Monday 23 September 2019

Tom Maguire: 'And that's nearly a wrap for Tax 2018, but a major metamorphosis is coming our way in the New Year'

Seamus Coffey’s report suggested that transfer pricing should apply to all firms, no matter what
Seamus Coffey’s report suggested that transfer pricing should apply to all firms, no matter what

Tom Maguire

What can you expect in 2019's tax land when you get back to your desks after the Christmas break? I've said it before, "Consultation with us decreases consternation among us", and we'll see a lot of that next year. More public consultations with one goal; changing our law. Consultation for consultation's sake is a waste of time.

We're in the middle of a public consultation, which will end in January, on the sci-fi-sounding area of "hybrids". This deals with instruments and entities that our law sees one way while other countries might see them another with differing tax consequences applying in those countries.

For example, one country might view a transaction involving debt as allowing a tax deduction for interest whereas another country might see it as equity seeing the return on it differently and tax it their way.

The EU Anti-Tax Avoidance Directive (ATAD) wants countries to sort that mismatch out and so we'll have to change our law to comply. This sounds simple, but it's excruciatingly complex.

There was a public consultation in 2017 on Seamus Coffey's review of the Irish corporation tax system and it asked a question regarding key considerations on the implementation of the hybrid rules.

The answers meant that a separate consultation was needed. One general consultation spawned a detailed specific one. So it's tough stuff. Some hybrid legislation has to be included in next year's Finance Act.

To be honest, we have it somewhat easier in giving our views (don't get me wrong, this is complex stuff) but civil servants have to draft legislation to ensure that the law is ATAD compliant while ensuring that the complexity of legislation does not bring about uncertainty of application.

That's not easy; when it comes to tax there's none so great an evil as a small degree of uncertainty according to the sage economist Adam Smith. You can see his point.

But here's the thing, various corporate taxpayers will have to understand not only the Irish tax consequences of entering into cross-border transactions or setting up operations in other countries but they will also have to understand their treatment in those countries.

The foreign element could affect the treatment back home depending on how the legislation ends up. Let that sink in for a second. Tax deductions for interest on borrowings are also part of that consultation. Let's get one thing clear off the bat, our law on this is already difficult given the level of legal hoops that taxpayers have to jump through to achieve a tax deduction for interest on borrowings.

That's why the Department of Finance said as part of the hybrids consultation that our existing interest deductibility rules were, while structurally different to the ratio-based approach in the ATAD, "equally effective" at preventing Base Erosion and Profit Shifting (BEPS) risks.

However, as noted in the Roadmap, the EU Commission seem to be adopting an almost word for word approach in assessing whether national rules are "equally effective" to the ATAD's rule.

The Department concluded that "while engagement on this matter is ongoing with the Commission, and as signalled in the Roadmap, work has commenced to examine options for transposing the ATAD interest limitation rule before 2023 and possibly as soon as Finance Bill 2019".

That's important as otherwise we would have almost another five years to change our laws.

This hybrids/interest consultation runs until January so it's crucial that all stakeholders make their views known to the Department.

Some will say: hold on a second, why the January rush, sure isn't the Finance Bill almost a year away? Two reasons:

(1) the more time that brainpower can be allowed scrutinise this extremely complex area the better and;

(2) there's a whole lot more to be dealt with next year by that same brainpower. So, the clock is ticking.

In my last column, I mentioned that this year's Finance Bill has now passed through the Dail. For the past couple of years our President has signed the Bill into law on Christmas Day; admittedly, I was probably watching Indiana Jones save the day (again) at the time, and we may see a similar enactment-timeframe this year.

This year's Bill brought about provisions for Controlled Foreign Companies which effectively allow us to tax other countries' money where Ts & Cs are met.

Other countries have such rules but consequently may not tax foreign dividends received by companies in those countries where more conditions are met.

We'll tax such foreign dividends and give credit for foreign tax on that income but that's a whole heap of legislative hoops for companies to jump through here and there may still be an Irish tax charge after that. There will be a public consultation on this in early 2019, according to the Department's Roadmap.

And there's more. Early 2019 will also bring about a public consultation on Transfer Pricing (TP). This requires an arm's length price be charged for goods and services between related companies with the justification for that price documented.

Right now, TP doesn't apply to SMEs and the Coffey report suggested, among other matters, that TP apply to all companies, irrespective of size or activity.

The roadmap notes explains that a substantial number of responses to the Coffey consultation said TP rules should not be extended to SMEs arguing the imposition of a disproportionate burden given the lower BEPS risk in SME companies.

It noted the broad consensus was that, should TP rules be extended to SMEs, de minimis thresholds should apply to minimise administrative burden and compliance costs.

Some stakeholders proposed that a simplified regime and/or less onerous documentation requirements should be applied to SMEs.

The roadmap explains that, while the Coffey review recommended implementation of TP changes by end-2020 strengthening the TP regime as an important element in defending Ireland's tax regime in international fora, it was intended to move forward with the updating of TP rules in 2019. Hence the forthcoming consultation so game faces, people!

In short, 2019 will be a year of tax metamorphosis.

In the words of the Jedi: May the Force be with us. Nevertheless, and let there be no doubt, because paraphrasing another Jedi Master: Do. Or Do not. There is no try.

See you in 2019.

Tom Maguire is a tax partner in Deloitte

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