Tax Strategy Group | TSG XX/XX Title
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CORPORATION TAX
Tax Strategy Group – TSG 18/01 10 July 2018
Tax Strategy Group | TSG 18/01 Corporation Tax
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TSG 18/01
Tax Strategy Group – Corporation Tax Contents
Introduction ................................................................................................................. 3
Tax Trends ................................................................................................................... 5
Rainy Day Fund ................................................................................................................. 8
Implementation of EU Anti-Tax Avoidance Directives ................................................... 9
CFC Rules ......................................................................................................................... 10
Exit Tax ............................................................................................................................ 11
Anti-Hybrid and Anti-Reverse Hybrid Rules.................................................................... 12
Interest Limitation Rules ................................................................................................. 13
Other features of the Corporate Tax regime currently under review ........................... 15
Three Year Start-Up Relief .............................................................................................. 15
Film Tax Credit ................................................................................................................ 16
Loss Relief ....................................................................................................................... 18
Property Related Funds .................................................................................................. 21
Real Estate Investment Trusts .................................................................................... 21
Irish Real Estate Funds................................................................................................ 23
Recent International Developments ........................................................................... 27
BEPS Multilateral Instrument ......................................................................................... 27
Common Consolidated Corporate Tax Base - C(C)CTB ................................................... 28
Digital Taxation ............................................................................................................... 29
Common EU list of non-cooperative tax jurisdictions .................................................... 30
US Tax Developments ..................................................................................................... 30
Broader international tax debates.................................................................................. 31
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Introduction
1. Companies that are resident in the State, and non-resident companies which carry on
a trade in the State through a branch or agency, are liable to corporation tax. Ireland
operates a worldwide system of corporation tax – a company which is resident in
Ireland for tax purposes is subject to tax on its worldwide profits with credit given for
foreign tax paid on the same income. The rates of corporation tax are:
12.5% – applicable to trading profits calculated under Schedule D, Case I
and Case II;
25% – applicable to profits from certain land dealings, mineral and
petroleum activities and non-trading income such as investment income or
rental income; and
33% – applicable to chargeable gains.
An effective 6.25% rate may be applied to profits arising to certain intellectual
property assets which qualify for the Knowledge Development Box (KDB).
2. Ireland’s corporation tax regime is a core part of our economic policy mix and is a long-
standing anchor of our offering on foreign direct investment (FDI). The 12.5% rate,
which applies to a broad base, is internationally competitive and is notable for its long
term stability. Certainty, transparency and a commitment to open engagement with
stakeholders are cornerstones of the corporate tax regime.
3. 2013 saw a shift in the international tax landscape with the commencement of the
OECD Base Erosion and Profit Shifting (BEPS) project. The resulting BEPS reports,
published in October 2015, give countries the tools they need to ensure that profits
are taxed where economic activities generating the profits are performed and where
value is created. Ireland has been at the forefront in implementing the BEPS
recommendations on country-by-country reporting as well as introducing the first
OECD-compliant patent box, the KDB.
4. Ireland has also been to the fore in progressing multi-lateral tax reform at EU level,
through the agreement of the Anti-Tax Avoidance Directives (ATAD) and the Directives
on Administrative Cooperation (DAC). Work on transposition of these directives is
ongoing, as per the agreed schedules.
5. In addition to contributing to the agreement of new international standards for global
tax reform, Ireland has also been pro-active in taking steps at domestic level to ensure
that our corporate tax regime remains competitive and continues to contribute to
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employment and economic growth, while also meeting the newly-agreed
international tax standards.
6. Ireland commissioned an independent expert, Mr. Seamus Coffey, to carry out a
thorough review of our Corporation Tax Code and to make recommendations for any
reforms that may be needed. Mr Coffey delivered his review to the Minister for
Finance and Public Expenditure and Reform, Paschal Donohoe, on 30 June 2017. The
Review makes 18 recommendations under the terms of reference. In the review, Mr
Coffey noted that a number of the recommendations are very technical and complex
and will require further consultation. The Minister agreed with this approach as it
provides all stakeholders with an opportunity to provide input and better inform
policy making, and a public consultation was undertaken early in 2018 on a range of
matters relating to both the Coffey recommendations and ATAD implementation (the
Coffey/ATAD consultation).
7. It is important that these initiatives support an environment of certainty for
substantive business investment in Ireland. Research by the Economic and Social
Research Institute points out that a competitive corporate tax rate is a significant
factor in attracting FDI to Ireland, especially from countries outside the EU. This
research concludes that, in addition to maintaining a competitive corporate tax rate,
Ireland’s attractiveness to FDI would benefit from policies aimed at maintaining cost
competitiveness and enabling further Research and Development (R&D) investment.
Therefore, in the face of an ever evolving international tax landscape and recognising
the importance of certainty, it is imperative that Ireland maintains its commitment to
sustaining an attractive, stable corporate tax regime. This will allow us to compete
legitimately and to continue to promote genuine substantive investment in the State.
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Tax Trends 8. The yield from corporation tax over the last five years has been rising steadily, with
the yield for 2017 of €8,201m accounting for 16% of the overall tax yield.
Table 1 – Corporation Tax receipts 2013 to 2018*
*Estimated SPU 2018 Forecast Source: Revenue Commissioners
9. Corporation tax receipts in 2015 were €6.87 billion. This represented an increase of
€2.26 billion or 49% on the 2014 receipts. 2016 receipts of €7.35 billion represented
a year on year increase of €480 million (7%). 2017 receipts were €8.2 billion,
representing a year on year increase of €850 million or approximately 12%. These rises
confirmed that 2015 was not a one-off phenomenon but represents a sustained level
shift in corporation tax receipts.
10. In April 2018, the Revenue Commissioners published ‘Corporation Tax 2017 Payments
and 2016 Returns’1. The analysis demonstrates a €14.7 billion increase in trading
profits from 2015 to 2016 and a broad-based increase in profitability across most
sectors. 2016 also saw increases in capital investment as evidenced by a 30% increase
in capital allowances claims in respect of plant & machinery and a 24% increase in
respect of intangible assets. Improved trading conditions and increases of productive
capital stock have led to a higher level of profits and thus a higher tax yield.
