Ireland’s CT Roadmap sets out significant changes to TP rules, with potential implications for intra-group financing arrangements.
On 5 September 2018 Ireland’s Government announced a Roadmap for the future of Ireland’s Corporation Tax (CT) regime. The Roadmap reflects Ireland’s tax policy objectives to remain aligned with the changes in the international tax landscape, including with the OECD’s Base Erosion and Profit Shifting (BEPS) project, with continuing engagement in the global debate on how the arm’s length principle can be adapted for the modern world. With reference to the OECD’s 2017 Transfer Pricing (TP) Guidelines, Ireland will introduce legislation in Finance Act 2019 to update Ireland’s TP regime with effect from 1 January 2020. The changes that are intended to be launched to a public consultation in early 2019 include: extending Ireland’s TP regime to non-trading and capital transactions; and consideration of whether the new OECD 2017 TP Guidelines should be applied to historic transactions.
Who is this relevant to?
The changes in the CT Roadmap suggest that TP requirements will apply to non-trading transactions, which would impact many intra-group financing arrangements. This is potentially going to impact UK-headed and also foreign-parented (especially US-headed) groups that have used interest-free loan structures through Ireland to finance their groups.
The consultation over the coming 12 months will determine the exact shape of the new law and whether or not it will apply to financing income, although most likely it will.
Why is this important?
Many UK-headed groups established controlled foreign company (CFC) finance companies in the wake of the 2012 UK CFC reforms, relying on the ‘finance company exemption’ in Chapter 9 TIOPA 2010 of the CFC rules. A typical structure involves Irish interest-free loans, with the funds being on-lent with interest through a jurisdiction such as Luxembourg or the Netherlands.
These structures came under some pressure as part of the OECD’s BEPS project that started in 2013, in particular BEPS Action 2, which focused on hybrid mismatch arrangements. It was decided by the OECD that the sort of planning involved in an interest-free loan structure like the above should not be regarded as a hybrid mismatch. The UK’s legislation follows this approach. Many UK groups therefore adopted the Irish interest-free lending structure as a post-BEPS financing arrangement.
The potential change in Irish law therefore puts these structures under further pressure. Ireland has two CT rates: trading income is taxed at 12.5 percent, whereas non-trading income is taxed at 26 percent. The Roadmap suggest that Ireland will maintain the 12.5 percent rate of CT, however it is currently unclear whether the rates will be aligned as part of this reform. If Ireland does not align the rates, an Irish interest-free lending structure will lead to a 26 percent tax charge in Ireland. There would be an excess that is not credited under the UK CFC rules, and so becomes an absolute cost to the group.
What action should be taken?
Groups need to identify if they have Irish financing structures that could be affected by the envisaged TP changes from the 1 January 2020 implementation date. In considering any potential new financing structures, thought would need to be given to matters such as the anti-hybrid rules, wider BEPS considerations, State Aid etc.
Groups also need to think about legacy exposures – for example, was the absence of TP rules on non-trading income in Ireland something that may create a State Aid risk?
Given the complexity of the various rules that could affect groups’ financing structures, these should be constantly reviewed to ensure they remain sustainable going forward.
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