Tax Partner Tax Director

Transcription

1 RSM IRELAND AIDAN BYRNE Tax Partner PADDY STAPLETON Tax Director

2 Agenda 20/11/18 Limerick - 21/11/18 Dublin 1. Doing business abroad summary tax matters 2. Permanent Establishments 3. Transfer pricing 4. International Tax reform 5. Sample structures 6. Tax aspects of building value & succession 7. Finance Bill Brexit

3 DOING BUSINESS ABROAD - SUMMARY TAX MATTERS

4 DOING BUSINESS ABROAD TAX MATTERS Branch or Subsidiary Engage with foreign tax advisors in advance. Branch (Permanent Establishment) or local Subsidiary company? If a subsidiary, any minimum capital requirements? Subsidiary additional costs & reporting over a Branch structure (incorporation, cosec, annual audit). Any practical restrictions for an Irish company doing business, e.g. financial institutions in some jurisdictions may require a local subsidiary Staff involvement formalise roles; level of authority who can sign contracts Place of business If using a Subsidiary, consider practical as well as minimum legal requirement for Board composition. Indirect taxes Indirect taxes / customs; Goods and services understand the transaction flow and carving indirect tax / customs issues. Contractual structure - PE/Branch contracting directly with customers, or will this be done by head office? Value and indirect tax considerations. B2C sales - EU distance selling thresholds. EU VAT MOSS scheme. Employment taxes Any special reliefs (SARP equivalent) for assigned employees? Temporary assignees any exemption for short term assignments, i.e. < 183 days PRSI coverage; E101 for assignments < 2 years Tax equalisation may be required.

5 DOING BUSINESS ABROAD TAX MATTERS Irish corporate tax on foreign profits PE / Branch Business is subject to corporation tax as part of the Irish head office result. Tax credit available for foreign tax but limited to the Irish tax on the same income. If loss making, losses rolled up into Irish result. Consider use of losses in investee jurisdiction if the business has flexibility of Branch or Subsidiary. Subsidiary No Irish taxation of subsidiary profits until repatriation. 12.5% rate available for foreign dividends election required. Credit relief for underlying profits tax & withholding taxes provides in most cases for effective exemption where tax has been suffered. Transfer Pricing PE or subsidiary must be remunerated on an arm s length basis. Transfer pricing analysis may required. Remunerate on Cost Plus or other basis. Repatriation of Profits Branch is more flexible Treaty in place with the investee jurisdiction? Intermediate holding company required? Loan funding.

6 Permanent Establishment sample treaty article Definition For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. The term "permanent establishment" includes especially: (a) a place of management; (b) a branch; (c) an office; (d) factory; (e) a workshop; (f) a warehouse, in relation to a person providing storage facilities for others; and (g) a mine, an oil or gas well, a quarry or any other place of exploration for, or extraction of, natural resources. The term permanent establishment likewise encompasses a building site or construction, installation or assembly project, or supervisory activities in connection therewith, but only if the site, project or activity lasts more than six months within any 12 month period.

7 Permanent Establishment Exclusions The term "permanent establishment" shall be deemed not to include: (a) (b) (c) (d) (e) (f) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; and he maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

8 Permanent Establishment Agents Dependent agent Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 6 applies - is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of 12 business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph. Independent Agent An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, and conditions are made or imposed between that enterprise and the agent in their commercial and financial relations which differ from those which would have been made between independent enterprises, he will not be considered an agent of an independent status within the meaning of this paragraph.

9 PERMANENT ESTABLISHMENT MLI changes PPT rules under MLI - all member states New anti-fragmentation (Ireland + 12 other member states) Ireland not opting for Dependent Agent Provisions (8 countries have) or Narrower definitions of Preparatory / Auxiliary functions Ireland not opting for new rules on Construction contracts (France & Slovakia) US not in MLI. Both treaty countries must elect to adopt a provision in order for it to apply. Effect of change may not be as significant as originally anticipated. Discussion points Functions and authority will determine whether a PE is triggered. PE status PE must be remunerated on an arm s length basis / Transfer pricing analysis required. Credit available for foreign tax but limited to the Irish tax on the same income. Not only corporation tax; Sales tax / VAT / customs / employment taxes / local taxes must be considered. Different requirements in different jurisdictions regarding accounts preparation.