11. Other factors behind the increases included:
Losses – a reduction of over 13,000 in the number of companies that carried
forward losses in 2016 as compared to 2015 (almost double the comparable
reduction in 2015 of over 7,900). This resulted in nearly €261 million in
increased receipts.
Additional companies – €594 million in payments was received from roughly
19,400 companies that did not pay corporation tax in 2015.
12. Companies had 2 million employments in 2016 (530,000 were in multinational
companies) with combined Income Tax, USC and PRSI payments for their employees
of €16.7 billion (€7.6 billion for multinationals’ employees).
1 https://www.revenue.ie/en/corporate/documents/research/ct-analysis-2018.pdf
Receipts 2013 2014 2015 2016 2017 2018*
Corporation Tax €4,270m €4,614m €6,872m €7,351m €8,201m €8,505m
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Table 2 – Trading Profits and Corporation Tax Paid by Sector 2015 and 2016
Sector Profits 2015 Profits 2016 Variance Var % Tax 2015 Tax 2016 Variance Var %
Manufacturing €55,406m €65,946m €10,540m 19% €1,818m €1,874m €56m 3%
Financial and Insurance Activities €27,004m €23,877m -€3,12702m -12% €1,601m €2,064m €463m 28%
Information and Communication €20,224m €22,989m €2,765m 14% €1,345m €1,226m -€119m -9%
Wholesale and Retail Trade €15,279m €14,284m -€996m -7% €1,139m €993m -€146m -13%
Administrative and Support Services
Activities
€13,347m €15,214m €1,866m 14% €122m €177m €55m 45%
Professional, Scientific and
Technical Activities
€4,185m €6,689m €2,504m 60% €230m €322m €92m 40%
Transportation and Storage €2,898m €3,459m €561m 19% €175m €243m €68m 39%
Mining and Quarrying, Utilities €1,663m €1,707m €45m 3% €102m €40m -€62m -61%
Construction €1,318m €1,531m €213.78m 16% €113m €153m -€40m 35%
Human Health & Social Work
Activities
€373m €394m €21m 5% -€8m -€15m -€7m -88%
Accommodation and Food Service
Activities
€784m €974m €190m 24% €58m €84m -€26m -45%
Real Estate Activities €396m €528m €132m 33% €92m €90m -€2m -2%
Agriculture, Forestry and Fishing €394m €446m €52m 13% €41m €39m -€2m -5%
Other Activities and Sectors €656m €749m €93m 14% €39m €54m €15m 38%
Total €143,926m €158,675m €14,748m 10% €6,872m €7,352m €480m 7%
Source: Revenue Commissioners; Note – Figures are rounded, therefore variance and total figures may appear different
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Table 3 – Corporation Tax Paid by Sector 2016 and 2017*
Sector 2016 2017 Variance
Variance
%
Manufacturing €1,874m €2,090m €216m 12%
Financial and Insurance Activities €2,064m €2,303m €239m 12%
Information and Communication €1,226m €1,368m €142m 12%
Wholesale and Retail Trade €993m €1,108m €115m 12%
Administrative and Support
Services Activities
€177m €197m €20m 11%
Professional, Scientific and
Technical Activities
€322m €359m €37m
11%
Transportation and Storage €243m €271m €28m 12%
Mining and Quarrying, Utilities €40m €45m €5m 13%
Construction €153m €171m €18m 12%
Human Health & Social Work
Activities 2
-€15m -€17m -€2m -13%
Accommodation and Food Service
Activities
€84m €93m €9m 11%
Real Estate Activities €90m €101m €11m 12%
Agriculture, Forestry and Fishing €39m €44m €5m 13%
Other Activities and Sectors €54m €60m €6m 11%
Total €7,352m €8,201m €849m 12%
*Sectoral trading figures for 2017 will not be available until Corporation Tax Returns are filed later this year. Source: Revenue Commissioners https://www.revenue.ie/en/corporate/information-about-revenue/statistics/receipts/receipts-sector.aspx
2 The negative figures are related to refunds of withholding tax
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Rainy Day Fund 13. The establishment of a Rainy Day Fund will play an important role in enhancing the
resilience of the public finances. The objective of the Fund is to build up our fiscal
reserves so that we have room for manoeuvre in the event of a major shock to the
economy in the future. The Government has committed that a certain level of current
tax receipts, including corporation tax receipts, will be set aside and can be drawn on
in the event of such a shock.
14. As announced in Budget 2018, it is proposed to capitalise the Fund in the coming year
with €1.5 billion from the Ireland Strategic Investment Fund. €500 million will be
transferred from the Exchequer each year commencing in 2019 with the aim that by
2021 the Fund will amount to €3 billion, reaching €8 billion over the medium term.
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Implementation of EU Anti-Tax Avoidance Directives 15. Following the publication of the BEPS reports in October 2015, a decision was taken
at EU level to introduce the Anti-Tax Avoidance Directive (ATAD) as part of a package
of measures aimed at ensuring a common and co-ordinated approach to the
introduction of the BEPS anti-avoidance measures.
16. The first ATAD, presented in January 2016 and agreed by all Member States in July
2016, provided for five separate anti-avoidance measures to be transposed on an
agreed schedule between 2018 and 2023.
17. Immediately following the agreement of ATAD1, work commenced on extending the
anti-hybrid provisions it contained to include mismatches involving third countries, in
addition to mismatches that arise in the interaction between the corporate tax
systems of EU Member States.
18. A Directive to amend the ATAD, referred to as ATAD2, was adopted in May 2017. It
expands the territorial scope of the ATAD to third countries, and also to address hybrid
permanent establishment mismatches, hybrid transfers, imported mismatches,
reverse hybrid mismatches and dual resident mismatches. The six measures and the
implementation timelines are set out in Table 4 below.
Table 4 – ATAD Measures and Implementation Deadlines
Article Provision Implementation Deadline
4 Interest limitation rule 1 January 2019 or, where national targeted rules
for preventing BEPS are equally effective, the end
of the first full fiscal year following agreement
between the OECD members on a minimum
standard with regard to BEPS Action 4, but at the
latest until 1 January 2024.
