Irish Government announces Budget 2016 and publishes update on international tax strategy

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1 16 October 2015 EY Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Services/Tax/International- Tax/Tax-alert-library#date Irish Government announces Budget 2016 and publishes update on international tax strategy Executive summary On 13 October 2015, the Irish Minister for Finance announced his Budget proposals for The Minister also published a document entitled Update on Ireland s International Tax Strategy (Strategy Statement Update). This Alert summarizes the main Budget 2016 announcements from an international tax perspective, and also summarizes the key items outlined in the Strategy Statement Update. Detailed discussion Budget 2016 Knowledge Development Box In his Budget proposals for 2016, the Minister announced that Finance Bill 2015 will include legislation to introduce an Irish Knowledge Development Box (KDB) from 1 January With qualifying income under the KDB to be taxed at a rate of 6.25% (i.e., at half the statutory corporate tax rate), the KDB is a further addition to Ireland s existing portfolio of incentives to encourage investment in innovation activities in Ireland. The Department of Finance has stated that the KDB will be best in class while being fully compliant with agreed Organisation for Economic Co-operation and Development (OECD) standards. Furthermore, the Irish KDB will be the first and only intellectual property (IP) box in the world to meet the tough new standards of the OECD s modified nexus approach. This commitment by Ireland to the

2 OECD standard should provide investors with long term certainty at a time when many international businesses are re-evaluating their IP structures to more effectively compete and succeed in a post- BEPS environment. Detailed legislation in relation to the new KDB regime will be published in the upcoming Finance Bill on 22 October. Country-by-Country reporting As signaled previously, the Minister announced that Ireland would be one of the first countries in the world to introduce Country-by-Country (CBC) reporting in line with OECD s agreed minimum standard under Action 13 of the OECD base erosion and profit shifting (BEPS) project. It is broadly expected that Ireland will follow the template proposed by the OECD without amendment. The CBC reporting requirements will apply to multinational groups headquartered in Ireland with consolidated revenues in excess of 750M (to be determined on a preceding year basis), and will apply for accounting periods starting on or after 1 January The deadline for filing the new report will be 12 months after the end of the accounting period (i.e., 31 December 2017 for accounting periods ending on 31 December 2016). Detailed legislation giving effect to CBC reporting in Ireland also will be published in the upcoming Finance Bill on 22 October. Update on Ireland s international tax strategy The publication of the Strategy Statement Update follows the October 2013 publication of Ireland s International Tax Strategy (Strategy Statement) and the October 2014 publication of A Road Map for Ireland s Tax Competitiveness (Road Map). These three documents collectively set out where Ireland stands and where it is going from an international tax perspective. Furthermore, the Strategy Statement Update reaffirms the Irish Government s commitments in an international tax context and outlines how the country will respond to the OECD BEPS reports and emerging tax related proposals from the European Union (EU). Foreword by the Minister for Finance A number of notable comments are made by the Minister in his foreword. First, the Minister notes that Ireland is well positioned for the post-beps world adding that the alignment of substance and taxation has been a long standing feature of Ireland s economic and international tax policy. The Minister goes on to state that the OECD s BEPS reports do not affect Ireland s 12.5% corporate tax rate and that, as explicitly recognized by the OECD, taxation, and the rate of tax charged, is a sovereign matter for each Member State to determine. Also noted by the Minister is that while Ireland continues to value stability and certainty, being acutely alert and responsive to a rapidly changing international environment is vital. And it is in recognition of this that Ireland has, through successive Budgets, continually made competitive enhancements to the Irish tax regime while at the same time ensuring that the transparency and openness of the Irish tax system consistently meets the highest international standards. Ireland s international tax strategy progress and developments Included in the Strategy Statement released back in October 2013 was an International Tax Charter (Charter) which set out the principles and strategic objectives underlying Ireland s international tax policy. This Charter expressly noted Ireland s commitment to maintaining an open, transparent, stable and competitive corporate tax regime and how this commitment would be achieved. The Charter also outlined a number of specific commitments in relation to the exchange of tax information with tax treaty partners, active contribution to the OECD/EU efforts to counter harmful tax competition and engagement with developing countries in relation to tax matters. The Strategy Statement Update sets out the further progress that has been achieved over the past 2

