Business Taxes

Anti-Hybrid Rules

The Budget announced the introduced of Anti-Hybrids rules as required by the EU Anti-Tax Avoidance Directive (“ATAD”). Section 30 Finance Act contains the relevant legislation and detail.

The rules are an anti-abuse measure designed to prevent arrangements that exploit differences in the tax treatment of an instrument or entity under the tax laws of two or more justifications to generate a tax advantage. These provisions will apply to associated entities (through ownership of shares, voting rights or rights to profits in that other entity), but they will also apply to “structured arrangements” between non-associated entities.

The following is a summary of the main provisions: 

  • ATAD anti-hybrid rules apply to all corporate entities/taxpayers, there is no minimum threshold. 
  • ATAD sets out a number of specific situations that give rise to a hybrid mismatch outcome and each of these situations is dealt with under the proposed provisions. 
    • A double deduction mismatch outcome arises where two countries give a tax deduction for the same payment but only one country taxes the associated receipt. 
    • A deduction without inclusion mismatch outcome arises where one country gives a tax deduction for a payment but no country taxes the associated receipt. 
    • A withholding tax mismatch outcome arises where the transfer of a financial instrument is designed to produce relief for withholding tax to more than one of the parties involved in the transaction.
  • ATAD requires that Member States implement a “primary rule” to neutralise the hybrid mismatch in the country where the benefit from the mismatch arises. 
  • Where the mismatch is not neutralised by a primary rule, ATAD sets out a secondary or “defensive” rule which may be implemented in the jurisdiction where the other party to the mismatch is situated. 
  • For each of the mismatch situation, the primary rule will deny the entity a tax deduction in the State in respect of the relevant payment. 
  • The defensive rule operates by either denying a deduction or including the relevant payment as taxable income of the entity in the State and only applies in certain circumstances.

The legislation applies to payments made or arising on or after 1 January 2020.

Exit Tax

Finance Act 2018 introduced anti-avoidance legislation which provided for a broad-based exit tax charge on certain disposals. This was part of Ireland’s continued effort to become compliant with the EU Anti-Tax Avoidance Directive (ATAD). The exit tax charge applies on all unrealised gains of migrating companies and assets transferred abroad, including transfers between a head office and its permanent establishment. The new rules introduced last year replaced existing anti-avoidance exit tax provisions that were subject to generous exemptions. 

Finance Bill 2019 has introduced a number of technical amendment to ensure that the rules function as they were intended to. The amendments address three issues:

  • There was perceived anti-avoidance of the rules whereby the exit tax was deemed not to apply in certain circumstances as the company is no longer resident in Ireland when the exit tax event occurs – the change now confirms that the exit tax will apply in such cases. 
  • Correction of a transposition errors included in Finance Act 2018 and now brings the exit tax legislation fully in line with the EU ATAD. 
  • Amendment of incorrect reference to a provision of the Finance Act 2018.

Transfer Pricing

As part of Ireland’s commitment to ongoing global tax reform, The Minster set out in his Budget speech that he would be reforming Ireland’s transfer pricing provisions to ensure they are in line with OECD standards.

Section 26 of the Finance Bill introduces a new Part 35A TCA 1997 which updates existing transfer pricing rules and extends their scope and application as follows:

  • It extends the application of the arm’s length principle to the computation of non-trading income, capital allowances and chargeable gains relating to transactions between associated persons. However, there is an specific exclusion from the application of the Transfer Pricing rules for transactions between certain associated persons who are chargeable to tax in the State on the profits or gains or losses arising from the transaction. 
  • In relation to the computation of capital allowances and chargeable gains, transfer pricing rules will only apply in respect of transactions relating to assets that have a market value of over €25 million. 
  • The meaning of “arm’s length” has been brought in line with the 2017 version of the OECD Transfer Pricing Guidelines. 
  • There will be increased transfer pricing documentation requirements for larger groups. 
  • It provides for the introduction of a higher rate of penalty for larger taxpayers who fail to comply with a request to provide transfer pricing documentation to the Revenue Commissioners. 
  • To encourage full and timely compliance with documentation requirements, there will be protection from tax geared penalties, in the careless behaviour category, where a taxpayer prepares transfer pricing documentation and provides it to the Revenue Commissioners on a timely basis and the documentation demonstrates reasonable efforts to comply with transfer pricing legislation. 
  • Under existing legislation, there were grandfathering provisions which applied to arrangements in place before 1st July 2010. This exclusion is now removed and these arrangements will now fall within the remit of the new rules. 
  • In addition, the exclusion from transfer pricing for SME’s is now removed. However, going forward, SME’s will either be fully exempt from transfer pricing documentation requirements or will have significantly reduced transfer pricing documentation requirements.

The rules will be operational for chargeable periods commencing on or after 1 January 2020 and, in respect of claims for capital allowances, where the related capital expenditure is incurred on or after 1 January 2020. The extension of the provisions to SME’s is subject to the making of an order by the Minister.

R&D Tax Credits

The Minister made a number of changes to the R&D tax credits in the Finance Bill 2019, which are subject to a commencement order by the Minister for Finance pending State aid approval from the European Commission. These amendments are being made on foot of a lack of take-up of the R&D tax credits since their first introduction, especially among Irish owned micro and small companies The following measures were introduced to make the relief more appealing to micro and small entities:

  • An increase in the R&D tax credit by 5% from 25% to 30%. 
  • The addition of an enhanced method to calculate the payable element of the R&D tax credit, based on twice the current year payroll liabilities. 
  • The introduction of an entirely new provision which allows pre-trading R&D expenditure to qualify for the tax credit. However, tax credits created in this way will be limited to offsets/repayments calculated by reference to payroll taxes (PAYE/USC) and VAT liabilities for the same period.

Separately, there are several other changes which will apply to all companies, as follows: 

  • An increase in the limit of outsourcing to third level institutions of education from 5% to 15% of the qualifying expenditure incurred by the company, or €100k whichever is greater. 
  • Where a company does outsource to third parties it must now notify in advance of, or on the day of, payment, if that company intends to make a claim for the R&D tax credit. 
  • Where a grant is provided by the State or an agency of the State/EU then the amount must be deducted from the qualifying R&D expenditure. 
  • It clarifies that where a payable amount or amount surrendered to a key employee is later withdrawn, then it is not permissible to use any offset of losses or credits to shelter the clawback of such an amount.

The Finance Bill 2019 included an additonal amendment regarding expenditure on buildings or structures, which are for scientific research. These buildings/structures will qualify for a scientific allowance. The Finance Bill 2019 confirms that where a company may qualify for a scientific capital allowance and the R&D tax credit, then both reliefs cannot be claimed in respect of the same expediture.

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