5 Exit Tax 1 January 2020
6 General anti-abuse rule
(GAAR)
1 January 2019
7 & 8 Controlled Foreign
Company (CFC) rules
1 January 2019
9 Hybrid Mismatches 1 January 2020
9a Reverse Hybrid
Mismatches
1 January 2022
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CFC Rules 19. Controlled Foreign Company (CFC) rules are an anti-abuse measure, designed to
prevent the diversion of profits to offshore entities in low or no tax jurisdictions.
Where CFC rules apply they have the effect of attributing the income of such an entity
to its parent company. Member States must introduce CFC rules, or bring existing
national CFC rules into alignment with the ATAD where relevant, by 1 January 2019.
20. CFC rules are often a feature of tax regimes with territorial elements, such as
participation exemptions. General CFC rules do not currently exist in Irish law,
therefore work is under way to introduce the required legislation in Finance Bill 2018
and is being informed by responses to the Coffey/ATAD consultation held early in
2018.
21. In broad terms, an entity will be considered a CFC under ATAD rules where it is subject
to more than 50% control by a parent company and its associated enterprises, and the
tax paid on its profits is less than half the tax that would have been paid had the
income been subject to tax in the hands of the parent company.
22. ATAD allows Member States to develop CFC rules to target entire low-taxed
subsidiaries, specific categories of income, or income which has artificially been
diverted to the subsidiary. Member States may choose one of two options to
determine whether the income of a CFC should be attributed to a parent company:
A. Option A attributes certain categories of undistributed passive income of a CFC
to the parent company.
B. Option B attributes undistributed income arising from non-genuine
arrangements put in place for the essential purpose of obtaining a tax
advantage.
23. Following consideration of the Coffey/ATAD consultation submissions received, it is
intended that Ireland will elect for the Option B approach when introducing CFC rules
in Finance Bill 2018. Consideration is now being given to additional elements of
optionality consequent on the Option B approach, including:
A. Whether to include the de-minimus derogations allowed under ATAD for:
i. entities with accounting profits of no more than €750,000, and non-
trading income of no more than €75,000;
ii. entities of which the accounting profits amount to no more than 10
percent of its operating costs for the tax period.
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B. ATAD allows for the use of white, grey or black lists of third countries in
determining the application of CFC rules to subsidiaries in those locations.
Should Ireland consider using such lists, and if so what criteria could be used?
C. ATAD CFC rules are not sufficient to target ‘cash box’ subsidiaries, cash/capital
rich companies with few or no employees in low tax jurisdictions where there
are no significant people functions in the State relating to the management of
those assets and risks. Should Ireland’s transposition exceed the ATAD
standard and develop measures to address such ‘cash box’ companies?
D. The purpose of CFC rules is to prevent businesses from structuring in such a
way as to divert otherwise taxable profits to a low/no tax location. Many
established CFC regimes therefore allow an exemption to provide a parent
company an exempt ‘grace period’ in respect of newly acquired CFCs (for
example subsidiaries acquired following the acquisition of another company or
corporate group) during which the parent can reorganise its business to
eliminate the CFC if desired. Should such a ‘grace period’ be allowed, and if so
for what period?
Exit Tax 24. The ATAD Exit Tax regime is designed to ensure that, where a taxpayer migrates its tax
residence out of a State while holding assets, or makes certain transfers of assets out
of a State, in circumstances where those assets have increased in value and therefore
hold an unrealised gain, the State will tax any capital gain which has accrued in its
territory even though the gain has not yet been realised at the time of exit.
25. Ireland currently has a limited Exit Tax regime which was introduced in 1997 as an
anti- avoidance measure. This was as a result of the identification of a number of
transactions whereby an Irish company migrated its residence to avoid the charge to
Irish Capital Gains Tax. The intention of the current regime was to influence behaviour
rather than to serve as a tax raising measure and it is understood that it has been
effective in this regard. The current exit tax is applied at the rate of capital gains tax,
currently 33%.
TSG Members are invited to comment on the transposition of CFC rules, including in
particular the options under consideration outlined in paragraph 23 above.
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26. The ATAD exit tax is significantly broader in scope and will impose a tax charge on all
unrealised gains of migrating companies / assets transferred abroad, irrespective of
any future intentions as to the disposal of the asset(s). Under the terms of the ATAD,
the current exit tax must be replaced by an ATAD-compliant exit tax regime to take
effect no later than 1 January 2020.
27. While the structure of the exit tax is prescribed by ATAD, the rate of the tax is a matter
for each individual Member State. Responses to the Coffey/ATAD consultation
focussed primarily on the rate to be applied in calculating the exit tax, with the
majority favouring a 12.5% rate for assets in use for the purposes of a trade.
28. There are indications that the widespread implementation of the BEPS reforms are
prompting multi-national corporations to re-consider their corporate structures and
to begin moving assets currently held in low-tax jurisdictions to onshore locations
where they have substantial presence, often in the US or the EU. In view of this long-
term planning, stakeholders have proposed that Ireland should consider making an
early announcement of the intended exit tax rate to allow companies to factor this
into their planning.
Anti-Hybrid and Anti-Reverse Hybrid Rules
29. These rules are intended to counteract tax mismatches where the same expenditure
item is deductible in more than one jurisdiction, or where expenditure is deductible
but the corresponding income is not fully taxable.
30. Following agreement of ATAD2, the territorial scope of the provisions was extended
to include also hybrid mismatches involving non-EU countries, and also to address
hybrid permanent establishment mismatches, hybrid transfers, imported mismatches,
reverse hybrid mismatches and dual resident mismatches.
TSG Members are invited to give their views on the introduction of an ATAD-compliant
exit tax.
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31. Implementation of these rules will be extremely complex. The text of the ATADs is
relatively brief and focusses on the high-level concepts agreed. It now falls to Member
States to draft the detailed legislation required to implement these concepts, and to
integrate it successfully with existing legislation. Responses to the Coffey/ATAD
consultation noted these measures as sufficiently complex and technical to require a
separate, detailed consultation process.
32. It is planned to launch a consultation paper considering both general and detailed
technical issues relating to the interlinked issues of hybrid entities/instruments and
interest in Q3 2018. Given the complexity of these issues, it is intended that the
consultation will be open for a period of c. 12 weeks, with a view to consideration of
submissions beginning post-Finance Bill 2018.
33. While anti-hybrid rules must be transposed by 1 January 2020, the deadline for anti-
reverse-hybrid rules is 1 January 2022, so it is likely that further consultation will also
be held in advance of this later deadline.
