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KPMG response to Hybrids and Interest Limitation consultation

Hybrids and Interest Limitation consultation

KPMG response to Hybrids and Interest Limitation consultation

KPMG responded on 18 January 2019 to the public consultation on Ireland’s adoption of Hybrids and Interest Limitation measures. These are measures required under the European Union’s (EU) Anti-Tax Avoidance Directive (ATAD).

These complex measures are likely to be of particular interest to corporate taxpayers operating internationally as well as to groups with significant levels of annual debt financing costs.

Ireland’s policy makers have expressed the view that Ireland’s corporation tax regime for deducting interest affords equivalent protection from base erosion to the ATAD Interest Limitation rule. However, they have found that Ireland’s principles based measures are difficult to compare on equivalent terms to the ATAD rule which limits deductible net borrowing costs to 30% of tax adjusted EBITDA. Ireland’s policy makers are consulting with a view to determining how Ireland might introduce an Interest Limitation rule in the context of its existing regime.

As the framework of Ireland’s existing regime already provides strong base erosion protection, KPMG believes there should be a redesign of Ireland’s corporation tax regime for taxing interest and other financial payments. This is to readjust the balance of protections by taking into account those afforded by an Interest Limitation rule and anti-hybrid rules which are to take effect from 1 January 2020. Our submission sets out an overview description of a suggested, revised regime.

In our submission, KPMG suggests Ireland:

  • Redesigns the corporation tax regime for deducting interest expense. This is required so that Ireland does not apply the ATAD Interest Limitation rule in addition to measures that already afford strong protection from base erosion,
  • Adopts the ATAD €3 million de minimis threshold for deducting interest expense, thereby excluding smaller taxpayers from scope,
  • Applies a local group as well as a global consolidated group based approach under the rule – with focussed effort on designing streamlined computation procedures,
  • Does not implement the Interest Limitation rule earlier than 1 January 2021, and
  • Adopts anti-hybrid rules under ATAD with effect from 1 January 2020 but does not go beyond the framework of anti-hybrid recommendations set out by the OECD.
  • Our submission responds in detail to questions raised on adoption of these very technical measures. It reflects soundings we have taken from businesses likely to be affected by the measures and from KPMG’s network of EU member firms to draw on their insights from implementing equivalent measures.

In light of the complexity of these measures, KPMG suggests that policy makers and Revenue consult closely with business prior to enactment. This should include review of draft legislative measures to ensure they are understood and achieve their intended effect across business sectors. Measures should be supported by detailed implementing guidance to provide certainty in their application.

The Department of Finance consultation document can be seen here.

If you consider that your business could be affected by these measures and have questions to ask on their impact for your business, please contact your KPMG team.