3 12 months with respect to each of these stated commitments. Some notable developments include: CBC reporting, as recommended in BEPS Action 13, will be introduced in Finance Bill 2015 The Irish KDB will be designed in a manner that ensures it fully complies with the international best practice agreed in BEPS Action 5 The OECD s Common Reporting Standard was legislated for in Finance Act 2014 Ireland has actively engaged in the OECD s BEPS project and will continue to engage in the project s remaining work New Double Taxation Agreements and Tax Information Exchange Agreements have been signed Tax Treaties with two developing countries have been re-negotiated to provide for greater source country taxation Ireland s Tax Competitiveness Road Map actions taken This section of the Strategy Statement Update provides an update on the actions taken by Ireland to deliver on 10 specific commitments outlined in the Road Map that was released in Some of the primary action items and related updates include: Maintain the 12.5% corporation tax rate absolute commitment reaffirmed by the Government on multiple occasions Introduce default Irish tax residence rule for Irish-incorporated companies new rules introduced in Finance Act 2014 Improve IP regime improvements to intangible asset amortization regime introduced in Finance Act 2014 and KDB to be introduced in Finance Act 2015 Enhance research and development (R&D) regime base year restriction removed in Finance Act 2014 Enhance Special Assignee Relief Programme (SARP) to attract mobile talent enhancements introduced in Finance Act 2014 Increase Revenue competent authority resources to defend transfer pricing disputes additional resources provided Maintain commitment to ensuring an open and transparent tax regime Common Reporting Standard of Exchange legislation introduced in Finance Act 2014 and CBC reporting to be introduced in Finance Act 2015 Ireland and the OECD BEPS project In this section of the Strategy Statement Update, it is noted that Ireland has been fully engaged and committed throughout the OECD BEPS project and that Ireland will play its full part in implementation. Furthermore, it is noted that it is important to Ireland that the remarkable international consensus, which led to the agreement in the BEPS reports, remains in place to implement the measures contained in the reports. In terms of actual implementation, the Strategy Statement Update refers to the implementation of CBC reporting in accordance with the OECD standard and the introduction of the world s first OECD-compliant IP box. In relation to the work underway among over 90 countries towards finalizing a multilateral instrument (MLI) to modify bilateral treaties, it is noted that Ireland will continue its close engagement at OECD level on the MLI and looks forward to the satisfactory conclusion of this important work. From a transfer pricing perspective, it is noted that the OECD will approve the BEPS report on Actions 8-10 in 2016 and that countries, including Ireland, will then be expected to update the references in their national tax laws to the revised OECD Transfer Pricing Guidelines. In relation to the final BEPS reports that pertain to issues such as controlled foreign company rules, interest deductibility and hybrid mismatches, the Strategy Statement Update notes that the best practices or common approaches outlined in these specific reports are not minimum standards requiring early action and that Ireland will continue to engage constructively with international developments on these issues. Ireland and the EU agenda In the penultimate section of the Strategy Statement Update, it is emphasized that taxation is a key policy tool for Member States, especially small EU Member States like Ireland, and that it is a vital aspect of a Member State s sovereignty. 3

4 In relation to the Common Consolidated Corporate Tax Base (CCCTB) initiative, it is noted that Ireland welcomes the postponement of the consolidation aspect of the proposals as a pragmatic solution given the standstill in discussions to date. And while it is noted that Ireland will constructively engage in all CCCTB related discussions, the Strategy Statement Update makes it clear that Ireland will maintain its position that taxation remains an area for unanimous decision making as laid out in Treaties. With respect to harmonization of tax rates and/or minimum levels of taxation across EU Member States, Ireland notes its disagreement with such proposals. It is clearly noted, however, that Ireland is a strong supporter of the work of the European Commission in relation to tax transparency and administrative cooperation, two areas that the Strategy Statement Update notes as being key to tackling the global problems of tax avoidance and aggressive tax planning. The Strategy Statement Update goes on to note that Ireland is an active participant in the EU Code of Conduct Group which examines harmful tax practices in the EU. Ireland s engagement with developing countries In the final section, the Strategy Statement Update reiterates Ireland s commitment to engaging constructively and respectfully with developing countries in relation to tax matters, a key commitment outlined in the Charter discussed above. As part of this commitment, Ireland has published a spillover analysis of the impact of Ireland s tax system and tax treaty network on the economies of developing countries. The quantitative analysis undertaken indicates very limited flows of capital and trade between Ireland and developing countries, indicating a small likelihood of spillovers from the Irish tax system. This final section concludes by noting that it is hoped that the spillover analysis that Ireland has undertaken will provide a road map for best practice in future interactions with developing countries, and potentially provide a model for other countries to follow in conducting such analyses. For additional information with respect to this Alert, please contact the following: Ernst & Young (Ireland), Dublin Kevin McLoughlin kevin.mcloughlin@ie.ey.com Joe Bollard joe.bollard@ie.ey.com James Burrows james.burrows@ie.ey.com Ernst & Young (Ireland), Cork Frank O Neill frank.oneill@ie.ey.com Ernst & Young (Ireland), Limerick John Heffernan john.heffernan@ie.ey.com Ernst & Young (Ireland), Waterford Paul Fleming paul.fleming@ie.ey.com Ernst & Young LLP, Irish Tax Desk, New York Karl Doyle karl.doyle@ey.com 4

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