Interest Limitation Rules 34. Following from the Common Approach agreed in BEPS Action 4, ATAD requires
Member States to implement an interest limitation ratio, designed to limit the ability
of entities to deduct borrowing costs when calculating taxable profits. It is intended
to prevent the use of excessive leveraging and interest payments to shift profits to
other jurisdictions.
35. The ATAD interest limitation rule operates by limiting the allowable tax deduction for
‘exceeding borrowing costs’ (in broad terms, net interest costs) in a tax period to a
maximum of 30% of Earnings Before Interest, Tax, Depreciation and Amortisation
(EBITDA).
36. The general implementation date for the ATAD interest limitation rule is 1 January
2019, but a derogation is provided in Article 11 such that Member States having
national targeted rules for preventing BEPS risks which are equally effective to the
ATAD interest limitation ratio may defer implementation until agreement on a
TSG Members are invited to give their views on the proposed process for the
development of anti-hybrid and anti-reverse hybrid rules.
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minimum standard for BEPS Action 4 is reached at OECD level, but no later than 1
January 2024.
37. Ireland’s existing interest limitation rules are different in structure to the ATAD rule as
they are purpose-based tests designed to limit qualifying borrowings, supplemented
by extensive anti-avoidance provisions relating to connected party transactions. It is
our opinion, supported by case study data, that Ireland’s existing interest rules are at
least equally effective to the rules contained in the Directive, and a notification in this
regard has been filed with the European Commission.
38. Initial responses from the Commission to affected Member States indicate that a
stringent, ratio-based, approach is being taken to assessing whether national targeted
rules are ‘equally effective’ to the ATAD Article 4 provision. As the Irish targeted
national rules are structurally different to the ATAD EBITDA ratio rule and related
reporting requirements are designed to capture data relevant to our existing regime,
it is unclear as yet if agreement will be secured in relation to the derogation.
39. Furthermore, following recent US tax reform, the European Council recently proposed
corresponding with the OECD with a view to accelerating work on reaching agreement
for a minimum standard approach under BEPS Action 4, which would trigger an earlier
implementation date for the ATAD interest limitation rule than 1 January 2024 (even
where the derogation is availed of).
40. Introduction of the ATAD interest limitation rule will be a complex process. It will
require consideration of how the new EBITDA ratio will interact with Ireland’s existing
interest rules including whether they should be layered over, and/or replace parts of,
Ireland’s existing extensive anti-avoidance rules relating to interest. It will also require
careful integration with ATAD anti-hybrid rules which, inter alia, will relate to the debt
or equity treatment of a transaction.
41. It is therefore proposed to incorporate detailed technical consultation on the
introduction of the ATAD interest limitation rule with the hybrids consultation, to be
launched in Q3 2018.
TSG Members are invited to give their views on the proposed process for the
development of an ATAD compliant interest limitation rule.
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Other features of the Corporate Tax regime currently under review
Three Year Start-Up Relief 42. The three year corporation tax relief for certain start-up companies commenced in
2009. The objective of the relief is to provide support to new business ventures in their
critical early years of trading, thereby creating additional employment and economic
activity in the State and supporting the broadening of the corporate tax base.
43. The relief is granted by reducing the corporation tax payable on the profits of a new
trade and the gains on the disposal of any assets used for the purpose of this trade.
The relief is available in full to start-up companies with corporation tax payable of
€40,000 or less in an accounting period. Marginal relief applies where the corporation
tax liability is between €40,000 and €60,000. No relief is available to start-up
companies with a corporation tax liability of €60,000 or above.
44. From 2012 onwards, the quantum of relief is linked to the amount of Employers’ PRSI
paid by a company in an accounting period, subject to a maximum of €5,000 per
employee. The limit of €40,000 still applies, with marginal relief available for liabilities
between €40,000 and €60,000. This amendment to the relief was designed to make it
more employment focused.
45. From 2014 onwards, the relief was amended such that start-up companies may now
carry forward the relief if they incur a loss or do not have a sufficient amount of profits
and tax payable in any of the first 3 years of trading to avail of the full benefit. The
amount of relief available is still related to the start-up companies’ Employers’ PRSI
contributions in its first 3 years. This amendment increased the flexibility of the
scheme for new start-up businesses, which often do not make profits in their early
years.
46. As is best practice for measures of this nature, the scheme has a sunset clause to
prompt review and is currently due to expire at end-2018. A tax expenditure review
of the relief is currently being carried out. This review will make recommendations as
to whether the review should be extended in its current form, amended and then
extended, or allowed to expire. Consideration will be given to the relevance of the
relief, its cost, the uptake of the relief and its current objective.
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Film Tax Credit
47. The Scheme is intended to act as a stimulus to the indigenous film industry in the
State, creating quality employment opportunities and supporting the expression of
the Irish culture.
48. Prior to 2015, film relief took the form of an investor tax relief which provided an
incentive to individual and corporate taxpayers to invest in Irish film production.
Finance Act 2013 amended the scheme such that, rather than providing relief to
investors, from 1 January 2015 a payable tax credit of 32 per cent is payable directly
to a producer company. The tax credit reduces the corporation tax of the qualifying
period in respect of which the return filing date immediately precedes the application
for a film certificate. Where the tax credit exceeds the tax due for the qualifying period
(as reduced by the tax paid), the tax credit will be a payable credit.
49. The credit is limited to 32% of the lowest of:
a. eligible expenditure;
b. 80% of the total cost of production of the film; or
c. €70,000,000.
50. The minimum amount that must be spent on the production is €250,000 and the
minimum eligible expenditure amount to qualify is €125,000.
51. The relief also contains a requirement that the Minister for Culture, Heritage and the
Gaeltacht may include conditions in relation to employment of personnel, including
trainees, for the production of the film. Each production must employ two trainees
for each €355,000 of corporation tax credit claimed, up to a maximum of 8 trainees.
However queries3 have been raised as to the effectiveness of this measure in requiring
the provision of quality training to support the development of indigenous talent.
3 Parliamentary Question 59, 20 June 2017
TSG Members are invited to give their views on the potential extension of the relief; the
term of any extension; and any amendments to the current structure that should be
considered.