10 TRANSFER PRICING OVERVIEW

11 TRANSFER PRICING Scope of Irish TP rules Introduced in Finance Bill 2010, to bring Irish tax legislation in line with international norms. Governs transactions with associated companies. Exemption for Small and Medium sized Enterprises (SMEs). The Irish TP rules do not apply to small and medium sized enterprises, i.e. it only applies to an enterprise, on a group basis, that has; a) in excess of 250 employees, And a) (i) a turnover exceeding 50 million or (ii) total assets exceeding 43 million A formal Revenue opinion can be sought. Advance agreements June Revenue published the Bilateral Advance Pricing Agreement Guidelines ( the Guidelines ) relating to the operation of Ireland s Advance Pricing Agreement ( APA ) programme. The bilateral APA programme is intended to apply in respect of a transactions where the transfer pricing issues involved are complex (e.g. there is significant doubt over the appropriate application of the arm s length principle or where there would otherwise be a high likelihood of double taxation arising). Voluntary system Only 4 APA s issued at 31/12/2017.

12 Transfer Pricing Two unique rules 1. Only applies to trading transactions confined to related party dealings that are taxable at Ireland s corporate tax rate of 12.5%. Activities that are deemed to be non-trading or passive are excluded from the scope of the regime. Does not apply to non-trading activities, e.g. financing activities such as interest free loans that are non-trading in nature. 2. Grandfather clause TP Rules do not apply to arrangements agreed prior to 1 July No time limit imposed. The pre-1 July 2010 agreement must clearly envisage the transaction and deliver the price.

13 Transfer pricing Pricing methods Cost plus basis This method takes the direct and indirect costs of the controlled transaction and adds the appropriate mark up so that a profit is made on the controlled transaction. The cost plus method is often most appropriate where the cost of the product or services provision, rather than sale price, is the key value driver. This will be determined through the functional analysis. Other methods Resale price method Transaction Net Margin Method Profit Split The cost plus method is often used in transactions involving a contract manufacturer, a toll manufacturer or a low risk assembler which does not own product intangibles and incurs little risk.

14 Transfer pricing Pricing of associated transactions

15 Transfer Pricing Safe harbour The Irish tax authorities, on March , issued new guidance to taxpayers on Ireland s simplified transfer pricing approach to low-value intra-group services ( LVIGS ). LVIGS are services, performed by one or more entities within an MNE group for one or more recipient entities within the same MNE group, which typically exhibit the following features; administrative or routine nature, supportive in nature and not part of the core business of the MNE group do not use or create unique and valuable intangible assets. do not involve significant risk for the service provider. The Irish tax authorities have confirmed that it is prepared to accept a markup of 5% of the relevant cost base, without the need for a benchmarking study where the service is the provision of LVIGS, which is in line with previous guidance released by the EU in respect of LVIGS.

16 Revenue TP compliance reviews Revenue audits Transfer pricing compliance review (TPCR) In November 2012, Revenue launched an initiative to monitor compliance with the Irish transfer pricing regulations. Not considered an audit for penalty purposes, but potentially could escalate into an audit of transfer pricing Requirement to submit a self-review report incorporating: Group structure; Details of related party transactions; Transfer pricing policies utilised; The relative function, asset and risk profile of parties to the transactions; and The basis for determining that the arm s length principle has been satisfied Transfer pricing audits In 2015, Revenue established a dedicated transfer pricing audit branch in LCD No details published on number of cases or adjustments raised to date More in-depth, more resources needed than TPCR

17 Revenue TP compliance reviews Sample review letter

18 Transfer Pricing Take away points While business may fall within TP SME exemption here, this may not follow suit when operating in another jurisdiction. Applies equally to Branch or Subsidiary. TP increasingly being used in the hunt for revenues by tax authorities. Volume of tax audits rapidly rising and increasingly aggressive. Understand local TP rules and documentation requirements.

19 TAX REFORM

20 Tax reform Political momentum Tax reform at OECD and EU level but this was given fresh political impetus with the global financial crash. Heightened focus on the tax affairs of multinational companies came amidst the global financial crisis. Are large corporates paying enough? Continuing tax controversy Lux Leaks Ireland / Apple case Dutch / Starbucks case (UK; reported a 8.1m current tax bill on pre-tax profits of 34.2m only slightly less than the total it paid over the 14 years following its arrival in the UK in 1998). Panama Papers / Mossack Fonseca Existing international tax rules were designed 80 years ago - international tax framework had not kept pace with global and digitally driven businesses. G20 meeting February 2013 agreed the need to prevent base erosion and profit shifting, requesting the OECD to report on BEPS.

