In an annual update on Ireland's international tax strategy, Ireland's Minister for Finance confirmed the government's "rock solid commitment to the 12.5% corporation tax rate". So, while there is no intention to change the domestic tax offering, Ireland must still conform with the EU, US and OECD tax reform. The question is how competitive it can remain in the course of doing so?
Ireland has been a favoured jurisdiction in recent years for multinational groups seeking the optimal location for operational and tax purposes. While the key reasons for Ireland's popularity remain unchanged (low corporation tax rate, comprehensive network of double tax treaties, straightforward, certain and efficient tax system, EU membership, common law jurisdiction, English speaking), the tightening of US Treasury rules aimed at curbing corporate inversions slowed down activity in 2016. The new rules in particular targeted, and succeeded in terminating, the proposed $160 billion merger of Pfizer and Allergan. However inversions continue to be viable for deals with a different fact pattern, as evidenced by the completion of the Johnson Controls merger with Irish-based Tyco in September 2016.
European groups choosing Ireland as a parent company location is increasingly becoming a feature of the Irish corporate and tax law landscape. In particular, pharmaceutical companies such as Cortendo/Strongbridge and Flamel/Avadel are relocating their parent companies to Ireland by way of cross-border mergers or other methods. While some of the same tax features that appeal to US multinationals are also relevant in an EU context, Ireland's access to US and international capital markets is proving a strong draw. Shares in Irish-incorporated parent companies that are listed on a stock exchange in the US or Canada can be treated as equivalent to American depositary receipts (ADRs) so that transfers cleared through the depository trust company (DTC) are not subject to stamp duty.
Increased European M&A activity is expected in Ireland in the wake of Brexit. For example, in a 50:50 EU-US merger with a dual listing in the EU and the US, a third jurisdiction is often sought to locate domicile of the merged entity. While to date, the UK may have been competitive in terms of its offering, Ireland is now the only country ticking all the boxes as an EU/EEA member state, which is English speaking, and which is a common law jurisdiction offering a favourable corporate tax regime.
On the subject of Brexit, midmarket M&A activity in Ireland slowed down in 2016 as a result of the uncertainty surrounding the UK's exit from the EU. However, this should pick up again in 2017 as UK companies seek suitable Irish acquisition targets to allow access to the EU single market. In particular, such UK companies may wish to complete mergers under the Cross-Border Merger Directive before the UK's exit from the EU. Irish-indigenous companies may also take advantage of the relatively weak sterling to make value acquisitions in the UK, which could have the added benefit of avoiding potential customs duties and tariffs when selling into the UK in the future. However, the principal area of Brexit-related activity in Ireland will be the financial services industry, with UK financial service providers that require continued access to the EU/EEA markets looking to relocate to an EU member state such as Ireland.
Ireland has extensive domestic law exemptions from interest withholding tax which apply without recourse to a treaty and without the need to complete any procedural formalities. In addition, Ireland continues to benefit from the provisions of the EU Parent-Subsidiary Directive and the EU Interest and Royalties Directive, as well as from its wide network of tax treaties. Ireland's securitisation vehicle, the Section 110 company, was made BEPS-compliant in 2011 by providing that no deduction is available for profit participating interest unless the interest is subject to tax in an EU/treaty partner country.
Politically speaking, Ireland and the UK were often allies in the area of tax policy at EU level, for example in opposing proposals for a common consolidated corporate tax base (CCCTB) when mooted in 2011. Now that such proposals have been revived, Ireland finds itself lacking a friend in the EU with the political influence and power of the UK.
US treaty negotiations
The US published its updated model tax treaty (MTT) in February 2016 and Ireland's Department of Finance announced in August 2016 that it was entering into a renegotiation of the Ireland-US tax treaty. Ireland's existing treaty with the US dates back to 1997 and differs significantly from the provisions of the updated US MTT. The updated US MTT is not drafted with a small, open-economy treaty partner in mind. In particular, there is concern that the limitation on benefits (LOB) clause could reduce the ability of Irish companies to qualify for treaty benefits in circumstances where there is no tax policy justification for such a restriction and no tax avoidance.