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52. In terms of administration, a Certificate is issued by the Revenue Commissioners but
both the Minister for Culture, Heritage and the Gaeltacht and the Revenue
Commissioners have specific responsibilities in relation to the certification process.
The Minister for Arts, Heritage and the Gaeltacht has responsibility to ensure that it is
appropriate for the Revenue Commissioners to consider the issue of a Certificate for
a film, having regard to –
The categories of film eligible for certification, and
The contribution a film will make to either or both the development of the film
industry in the State and the promotion and expression of Irish culture.
53. The Revenue Commissioners have responsibility to ensure that all other aspects of the
project, including the financial aspects, have the potential to satisfy the requirements
of the law. The Revenue Commissioners will not issue a Certificate unless they have
received an authorisation from the Minister for Culture, Heritage and the Gaeltacht
and they are satisfied with the other aspects of the proposal.
54. As a tax expenditure of the Taxes Consolidation Act 1997, Section 481 is subject to the
requirements of the Department of Finance tax expenditure guidelines and is required
to be reviewed periodically. Section 481 is currently subject to a review under the
guidelines due to be completed in July.
55. As is best practice for measures of this nature, the scheme has a sunset clause and is
currently due to expire at end-2020. However, in view of the long development period
associated with screen productions, stakeholders have requested that an early
decision be made in relation to the potential extension of the credit beyond that date.
TSG Members are invited to give their views on the potential extension of the relief; the
term of any extension; and any amendments to the current structure that should be
considered, including in particular changes to the training requirement. It should be
noted that this relief is an approved State Aid, therefore any changes to the regime
must comply with State Aid requirements.
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Loss Relief
56. The availability of relief for losses incurred in a business is a well-established feature
of corporation tax regimes. It recognises the fact that a business cycle runs over
several years, and that it would be unbalanced to tax profits in one year and not allow
relief for losses in another. Losses incurred in a trade are a fact of business life, and
the provision of relief for such losses is a standard feature of our tax code and that of
all other countries in the OECD.
57. Under existing loss relief provisions in the Taxes Acts, any unrelieved trading losses of
a company for an accounting period may be carried forward for offset against trading
income of the same trade in future accounting periods. Trading losses carried forward
may only be offset against future trading income of the same trade and not against
any other profits, passive income or gains. Unused trading losses may be carried
forward until they are fully offset or the trade ceases.
58. According to data provided by the Revenue Commissioners, the value of trading losses
carried forward fell by 1.7% at end 2016.
Table 5 – Trading Losses by Sector
Sector 2015 2016 Variance Variance %
Financial and Insurance
Activities €124,175m €112,796m -€11,379m -9.2%
Administrative and Support
Services Activities €37,966m €37,966m €1,654m 4.4%
Information and
Communication €10,534m €11,281m €747m 7.1%
Construction €9,999m €11,369m €1,370m 13.7%
Manufacturing €8,305m €8,857m €552m 6.6%
Transportation and Storage €8,382m €8,513m €130m 1.6%
Wholesale and Retail Trade €7,628m €7,991m €364m 4.8%
All Other Sectors €11,347m €14,158m €2811m 24.8%
Total €218,335m €214,585m -€3,751m -1.7%
Source: Revenue Commissioners
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59. While the Financial and Insurance activities sector has consistently had the highest
losses of any sector in recent times, there has been a reduction in both overall losses
in this sector and the share of losses concentrated in this sector. The value of losses
carried forward by the financial and insurance activities sector into accounting periods
ending in 2016 fell by more than €11 billion (-9%). While the losses in this sector are
still substantial, this highlights that corporate taxes losses are being significantly
utilised in this sector.
60. It is important to note that around €40 billion of losses brought forward (from the
€214 billion at end 2016) relate to companies that are in liquidation or are otherwise
unlikely to be in a position to ever use these losses. The bulk of such losses are
recorded by companies in the financial sector.
61. Approximately 90% of the losses forward claimed on 2016 returns were by companies
that had been claiming losses forward for five years or more.
62. The only substantial increases in trading losses carried forward were in administrative
& support services at €1.6 billion (+4.4 per cent), construction €1.3 billion (+13.7 per
cent) and in other sectors €2.8 billion (+25 per cent).
63. Banks are now subject to the same loss relief provisions as other corporate entities.
Prior to 1 January 2014, s.396C TCA 1997 imposed a 50% annual restriction on the
level of profits that NAMA-participating banking institutions could shelter using losses
carried forward. This restriction was removed in Budget 2014 in view of the State’s
subsequent acquisition of substantial shareholdings in the banks and the capital
requirements introduced under the Capital Requirements Directive IV.
64. It should be noted however that the State has also imposed a bank levy, in part to
recognise the fact that many of the banks would not pay corporation tax for many
years due to the level of losses carrying forward, and to ensure a level of current
revenues to the State. It generates an annual yield to the State of c.€150 million.
65. In response to questions on the matter, Minister Donohoe has noted that he does not
intend to change the treatment of losses for Irish banks and that he views the bank
levy as the appropriate method of ensuring the banks contribute to the Exchequer.
However, following a commitment during Committee Stage of Finance Bill 2017,
Department officials have prepared a paper for the FinPer Committee to examine in
further detail the possible consequences of changes to the treatment of tax losses in
respect of banks and/or all corporate entities.
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66. The paper examines three separate proposals:
A. Reintroduce the “NAMA” restriction for AIB and BOI (the remaining NAMA
participating institutions), or for the ‘bailed out’ banks (including PTSB).
B. Introduce a wider loss restriction to include all retail banks in Ireland.
C. Introduce a system of loss restrictions, such as a sunset clause, for all
companies.
67. The Department of Finance’s analysis indicates that the reintroduction of a restriction
focused on the banking sector would be likely to have a number of significant negative
consequences including:
A weakened capital position for each of the banks that the State has an
investment in, and particularly for PTSB assuming a mechanism could be
found to reintroduce the restriction to cover other ‘bailed out’ banks as well.
The valuation of the State’s investments would be materially impacted and
we have estimated this could be in excess of €400m.
Damage to the State’s credibility in international markets as investors
invested in the AIB IPO on the understanding that there were no plans to
change the policy with respect to tax losses.