21 Tax reform BEPS goals Greater alignment of taxable profits and the location of economic substance. Increasing the transparency of corporates tax affairs through Country-by-Country Reporting ( CbCR ) and the automatic exchange of information between tax authorities. Re-design of preferential IP regimes to ensure that there is a nexus between the qualifying income and the location of the underlying R&D activities. Addressing tax relief on financing and interest payments hybrid entities & instruments. Re-design of transfer pricing principles which will reform the way in which profits are allocated within corporate groups.

22 TAX REFORM BEPS 2015 Final Reports October 2015

23 Implementation - the big players

24 TAX REFORM IRELAND Corporate tax residence rules reformed; changes were made to Ireland s corporate tax residence rules in Finance (No.2) Act 2013 to prevent Irish incorporated companies from being stateless for tax purposes and in Finance Act 2014 to shut down known structures (such as the socalled Double Irish ) which were designed to exploit gaps in US anti-avoidance rules KDB introduced OECD approved modified nexus approach. CbCR Country by Country Reporting introduced in Finance Act 2015 and subsequently agreed a Directive (DAC4) to ensure a consistent approach on CbCR across the EU. 750M group threshold. MLI Ireland were among the group of countries to sign the BEPS multilateral instrument at the first possible opportunity. This will see the majority of Ireland s tax treaties updated to be BEPS compliant. EU ATAD; Ireland agreed two Anti-Tax Avoidance Directives (ATADs) with our fellow EU Member States in 2016 and New CFC / Interest limitation / Exit Tax

25 TAX REFORM IRELAND TP Rules; The 2017 OECD Transfer Pricing Guidelines will be incorporated into Irish law and will apply from 1 January Further consultation is expected on broader changes to the Irish transfer pricing regime during CRS; Early adopter of the OECD Common Reporting Standard on Exchange of Financial Account Information, and in 2012 Ireland became the 4th country in the world to sign a FATCA Agreement with the USA. DAC 5 exchange of access for tax administrations to information about beneficial owners of companies DAC 6 - a common mandatory reporting regime for tax advisers and companies where transactions are entered into that meet certain hallmarks (Ireland had mandatory reporting pre DAC 6) Automatic exchange; Ireland fully implemented EU Directive (DAC3) to provide for the automatic exchange of information on advance cross-border tax rulings and advance pricing arrangements among all Member States. Ireland is also fully compliant with the BEPS Action 5 requirements on exchange of this taxpayer information.

26 TAX REFORM IRELAND MLI Steps to ratify MLI initiated in Finance Act 2017, to be completed before the end of MLI will then generally start to have effect for Ireland from the beginning of Key features PPT Regarding the prevention of tax treaty abuse, Ireland intends to adopt the Principal Purpose Test (PPT) provided for in Article 7. This will introduce this general anti-avoidance clause into any treaty where the treaty partner also chooses the PPT option. As Ireland has a domestic general anti-avoidance rule which is similar in nature to the new treaty rule, we do not believe this will create significant additional planning in establishing new structures or maintaining existing ones. WHT As Ireland does not currently have a minimum holding period in order to reduce WHT applicable to dividend payments, the adoption of new ownership holding period provisions under the MLI will require more careful examination of the availability of reduced rates. Permanent Establishments Ireland will adopt Option B of Article 13 the anti-fragmentation rule, which is consistent with Ireland s longstanding interpretation of the provisions. Practically therefore, this will not trigger significant change over existing practice. Ireland also intends to adopt the anti-fragmentation rule in Article 13(4) which is designed to prevent corporate groups from fragmenting a cohesive operating business into several small operations in order to avail of these exemptions.

27 TAX REFORM IRELAND EU ATAD key measures The introduction of Controlled Foreign Company ( CFC ) rules by all member states. CFC rules are anti-avoidance rules that reattribute the income of a low-taxed controlled foreign subsidiary to its - usually more highly taxed - parent company. Provided for in Finance Bill Effective 1/1/2019 A 12.5% exit tax on IP developed in the EU when it is transferred outside the EU. Budget New rules on interest deductibility for intra-group loans - generally limiting the deduction to 30% of a company's earnings (EBITDA). Certain exceptions to the interest limitation rules apply (Deferred until 2024). 3M de minimus threshold. New General Anti-Avoidance Rules. Implementation EU Member States which have equivalent rules will be allowed to continue with those rules until the OECD recommends a minimum standard of interest limitation rules, or at the latest by 1 January 2024.