However, since the announcement of the renegotiation a new administration has entered into power in the US and the OECD has published its multilateral instrument (MLI) as part of the BEPS Project. The MLI aims to implement the tax treaty-related measures of the BEPS Project and will, once ratified, simultaneously amend multiple bilateral treaties. Therefore, the appetite for negotiating a new bilateral treaty between Ireland and the US may have waned and it is hoped that cross-border investment in Ireland will continue under the more certain and appropriate provisions of the MLI.
The OECD BEPS outputs are, by the OECD's own admission, 'soft law' legal instruments. However, while the reports, in themselves, do not have direct legal effect, the pace at which various measures have been implemented by participating countries into domestic laws has made the project a resounding success.
Ireland has been a consistent supporter of the BEPS Project and early adopter of BEPS measures. Ireland has a substance-based system of taxation which has meant that foreign direct investment has always translated to job creation. As a result Ireland has a highly skilled cluster of support services for the pharmaceutical, medical devices, technology, financial services and aircraft leasing industries. It is anticipated that the focus of the BEPS Project on substance will attract further foreign direct investment and jobs to Ireland.
In terms of the implementation of BEPS measures to date, Ireland introduced country-by-country reporting obligations with effect from fiscal year beginning January 1 2016, and we understand that Ireland will sign up to the MLI in Paris in June 2017 following its recent submission of a list of qualifications to the MLI.
While other measures have not yet been introduced into Irish law, buyers in the Irish M&A market will want to ensure that any potential acquisition is BEPS-proofed for the future. In particular it will be essential that sufficient substance is located in Ireland to support the business of Irish target companies. It is important that employees in Ireland undertake the activities purported to be undertaken by their employer. If Irish companies outsource certain activities, it is important that their Irish-based employees actively oversee the performance of those activities. Furthermore if Irish companies have employees who fulfil employment duties outside Ireland, the nature and extent of those duties must be assessed in order to determine whether companies have a permanent establishment (PE) in another jurisdiction.
Documentation of Irish target companies relating to IP arrangements and intra-group financing arrangements must be reviewed to ensure compliance with updated OECD transfer pricing guidelines. Tax-efficient intra-group financing must also be examined with a view to identifying arrangements that might fall foul of interest limitation rules (discussed further in the context of EU ATAD below).
Finally, Irish Revenue tax opinions/confirmations issued to Irish companies must obviously be examined by any potential buyer. While in Ireland these are viewed as non-binding opinions that merely interpret and apply the law, the European Commission may take a different view of such opinions. Irish Revenue has recently confirmed its policy that all of its opinions/confirmations are subject to a maximum validity period of five years, or such shorter period as may have been specified when providing the opinion/confirmation, so the expiry date of opinions/confirmations should also be checked in due diligence.
EU Anti-Tax Avoidance Directive (ATAD)
The EU plans for the ATAD to be the vehicle by which it co-ordinates implementation of BEPS measures across its member states. The ATAD was proposed in January 2016 and adopted at the EU Council in July 2016. Unlike soft-law BEPS outputs, ATAD minimum standards must be transposed into domestic law by specific deadlines:
- interest limitation rules (January 1 2019 unless a member state has existing national-targeted rules preventing BEPS risks which are equally effective to the ATAD rules, in which case the interest limitation rules must be implemented by January 1 2024);
- controlled foreign company (CFC) rules (January 1 2019);
- hybrid mismatch rules (January 1 2019);
- exit tax (January 1 2020); and
- general anti-abuse rule (GAAR) (January 1 2019).