68. Although the (re)introduction of a loss restriction measure on some or all of the
banking sector would generate additional corporation tax revenue for the State in the
short term4, it may also require re-consideration of the bank levy.
69. With regard to a broader restriction on loss relief for all companies, some other
jurisdictions apply a ‘sunset clause’ to limit the carry forward of losses and/or a
restriction on the amount of profits in any year that can be sheltered by losses.
However it must also be noted that in most cases these countries do not limit the
‘sideways’ offset of losses carried forward against other sources of income and gains.
Any proposal for a general restriction in loss relief carried forward would therefore
also need to consider the current position with regard to sideways loss relief.
4 The previous measure applied a 50% restriction on the amount of profits in any year that could be sheltered by losses, with the balance of the losses carried forward to future years. It therefore did not reduce the total relief for the losses, but rather extended it over a longer period.
TSG Members are invited to give their views on:
1. A loss-relief restriction focussed on the banking sector, and potential
consequential implications for the bank levy.
2. A wider loss-relief restriction for all companies, and potential consequential
implications for the nature of loss relief.
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Property Related Funds
70. During the course of the Committee Stage debate on Finance Bill 2017 it was agreed
that the 2018 corporation tax TSG paper would give consideration to the REIT and IREF
regimes for the taxation of property held by corporate entities / funds, with particular
reference to their impact on the residential property market.
Real Estate Investment Trusts
71. Section 41 of the first Finance Act of 2013 introduced the regime for the operation of
Real Estate Investment Trusts (REIT) in Ireland. A REIT is a quoted company, used as a
collective investment vehicle to hold rental property. There is a diverse ownership
requirement, so no one person or group of connected persons can control the REIT.
A REIT is exempt from corporation tax on qualifying income and gains from rental
property, subject to a high profit distribution requirement to shareholders i.e. the Irish
distribution requirement is 85% of property profits. They provide the same after-tax
returns to investors as direct investment in rental property, by eliminating the double
layer of taxation at corporate and shareholder level which would otherwise apply.
72. When the REIT regime was introduced, amongst the intended benefits listed included
the following:
Bringing new sources of capital into the Irish property market;
Reducing dependence on bank financing in the property market, and freeing up
available bank financing for use in other industries;
Facilitating collective investment in property, providing the benefits of risk
diversification to investors of all sizes; and
The promotion of professional management in the Irish property market.
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73. REIT investors are taxed as follows:
Irish Investors:
Individuals: Taxed at their marginal rates.
Corporates: Taxed at 25%.
Institutional portfolio
investors:
Generally exempt: pension funds, life policies,
investment undertakings (where an investment
undertaking is an Irish Real Estate Fund (deriving
25% or more of its value from Irish property) the REIT
dividend will form part of the IREF profits which may
be subject to a 20% IREF withholding tax).
Dividend Withholding Tax (DWT) at the standard rate of 20% is deducted by the
REIT from dividends paid to individual shareholders and is available as a credit
against tax liabilities.
Foreign Investors:
For all foreign investors, the REIT will withhold DWT at the standard tax rate of 20%.
Foreign investors resident in treaty countries may be able to reclaim some of this DWT
under the relevant tax treaty. Tax treaty rates on dividends vary from treaty to treaty,
but the most common rate applicable to small shareholdings would be 15% – this
means that Ireland would retain taxing rights of 15% on dividends paid from Ireland.
Other:
Where a REIT has not made reasonable steps to prevent a distribution being paid to
an investor who owns more than 10% of the shares in a REIT, the REIT is subject to
corporation tax at 25% on the amount of that distribution. This acts as a deterrent to
ensure that REITs are widely held.
74. REITs are listed companies, and are required to be listed on the main market of a
recognised stock exchange in an EU member state. They will therefore be obliged to
comply with European Directives including the Prospectus Directive, Transparency
Directive, Market Abuse Directive and the Markets in Financial Instruments Directive.
75. In addition, depending on the structure of a REIT and its management, a REIT may be
considered to be an Alternative Investment Fund for the purposes of the Alternative
Investment Fund Managers Directive which was introduced across the EU in July 2013.
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76. There are currently five REITs operating in the Irish market, two of which are active in
the residential property market. Records suggest that the majority of REIT investment
is focussed in the commercial sector.
77. Research undertaken by Revenue Statistics Branch using corporation tax returns and
Local Property Tax (LPT) payments estimated that the value of properties returned by
REITs on the LPT system is €387m. It should be noted however that this is the LPT
valuation and not the current valuation, and that property constructed from 2013 on
is not yet subject to LPT.
Irish Real Estate Funds
78. The Irish Real Estate Fund (IREF) regime was introduced in Finance Act 2016. The
legislation addresses concerns raised regarding the use of collective investment
vehicles to invest in Irish property. The investors had been using the structures to
minimise their exposure to Irish tax on Irish property transactions.
79. The key features of the regime are:
IREFs are investment undertakings (excluding UCITS) where 25% or more of the
value of that undertaking is made up of Irish real estate assets. Where the main
purpose of the fund is to invest in Irish property, this will also fall into the regime
regardless of the amount of property held.
Any rental income or development profits earned by the IREF will be included in
the calculation of the IREF's profits.
Where an IREF makes an actual distribution or on the redemption of units in the
IREF, non-resident investors will be subject to a withholding tax of 20%.
In line with provisions in the wider tax code, exemptions have been included
where the payments/redemptions are made to a pension fund, another
investment undertaking, life assurance fund and their EU equivalents. Charities,
credit unions and the NTMA are also exempt.
The new regime applies to accounting periods beginning on or after 01 January
2017.
80. Table 6 on the next page sets out the value of Irish real estate being held by Irish funds
as per Central Bank statistics. The data shows a considerable slowdown in the increase
in the level of Irish real estate being held by Irish funds since the introduction of the
IREF regime.