28 SAMPLE STRUCTURES

29 SAMPLE 1 Branch business Background Irish Co Foreign Branch Irish Co hires sales/marketing employees in a foreign jurisdiction. Role limited to sales and sales support in respect of Irish Co's goods/services. The Branch has no other functions. The sales Branch triggers a Permanent Establishment. Sale contracts are entered directly by head office. Head office makes the supply of the goods / services. Analysis TP analysis undertaken, determines that PE remunerated on a Cost + 5% basis. IrishCo taxed on PE result. Credit for foreign corporate income tax on PE profit. Irish Co may be entitled to register for VAT in the foreign jurisdiction and recover VAT on its costs. PE must register for employment taxes.

30 SAMPLE 2 Sales only Irish Co Licence of IP Background Irish Co developed and owns the worldwide rights to IP. Irish Co licenses the use the IP rights to the Foreign OpCp in return for an arm s length fee. Foreign OpCo uses the licensed IP in providing services to third party, contracting directly with the customers. Provides services Foreign OpCo 3 rd party customers Analysis Irish IPCo s trading profits taxed at a rate of 12.5%. A portion of Irish Co s profit may qualify for the reduced 6.25% KDB rate. The value of the IP and functions of both companies will determine the relative split of return earned by IrishCo & Foreign OpCo. Foreign OpCo taxed in accordance with local tax laws. With double tax relief, effective exemption for foreign profits distributed to Irish Co. Geared at housing DEMPE in Ireland, supports allocation of more profit to IrishCo.

31 SAMPLE 3 Sales & development of IP Background Licence of IP Irish IP Co Irish R&D centre Irish IPCo needs to access specialised talent in foreign jurisdiction. Foreign Sales Co hires local specialist staff to undertake R&D activities. Irish IPCo & Foreign Sales Co enter a cost sharing agreement for development of future IP. Irish IPCo carries out its own R&D activity to continue to develop existing and future IP. Foreign Sales Co manages and exploits the IP in providing services to third party customers, contracting directly with the customers. Provides services 3 rd party customers Foreign Sales Co Foreign R&D centre Cost Sharing agreement for future IP Analysis Irish IPCo s trading profits taxed at a rate of 12.5%. KDB rate of 6.25% may also be available. A deduction should be available for revenue expenditure on a current basis (including any cost share payments). Irish IPCo claims R&D Tax Credits on qualifying expenditure. Potential for part of Irish OpCo s income to qualify for KDB and hence subject to the lower tax rate of 6.25%. Foreign Sales Co may be entitled to R&D incentives in its jurisdiction. With double tax relief, effective exemption for foreign profits distributed to Irish Co.

32 SUCCESSION PLANNING

33 Tax Aspects Of Building Value Process Stakeholders to be considered What is the strategy? Specific Tax Matters to be considered

34 Tax Aspects Of Building Value Process Start early Give it the time it deserves Engage with management team in organisation Develop your leaders or Find a way for generations to learn from each other It is not succession planning it is succession development For family companies acknowledge that keeping it in the family may not be easy Be prepared to change course!

35 Tax Aspects Of Building Value Stakeholders to be Considered Senior management and employees Family Customers and suppliers Bankers and financiers Yourself!

36 Tax Aspects Of Building Value What is the Strategy? Tax is complex and is multi-faceted The hardest thing in the world to understand is the income tax - Albert Einstein When looking at the profit or value, the key is to focus on profit/value after tax. Consider longer term objectives versus shorter term tax savings.

