Ireland reveals Budget and international tax strategy

Ireland’s budget statement for 2016 (Budget) was delivered by the Minister for Finance last week.

The Budget’s primary focus was on personal tax matters, which is somewhat unsurprising given the general election early next year.

However, the Budget also contained two key announcements on Ireland’s corporation tax system.  In line with expectations, following the publication of the final reports under the OECD’s base erosion and profit shifting project (BEPS), Ireland will implement:

• Country-by-country-reporting (CbCR) as recommended under BEPS Action 13
• a knowledge development box (KDB), which will be OECD-compliant and will permit certain income from intellectual property to be taxed at 6.25%.

The detail of these announcements will be available later this week upon publication of the Finance Bill 2015.

It is anticipated that the parameters set out in the final reports issued by the OECD under BEPS Actions 5 and 13 will be reflected in the draft legislation.

In particular, the KDB will incorporate the nexus approach proposed under BEPS Action 5 making it the world’s “first and only OECD-compliant box”.

The Minister for Finance also published an Update on Ireland’s International Tax Strategy (the Strategy) which outlines Ireland’s position on the BEPS project and the emerging EU tax agenda and reaffirms Ireland’s commitment to continue competing fairly to attract foreign direct investment.

Ireland’s international tax charter

The Strategy contains an updated international tax charter which details the principles and strategy objectives that direct Ireland’s international tax policy.

Maintaining the 12.5% rate of corporation tax remains the cornerstone of Ireland’s corporate tax strategy. In addition, the recent measures taken to enhance Ireland’s “best in class” offering are detailed, including the enhanced R&D tax credit and the expanded intangible asset amortisation regime.

The Strategy also notes recent measures taken to enhance the resources and capabilities of the Irish Revenue Commissioners and, in particular, the transfer pricing and overall international tax capabilities.

Ireland’s position on BEPS

Ireland has fully engaged with the BEPS project and the Budget announcements on CBCR and KDB are generally seen as the first steps in Ireland’s BEPS implementation. The next steps for Ireland on BEPS are:

• to update Irish transfer pricing legislation to incorporate the revisions made to the OECD transfer pricing guidelines under Actions 8 to 10 (the “Revised Guidelines”);
• to participate in the negotiation of the multilateral instrument proposed under BEPS Action 15.It is intended that the multilateral instrument will implement recommendations made under BEPS Action 6 to prevent treaty abuse and BEPS Action 7 to extend the definition of what constitutes a permanent establishment; and
• to participate in the ad hoc group of 20 countries that have agreed to incorporate mandatory binding arbitration provisions into their double tax treaties.

Other than implementing the Revised Guidelines, the next steps mentioned above consist simply of continued participation in ongoing negotiations and discussions.

Outside of that participation, Ireland will not take immediate steps to implement other BEPS recommendations but will “continue to engage constructively with international developments”.

Ireland’s position on the EU tax agenda

The European Union has become increasingly active in the area of direct taxation. Most recently, it has proposed amendments to existing European Directives to provide for automatic exchange of information relating to financial accounts and automatic exchange of information relating to tax rulings. Ireland is supportive of both initiatives.

As a broader matter, the Strategy confirms that Ireland considers that tax policy is a vital aspect of a Member State’s sovereignty.

Ireland disagrees with any harmonisation of tax rates or minimum levels of taxation. Ireland will continue to engage in discussions on the proposed re-launch of the common corporate tax base to ensure that Ireland’s perspective is fully advanced. Changes may only be made to corporation tax at EU level if all Member States are in unanimous agreement.

Irish implementation

In the short-term, Finance Bill 2015 is due to be published later this week and will contain additional detail on CBCR and the KDB.

In the medium-term, implementing legislation will also be required to give effect to the Revised Guidelines and the multilateral instrument.