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Table 6 – Value of Irish Real Estate held by Irish Funds
Value of Irish Real
Estate Assets Held
by Irish Funds
Quarterly Increase
Quarter-on-
Quarter
% increase
31/03/2014 €2,662m n/a n/a
30/06/2014 €3,919m €1,257m 47%
30/09/2014 €4,838m €919m 23%
31/12/2014 €5,745m €907m 19%
31/03/2015 €6,020m €275m 5%
30/06/2015 €7,534m €1,514m 25%
30/09/2015 €7,904m €370m 5%
31/12/2015 €10,518m €2,614m 33%
31/03/2016 €10,897m €379m 4%
30/06/2016 €11,648m €751m 7%
30/09/2016 €11,921m €273m 2%
31/12/2016 €15,674m €3,753m 31%
31/03/2017 €15,931m €257m 2%
30/06/2017 €15,091m -€840m -5%
29/09/2017 €16,471m €1380m 9%
29/12/2017* €16,141m -€330m -2%
29/03/2018* €16,568m €427m 3%
Source: Central Bank of Ireland
* Correct as at 2/7/18 – data not yet final and may be subject to review
81. As noted above, as part of the Finance Act 2017 process, Minister Donohoe agreed
that officials would consider the impact of both REITs and IREFs on the Irish property
market in the 2018 Tax Strategy Group paper. However, due to the lack of availability
of data in relation to the recently-introduced IREF regime, it is not yet possible to carry
out a detailed assessment. The IREF regime is currently in its infancy and the first
returns are due to be filed by 31 July 2018. In order to improve the quality of data
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available, the Revenue Commissioners have requested detailed information as part of
the IREF return including classification of property held and location by region. An
example of the data request is set out in Appendix 1. Once received, these returns
should provide a basis on which to analyse the market impacts in greater detail.
82. Data is currently available from the Residential Tenancies Board which illustrates the
scale of large-landlord participation in the residential rental market. The following
tables 7 and 8 provide figures in relation the number of tenancies per landlord and
the amount of tenancies held by the top 20 landlords. This data demonstrates the
continuing preponderance of small landlords in the Irish market, with almost 70% of
landlords holding just one tenancy and over 91% holding three or fewer tenancies.
The top twenty largest landlords account for just 2.83% of total tenancies.
Table 7: Number of Tenancies per Landlord
No of
Tenancies
Individual
Roles
Company
Roles Total Landlords % of Landlords
1 120,485 3,375 123,860 69.71%
2 27,677 898 28,575 16.08%
3 9,975 416 10,391 5.85%
4 4,597 257 4,854 2.73%
5 2,491 188 2,679 1.51%
6 1,563 163 1,726 0.97%
7 1,022 116 1,138 0.64%
8 677 82 759 0.43%
9 521 70 591 0.33%
10 - 20 1,792 385 2,177 1.23%
20+ 541 386 927 0.52%
Totals: 171,341 6,336 177,677 100.00%
Source: Residential Tenancies Board
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Table 8 : Top-20 Landlords by Number of Tenancies (as of May 2017)
No. of
Tenancies
Registered
% of
Total
Tenacies
Type
No. of
Tenancies
Registered
% of Total
Tenacies Type
1 1,931 0.60% Company 11 283 0.09% Company
2 1,074 0.33% Company 12 276 0.09% Company
3 809 0.25% Company 13 270 0.08% Company
4 481 0.15% Company 14 263 0.08% Company
5 468 0.14% Company 15 261 0.08% Company
6 413 0.13% Individual 16 258 0.08% Company
7 378 0.12% Company 17 258 0.08% Company
8 362 0.11% Company 18 237 0.07% Company
9 354 0.11% Company 19 236 0.07% Individual
10 298 0.09% Company 20 231 0.07% Individual
Top 20 landlords – combined % of total tenancies 2.83%
Source: Residential Tenancies Board
TSG Members are invited to give their views on the REIT and IREF regimes.
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Recent International Developments
83. The last few years have seen significant developments globally on international
corporate tax reform. Ireland has been an active participant in, and supporter of, this
work through various international fora.
84. Ongoing work at international is twofold – work on the implementation of the various
BEPS recommendations and consideration of what further reforms may be needed to
ensure tax is paid where value is created.
BEPS Multilateral Instrument
85. On 7 June 2017, Ireland signed the ‘Multilateral Convention to Implement Tax Treaty
Related Measures to Prevent BEPS’. This convention, which is commonly referred to
as the ‘BEPS Multilateral Instrument’ has now been signed by 78 countries.
86. The Multilateral Instrument provides a mechanism for countries to transpose a range
of BEPS recommendations into their existing bilateral tax treaties. Some
recommendations are considered to be “minimum standards” which countries have
committed to, while others are recommended best practices that countries can
choose to adopt.
87. Ireland has 74 tax treaties and the Multilateral Instrument will enable Ireland to
update the application of the majority of these treaties to ensure they are BEPS
complaint without the need for separate bilateral negotiations.
88. The Multilateral Instrument must be ratified by Ireland before it comes into force. The
approach Ireland proposes to take to the various options in the Multilateral
Instrument will become binding on Ireland on foot of the ratification of the
Multilateral Instrument in Irish law. The application of Ireland’s tax treaties will be
modified where both Ireland and the relevant treaty partner have fully ratified the
convention in their domestic law.
89. Ireland took the first steps towards ratifying the Multilateral Instrument in Finance Act
2017 and will seek to complete the process before the end of this year. The
Multilateral Instrument will then start to have effect for Ireland from the beginning of
2020.
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Common Consolidated Corporate Tax Base - C(C)CTB
90. The European Commission re-launched its proposal on a Common Consolidated
Corporate Tax Base sometime on 25 October 2016.
91. The proposal takes a twostep approach – first Member States will seek to agree a
common corporate tax base (a CCTB) and only if agreement can be reached on this,
will discussions begin on agreeing the Consolidation of that tax base. The
Commission’s proposal is that the CCCTB would be mandatory for large companies
with group turnover of more than €750 million. It would also be open to smaller
companies to opt in to the CCTB and calculate their profits using the CCTB rules rather
than the Member States domestic tax rules.
92. A common corporate tax base (CCTB) would consist of agreed rules for how a company
calculates its taxable profits in each Member State. The Member State would then
apply its own tax rate to those profits. The CCTB is by necessity a very complex
proposal. Each Member State currently applies different rules in terms of what
income is taxable, what deductions are allowed, what credits are given etc.
93. The discussions between Member States to date have focussed on the CCTB proposal
Member States have yet to reach any consensus on what an appropriate common
base may look like. Member States are also attempting to examine what the impact
would be on their tax system if a common base was introduced.
