On July 31, 2018, Ireland’s Department of Finance released its Corporation Tax Strategy Report (TSG 18/01), dated July 10, 2018. The report discusses Ireland’s proposals with respect to taxing the digital economy, hybrid mismatches, controlled foreign companies (CFCs), limitation on interest deductions, and the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent BEPS (“MLI”).
Taxing the digital economy (BEPS Action 1)
On March 21, 2018, the European Commission (EC) issued two proposals for directives introducing special tax rules for the digital economy. These proposals include a Council Directive for rules on corporation tax of a significant digital presence and a Council Directive for a digital services tax (DST) on revenues derived from the supply of certain digital services by taxable persons.
On May 15, 2018, both Dáil and Seanad Éireann issued opinions with the EC that both digital tax proposals were in breach of the principle of subsidiarity. Ireland is committed to working with its international partners to reach a “fair and appropriate solution,” which ensures that tax is paid where real value is created.
Hybrid mismatches (BEPS Action 2)
Ireland plans to launch in Q3 2018 a consultation paper on technical issues related to hybrid entities and instruments. It intends to keep the consultation open for 12 weeks, and will consider submissions beginning post-Finance Bill 2018.
CFCs (BEPS Action 3)
Currently, Ireland does not have CFC rules; however, Ireland plans to introduce CFC legislation in Finance Bill 2018. According to EU Directive 2016/1164 (“ATAD 1”), an entity will be considered a CFC 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 the difference between the corporate tax that would have been charged in the taxpayer’s member state and the actual corporate tax paid.
ATAD 1 allows member states to develop CFC rules to target 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 how to attribute the CFC’s income to the parent company by including in the tax base either: (1) the undistributed income, derived from specific categories, of the entity or PE; or (2) the undistributed income of the entity or PE arising from non-genuine arrangements that were put in place with the essential purpose of obtaining a tax advantage.
Ireland plans to elect the second approach when introducing CFC rules in Finance Bill 2018.
Interest Limitation (BEPS Action 4)
Ireland’s existing interest rules are “at least equally effective” as the rules in ATAD 1, and it has filed a notification with the EC. Ireland proposes to launch a detailed technical consultation in Q3 2018 on the introduction of an interest limitation rule.
MLI (BEPS Action 15)
On June 7, 2017, Ireland signed the MLI. The MLI will modify Ireland’s tax treaties where both Ireland and the relevant treaty partner have ratified the convention under their domestic laws. Ireland took the first steps towards ratifying the MLI in section 80 of Finance Act 2017, and will seek to complete the process before the end of 2018. The MLI will then have effect for Ireland from the beginning of 2020.
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