As alluded to above in the context of BEPS measures, the financing of acquisitions and the viability of existing intra-group financing arrangements will be impacted by the introduction of fixed-ratio interest limitation rules in Ireland, which hitherto did not apply. Net interest costs (being gross deductible borrowing costs less taxable interest income) are only deductible up to 30% of the taxpayer's earnings before interest, taxes, deductions and amortisation (EBITDA). Member states may opt, inter alia, for a group exclusion provision that allows taxpayers to deduct net interest exceeding the 30% threshold if their net interest to EBITDA ratio is no higher than the consolidated group's net interest to EBITDA ratio. Ireland has indicated it intends to avail of the deferred implementation date for interest limitation rules of January 1 2024 although it is unclear whether Ireland's existing interest deductibility rules would satisfy the conditions of the derogation, without further guidance on the interpretation of those conditions.
While interest limitation rules will represent a new Irish tax measure, their impact may be limited due to the fact that Irish companies that form part of a worldwide group do not generally carry a lot of debt. Interest deductions are often availed of in jurisdictions which have a higher tax rate than 12.5%.
The introduction of anti-hybrid rules could make Ireland a more attractive location for treasury companies within a group. With double deduction or deduction/non-inclusion structures in other jurisdictions no longer viable, tax at 12.5% on the profits of financing activities is a competitive proposal.
While the introduction of CFC rules will be a new departure for Ireland, locating a holding company in a low-tax jurisdiction such as Ireland may be efficient under the new EU-wide CFC regime. The CFC rules re-attribute certain types of income earned by low-taxed controlled subsidiaries (or PEs) to the parent holding company. In summary, a CFC is a more than 50% controlled subsidiary where the actual corporate tax paid by that subsidiary is lower than the difference between the corporate tax that would have been charged in the parent holding company jurisdiction and the actual corporate tax paid by the subsidiary. If a subsidiary is classified as a CFC, its undistributed passive income can be attributed to its parent company unless it carries on substantive economic activity supported by staff, equipment, assets and premises. Therefore while the new CFC rules may not greatly impact Irish holding companies, where groups have Irish subsidiaries that avail of the 12.5% rate, those Irish subsidiaries should carry on substantive economic activity in Ireland. Irish Revenue places particular emphasis on the level of activity being carried on in Ireland by employees with the requisite skills and experience when considering whether the 12.5% rate of corporation tax on trading income applies and therefore Irish trading subsidiaries should meet the substantive economic activity test.
While constancy is at the core of Irish domestic tax policy, Ireland must adapt to conform to international tax reform. Ireland's focus will be on availing of the opportunities arising from uncertainty overseas and remaining a competitive location for inward investment and M&A activity.
Partner, tax group
Tel: +353 (0)1 618 1113
Aisling Burke is a partner in the tax group of Arthur Cox and advises multinationals and corporate clients on tax structuring, inward investment, cross-border tax planning and the tax aspects of a wide variety of transactions including M&A (both public and private), migrations, reorganisations and financing arrangements. Aisling has particular expertise in advising on the tax consequences of doing business in and from Ireland.
Aisling also advises banks, insurance companies, investment funds and asset management companies on financial services taxation including advice on debt issuance programmes, structured finance, derivatives and securitisation transactions. She has frequently advised on the structuring of property related transactions in recent years.
Aisling has extensive experience of dealing with the Irish Revenue Commissioners in contentious and non-contentious matters.
Partner, co-chair tax group
Tel: +353 (0)1 618 0585
Caroline Devlin is co-chair of the tax group at Arthur Cox. She has extensive experience in advising both domestic and international companies on structuring their tax affairs for various types of transactions. Her experience covers a wide variety of transactions including M&A, reorganisations, tax planning involving maximising IP assets and advising on efficient cash extraction methods.
Caroline is very experienced in advising international clients on doing business in and through Ireland. She acts for a broad range of international clients including multinational corporations, private equity houses, hedge funds and financial institutions as well as growth and emerging companies.
Caroline is a member of the Irish Tax Institute's Tax Administration Liaison Committees, which deal with various tax issues including the implementation of BEPS and the ATAD in Ireland. Caroline is particularly experienced in advising on financing structures, including aircraft and equipment leasing. Caroline also leads Arthur Cox's Asia Pacific group.