94. The Department and the Revenue Commissioners are carrying out analysis of the CCTB
to identify the extent to which it would change the existing Irish tax base. Our initial
view is that the CCTB would narrow our tax base, and therefore result in less corporate
tax revenue being paid in Ireland. This primarily relates to the inclusion of additional
allowances and expenditures within the proposed CCTB and the fact that Ireland
would have to abolish two of our three corporate tax rates under a CCTB.
95. The third “C” in the proposal, Consolidation, relates to how profits are attributed to
each country in the EU. A CCTB would give countries common rules for how to
calculate profits but it would not impact on where the profits, and therefore taxing
rights, are attributed. Currently, Member States use transfer pricing rules to
determine how profits are attributable to each country. Transfer pricing looks at
where the real value adding activities happen and attributes a proportionate share of
the profits to those activities.
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96. Consolidation would replace the transfer pricing approach with a formula for dividing
profits among Member States. This formula would be based on where sales happen,
where staff are located and where a company’s assets are. Each corporate group’s
total EU taxable profits would be added together and divided among countries under
this formula. Each country would then tax the profits attributed to it at its own
corporate tax rate. Consolidation would not impact a country’s tax rate but would
have a significant impact on how much tax would be paid in each Member State. It is
inevitable that any consolidation formula that includes sales would disproportionately
impact the corporate tax receipts of small exporting Member States.
97. Under a consolidation regime, companies would file a single tax return for all their
activities in the EU through one tax authority, rather than having to file a tax return in
every country where they have a taxable presence.
98. In line with the commitment in the Programme for Government, Ireland is engaging
constructively with this proposed reform while critically analysing the proposals and
considering whether it is in Ireland’s long term interests. Unanimity will be required
before any proposal on CCTB or CCCTB is adopted.
Digital Taxation 99. A major area of focus for international tax reform is the question of where digital
companies should pay tax.
100. On 21 March the European Commission published two proposed Directives which
seek to tax certain digital activities differently within the EU. One, a ‘temporary’
solution for a 3% levy (called the Digital Services Tax) on turnover from certain digital
service activities. The second, "comprehensive solution" requires an overhaul of
international taxation, establishing the concept of a "digital permanent
establishment", allowing countries taxing rights over the digital business carried out
by a company in that country, even where that company has no physical presence
there.
101. If adopted in its current form, the Digital Services Tax proposals would result in a
significant shift in how corporate tax is paid and may have unanticipated negative
consequences for EU Member States and companies. Therefore it is important that
these proposals are properly considered and analysed.
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102. On 15 May, both Dáil and Seanad Éireann issued reasoned opinions to the European
Commission that both digital tax proposals were in breach of the principle of
subsidiarity.
103. Ireland will continue to actively engage on these matters with our fellow Member
States and the related debate ongoing at OECD level so that we have a system of
international taxation which is appropriate to meet the challenges and opportunities
that arise from the digitisation of the economy.
104. Ireland is committed to working with our international partners to reaching a fair and
appropriate solution to the ongoing work digital tax which ensures that tax is paid
where real value creating activities take place. The Department will seek input from
various stakeholders as appropriate as part of this ongoing analysis.
Common EU list of non-cooperative tax jurisdictions 105. At EU level, a common list of non-cooperative tax jurisdictions was agreed before the
end of 2017.
106. The listing was based on criteria agreed by Member States. These criteria focus on
compliance with international standards on tax transparency and harmful tax
practices and on a country’s commitment to the OECD BEPS process.
107. An additional criterion also requires that countries with a zero, or almost zero, tax rate
should be subject to further scrutiny. This work is still ongoing with a view to reaching
decisions on whether individual zero tax countries should be listed by the end of 2018.
108. Discussions are also underway in the Code of Conduct Group as to what ‘defensive
measures’ Member States may apply against countries that are included on the list.
US Tax Developments 109. US tax reform was agreed at the end of 2017. The key changes made, from an
international tax perspective, were:
A reduction in the US corporate tax rate to 21% from 35%
A one-off ‘repatriation tax’ on existing overseas profits of US multinationals. The
proposed rate will be either 8% or 15.5% depending on whether the profits had
been invested or were held in cash.
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A move from a worldwide tax system which taxes US companies on their global
activities to a territorial system which would only tax US companies on their
activities that take place in the US.
The introduction of two novel anti-avoidance provisions – the GILTI and the BEAT.
The GILTI measure is aimed to ensure that US headquartered groups must pay a
minimum rate of tax of 13.125% on their foreign profits or else they will have to
pay some US tax on a current year basis. The BEAT applies additional tax where
large US based MNCs make large tax deductible payments from the US to a non-US
group company.
110. While companies still working through the potential impact of US tax reform, the
changes have not resulted in the relocation of existing activities out of Ireland by US
MNCs. While the competitive balance between the US and Ireland has shifted, Ireland
remains highly attractive as a location for US companies to invest in and trade from.
US business will also still want to locate substantial operations within the European
Union to benefit from access to the EU Single Market.
111. Our initial analysis is that the anti-avoidance measures introduced should have a
major impact on the ability of US MNCs to engage in aggressive tax planning practices.
Where a US MNC pays less than 13.125% of tax on its non-US profits, it will have to
pay additional US tax on a current year basis. This change could significantly reduce
the incentive for US companies to engage in aggressive tax planning practices.
Broader international tax debates
112. In addition to the items above, there are broad themes that continue to be discussed
between countries on international tax. Broad issues including what type of tax
measures constitute harmful tax competition between countries and how best to
adapt tax rules for the modern world remain under discussion in various international
fora. Ireland remains committed to having a global international tax framework that
ensures tax is certain, sustainable, internationally agreed and that ensures that tax is
paid where value is created.
113. In this context, there is also of course debate around the role of the EU State Aid
regime and taxation. There have been a number of tax and State Aid decisions made
by the Commission in respect of Ireland and other EU Member States which are only
now being considered by the EU courts. In the specific Irish context it is worth nothing
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that an agreement to recover the alleged State Aid was concluded between Ireland
and Apple in April 2018. The recovery process is well underway with an expected
completion date of end of Q3 2018. Consideration of the legal issues in the Apple case
may commence before the end of 2018.
115. The Tax Strategy Group may wish to consider these issues.
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Appendix 1