Ireland’s corporate tax regime continues to come under pressure from international developments outside the control of the Government. There is pressure amongst larger jurisdictions who want to introduce a “Digital Sales Tax”, aimed at subjecting corporate profits to tax in jurisdiction where sales of digital services occur. This would be a fundamental change in corporate tax principles which to date have developed on taxing profits in the location in which the intellectual property is located. Ireland to date has resisted unilateral initiatives at an EU level, preferring for the OECD (which includes the US) to take the lead on international tax developments.
Over the last few months the Organisation for Economic Co-Operation and Development (OECD) has set out new proposals for a minimum effective tax rate on corporate profits. Depending on the detail of these proposals, they could have a significant adverse impact on Ireland’s foreign direct investment policy, which for decades has successfully been based on a low rate of corporation tax. The fact that the OECD is now considering proposals for a minimum corporate tax rate (with a view to securing agreement by the end of 2020) suggests that change is coming down the tracks and Ireland needs to focus on its overall tax regime, with a view to ensuring Ireland remains competitive and continues to attract investment.
Ireland introduced formal transfer pricing legislation in Finance Act 2010 effective for chargeable periods beginning on or after 1 January 2011. The current legislation specifically does not apply to “small or medium” sized enterprises (as defined). In addition the legislation currently only applies to trading transactions i.e. does not extend to passive activities e.g. intra group rentals or intra group lending. Therefore, due to the limited scope of the transfer pricing legislation the vast majority of domestic Irish businesses have not been impacted by the formal transfer legislation.
The current Irish transfer pricing legislation effectively incorporated the 2010 OECD Transfer Pricing Guidelines into Irish law. The 2010 guidelines have now been superseded by revised 2017 guidelines. Therefore Ireland intends to introduce legislation in Finance Bill 2019 to update Ireland’s transfer pricing rules with a view that they will come into effect from 1 January 2020. Earlier this year the Department of Finance launched a public consultation on Ireland’s transfer pricing regime. Some of the questions raised are whether the current transfer pricing legislation should be extended to SMEs and whether the legislation should be extended to non-trading transactions.
Given the difference in corporate tax rates between non-trading income (25%) and trading income (12.5%), if transfer pricing rules were to be extended to non-trading transactions then this could have a significant negative impact on Irish corporate groups where traditionally interest free loans have been used to provide finance within a corporate group. In addition extending the rules to SMEs would in our opinion simply create an additional administrative burden (and cost) on Irish businesses which is unnecessary and unwarranted.
The R&D tax credit is a very valuable incentive aimed at encouraging research and development. Companies performing R&D can benefit from a tax credit of 25% on their qualifying R&D expenditure. The tax credit, when allied with the corporate tax deduction for the R&D expenditure can lead to effective tax relief of 37.5% of the qualifying R&D spend. It is also worth noting that where a taxpayer does not have profits (e.g. due to losses) against which the R&D credit can be offset, it is possible to obtain a refund of the tax credit.
Identifying all qualifying R&D activities for the R&D tax credit can be challenging for all companies both large and smaller alike. As well as identifying any R&D activities there is also the requirement for appropriate documentation to be in place outlining the basis of the claim and qualification of activities. Where the R&D tax credits is claimed, there is also an increased risk of a revenue intervention, whether a full Revenue audits or a more focused R&D aspect query. Revenue aspect queries and audits in relation to R&D claims are increasing. The number of R&D interventions have increased from 26 in 2011 to 276 in 2016.
Earlier this year, Revenue issued updated guidelines in respect of the R&D credit. The main aim of the updated guidelines is to make the application process easier. The main changes include the inclusion of Appendix 3, which includes a suggested file layout for an R&D tax credit claim and a new section 2.7, which provides additional guidance in relation to the science test for micro or small enterprises who have received an R&D grant.
For any taxpayers considering making a claim, ensuring that appropriate documentation supporting the claim (both the scientific / engineering requirement and the financial requirement) is critical. This information will need to be provided to Revenue in the event of a Revenue audit.
There are concerns that the current R&D regime is targeted more at larger multi-national businesses and less so at domestic Irish SME’s, which may have less resources to support the R&D claim or to defend against inevitable Revenue intervention. It is worth comparing and contrasting the Irish R&D regime with the UK equivalent regime where HMRC will provide “Advance Assurance” to SMEs before they file their first R&D claim. HMRC state that this is:
“used to give companies a guarantee that any R&D claims will be accepted if they are:
This approach is much more collaborative than the Irish approach wherein business claim the R&D tax credit and then may have to defend the claim years later (with an exposure to penalties and interest is Revenue successfully challenge the claim). An advance ruling system would provide significant comfort to Irish SMEs who wish to make a claim but may be concerned about the possible challenge.
The Department of Finance is currently undertaking a review of Ireland’s R&D regime and has opened a public consultation in relation to the operation of the R&D tax credit regime. Any recommendations arising from the consultation process may then form part of any future Finance Acts.
The amount of capital allowances/tax depreciation available on motor vehicles is based on the emissions levels of the car (no restriction on vans). Under the general scheme, an allowance is available at 12.5% over a period of 8 years and up to a “specified amount” of €24,000 regardless of the actual cost of the vehicle. As part of Revenue’s green initiative, it is possible to claim accelerated allowances for qualifying new electric vehicles which will allow a company/sole trader claim 100% of the allowances in the year the car was bought. The accelerated allowances that can be claimed will be restricted to €24,000 and the company will have the choice to claim allowances in full in the first year or claim them over an eight year period.
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