place to support their intra-group pricing policies.
A unique feature of Ireland’s current TP regime is that TP does not extend to “non-trading” transactions, which would cover companies that, for example, might provide a limited number of (interest-free) intra-group loans. The expectation is that Ireland will move to change this, with TP in the future covering both trading and non-trading transactions.
While it is expected that there will be an appropriate time-frame to unwind existing structures, or suitable grandfathering provisions, the changes may have a significant impact on Irish and international groups with interest-free loan structures in place.
The position in respect of digital tax is a moveable feast. At the time of writing, the potential for a consensus at European Union (EU) level looks low, which in some respects is a positive for Ireland, which stood to lose tax revenues from an EU-wide digital tax. However, we are already seeing individual countries, such as the UK, introduce unilateral digital tax equivalent measures. Such measures can reduce the attractiveness of our 12.5% tax regime.
2019 may see further developments at EU level on the digital tax front, or more likely an increase in the number of countries looking to implement their own digital tax regimes. The OCED has recently rowed heavily into this debate, which is likely to give significantly more impetus to proposed future changes.
Unanimity over tax matters
There has been talk at EU level of removing the current requirement for unanimity at EU level for the passing of tax changes. If, instead of unanimity, a qualified majority only was required to introduce tax changes, it would increase the likelihood of other EU changes being introduced. For example, the threat of a common consolidated corporate tax base (CCCTB) regime would increase, which would also erode the benefits of our low corporate tax rate. A change to the current unanimity rules would itself require unanimity, which at the moment seems most unlikely. However, it provides a good sense as to the direction in which the EU wishes to travel.
In summary, we can expect significant further activity in 2019 on the international tax front that will be critical in shaping the landscape both for multinational corporations operating in Ireland and for indigenous Irish groups with overseas operations.
Source: Chartered Accountants Of Ireland