37 Tax Aspects Of Building Value Specific Tax Matters to be Considered 1. Staff Engagement Share incentive schemes Keep incentive Scheme Phantom share schemes 2. Pros and Cons of giving shares/options to employees Good/bad leaver provisions Loss of control

38 Tax Aspects Of Building Value Retirement relief & Business relief Retirement Relief & Business Relief Valuable reliefs that can reduce tax liabilities in circumstances of succession to family or via a trade sale CGT Relief on sale of chargeable assets where proceeds up to 750,000 ( 500,000 if over 66) are disregarded for CGT purposes. No limit on sale to family members if under 66, restricted to 3,000,000 over 66. Business Relief facilitates the passing of assets to family members at 10% of their actual value Neither relief requires the individual passing the assets to actually retire

39 Tax Aspects Of Building Value Entrepreneur Relief 10% CGT rate 1m limit Allows for a reduced rate of 10% to a gain arising on the disposal by a relevant individual of their chargeable business assets (CBA) up to a lifetime limit of 1M Relevant Individual will have owned the CBA for a continuous period of not less than 3 years in the previous 5 years, immediately prior to the disposal. They will have worked on a full-time basis in a managerial capacity within the business for that time CBA are assets, including goodwill, used for the purposes of a qualifying business. This also includes shares of a company in which a qualifying business is carried out, including shares in a holding company Recent anti-avoidance legislation introduced to restrict connected party transactions

40 Tax Aspects Of Building Value Holding Company Regime section 626B TCA 1997 Use of a holding company can result in greater flexibility Participation Exemption allows for tax free sale of trading subsidiaries if certain conditions are met Full sales proceeds of trade sale of trade assets are paid to holding company which can either be utilised for further investments or it can be liquidated to achieve same outcome as direct sale of business---but you control tax payment date Growth shares can be given to family members to bring them into legal ownership of the wealth generation assets---control issues to be carefully dealt with in advance of widening ownership structure

41 Sale event - summary of tax matters Section 626B Exemption CGT Retirement Relief Shareholders Shareholders CGT Entrepreneur relief December 2017 Anti-avoidance rules OpCo Hold Co May need to hive out any nonrequired assets or hive out required assets/business to NewCo planning & time required. OpCo

42 FINANCE BILL 2018

43 FINANCE BILL 2018 summary of key measures The Bill provides for the Budget Day announcements of a reduction to 4.5% in the 4.75% rate of USC, an increase to the ceiling of the band on which the 2% rate of USC will be payable, an increase in the income tax standard rate band, the increase in the home carer tax credit and the earned income tax credit. The Bill also provides for the change in the 9% VAT rate for hotels, restaurants and a range of other services to 13.5% An increase in the excise duty on cigarettes of 50 cents. Changes to the KEEP incentive (Key Employee Engagement Programme) Reforms in the administration of the Employment and Investment Incentive (EII) and Start-up Refunds for Entrepreneurs (SURE) schemes. In line with the recently published Roadmap on Corporate Taxation, the Bill provides for the introduction of a Controlled Foreign Company (CFC) regime as required by the EU Anti-Tax Avoidance Directive (ATAD). CFC rules are an anti-abuse measure, designed to prevent the diversion of profits to offshore entities (the CFCs) in low- or no-tax jurisdictions. The Bill also provides for the introduction of a new ATAD-compliant exit tax regime as announced in the Budget. The rate for the new regime is 12.5%. Further changes to VRT rates for diesel cars and preferential regimes for hybrid and electric vehicles are also provided for in the Bill including the introduction of a new fixed term VRT scheme for certain leased or hired vehicles. Enhancements to the Film Relief Scheme including the extension of the scheme to end-2024 and introducing a regional uplift.

44 BREXIT

45 Brexit And we wonder why it s a mess

46 Brexit Supply Chain and Supply Chain and Imports/Exports Imports/Exports e.g. working capital, sales finance e.g. monetisation, working capital, export/import sales finance tariffs, non-tariffs monetisation, barriers, manufacturing export/import footprint, tariffs, buffer nontariffs barriers, manufacturing footprint, stock buffer stock Tax e.g. Impact on interest and royalty tax framework; and on parent-subsidiary relations, VAT and Customs tax M&A / Competition e.g. European capital markets directive (Takeovers, Prospectus), competition clearance. Payments e.g. high value payments, SEPA credit transfers, SEPA direct debits. Markets and Risk Management e.g. Trade risk, FX, Commodities and Rates risk, volatility, growth opportunities, counterparty risk and banks ratings. Treasury Management e.g. Treasury centralisation and location,. connectivity, process efficiencies, data transfer and data sharing. Legal and Intellectual Property e.g. EU Trademark regime no longer valid in UK. If patents, impact on existing contracts. Human resources e.g. restricted access to European talent and increased cost of labour.

47 Thank you for your time and attention