Like tax authorities in many other countries, the Irish tax authorities recently confirmed that the first filing deadline date under DAC6 will be extended for six months. Notwithstanding this extension, advisers in Ireland are continuing to focus on the practical application of DAC6 and the Irish tax authorities have recently published their guidance notes (the Guidance). Some interesting points have arisen from this Guidance, a few of which this article focuses on.
Main benefit test – is tax just the ‘icing on the cake’?
The Guidance specifically refers to the idea of a tax advantage only being one of a number of benefits. The Guidance notes that if the advantage is simply ‘the icing on the cake’, it would not satisfy the main benefit test.
Substantially standardised documentation
The Guidance confirms that this hallmark is targeted at ‘mass-marketed’ or ‘off the shelf’ schemes. This is certainly a helpful acknowledgement as a significant number of genuine commercial transactions could be reportable if this hallmark were interpreted broadly (e.g. where market standard precedent documentation is updated for use in a particular transaction).
The Guidance confirms that this hallmark is targeted at documentation which is substantially pre-prepared and requires little, if any, modification to suit a particular client. Irish Revenue note that there must be a link between the use of substantially standardised documentation and the tax advantage or benefit which is intended to be obtained. The Guidance also clarifies that documentation which is standardised for legal or regulatory reasons in routine financial transactions would not necessarily be reportable.
Contrived steps to acquire a loss-making company
The Guidance expressly notes that steps will be contrived where they are “pre-planned and artificial” and whether or not a transaction falls within this hallmark should be “evident from the facts of the case”. Therefore, the current expectation in Ireland is that this hallmark will only be relevant in limited circumstances where it is clear that deliberate steps were taken to acquire a loss-making company specifically to reduce a tax liability.
Converting income into capital or something that is taxed at a lower rate or exempt from tax
The Guidance expressly notes that commercial transactions are unlikely to fall within this hallmark. However, the hallmark could be interpreted broadly and the Guidance suggests that some commercial transactions will need to be reviewed very carefully, including a fund that is a ‘wrapper’ for investment in underlying assets, stock lending and repo transactions, a finance lease and the disposal of a right to an income stream. It is difficult to see how a finance lease could fall within this hallmark.
The Guidance notes that it would be necessary to quantify, and then compare, the tax which would have been payable had the conversion of income not taken place.
Circular transactions involving the round-tripping of funds
The Guidance states that it will be clear if the round-tripping serves no commercial purpose and is done solely to create a tax advantage. Irish Revenue have given the example of arrangements involving routing domestic funds through offshore entities in order to access preferential tax treatment that is only available to investors from other jurisdictions as something which would be reportable. In Ireland, these types of transactions are rarely seen.
Interestingly, the Guidance states that the hallmarks in category C are targeted at hybrid arrangements. Whilst Irish Revenue have not yet provided any detailed commentary or examples on category C hallmarks, this general observation is expected to help identify what may or may not be within the scope of this hallmark.
Unilateral safe harbour from transfer pricing
The Guidance clarifies that this hallmark contemplates arrangements which involve a safe harbour from the transfer pricing rules only. It does not apply where a particular category of taxpayer or transaction falls outside of the scope of our domestic transfer pricing rules in the first instance. For example, small to medium enterprises are excluded from Ireland’s transfer pricing rules so would similarly fall outside the scope of this hallmark.
Industry hopes for further clarification of Irish Revenue’s interpretation of hallmarks C.
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