Welcome to the February edition of our corporate tax newsletter.
In this month’s edition we will be discussing:
- Ireland’s position in relation to the OECD’s Multilateral Instrument;
- a Finance Act 2017 provision which could affect future corporate acquisitions and MBOs; and
- Annual Taxation Report 2017.
Multi-Lateral Instrument – Current Status in Ireland
In June 2017, government representatives from 68 jurisdictions signed up to multilateral instrument (“MLI”) which is designed to efficiently update the worldwide tax treaty network in line with certain of the OECD’s BEPS recommendations.
It is expected that the MLI will result in amendments to more than 2,000 treaties worldwide and is likely to have a significant impact on existing and future international tax planning. Ireland is a signatory to the MLI, and in Finance Act 2017 took the first steps towards MLI ratification. This article briefly discusses how some aspects are expected to operate in relation to Ireland’s treaties.
The MLI will operate alongside existing tax treaties and seeks to amend how existing treaties will apply in the future.
The MLI is designed to address 4 of the 15 BEPS action points. It provides for what are known as “minimum standards” in relation to 2 of the action points (Action 6 - Treaty Abuse and Action 14 – Dispute Resolution) and for “optionality” for the other 2 (Action 2 - Hybrid Mismatches and Action 7 – Permanent Establishment Avoidance). We summarise the current position in relation to Actions 6 and 7 below.
Action 6 is designed to counteract situations where tax treaties could be used to avail of treaty benefits in unintended circumstances. In this context the MLI provides for two options – a principal-purpose test (“PPT”), or a simplified “limitation-on-benefits rule” (“LOB”) to be used in conjunction with a PPT. The PPT seeks to deny treaty benefits where obtaining the benefit was one of the principal purposes of an arrangement or transaction that results in the benefit. Ireland has adopted the PPT. Ireland also wishes to introduce minimum holding periods in relation to reduced withholding tax rates on dividends.
In relation to Action 7, the MLI seeks to broaden the range of circumstances in which a PE may arise, and also seeks to counter PE avoidance techniques which involve commissionaire structures and contract separation. Ireland expressed a reservation regarding the commissionaire and similar arrangements, due to concerns about how it will operate in practice. Ireland also wishes to retain exiting treaty PE exemptions, and intends adopting the anti-fragmentation rule included in Action 7.
The MLI is a significant change in international tax and considering its implications is essential when evaluating new structures/transactions and reviewing current structures.
Corporate Acquisitions and Disposals – Impact of Finance Act 2017
In any corporate takeover or management buyout (“MBO”) much thought will be given to how the takeover is to be funded. Typical funding may consist of a mix of debt and equity, with tax consideration given to several aspects, including whether a tax deduction is available for any interest arising on acquisition debt.
However where external debt and equity is not available, a typical approach might be for an acquisition company to be established (“SPV”) which would pay the departing shareholders from internal resources of the target company, by way of say post acquisition loans or dividends from the target company to the SPV for onward payment to the departing shareholders.
From a tax perspective, this approach was generally not regarded as contentious or aggressive. However thanks to Finance Act 2017 (“FA 2017”), a fresh look should be taken in the future when seeking to use this approach for close companies.
FA 2017 introduces a new subsection 3A into Section 135 TCA 1997. The subsection provides that the sales proceeds received by a shareholder when selling his shares in a close company may be regarded as distributions and therefore liable to income tax, rather than being regarded as capital receipts and thereby liable to capital gains tax (“CGT”). This distribution treatment may apply where certain “arrangements” are entered into by the shareholder as part of the share sale. Subsection (3A) applies in relation to relevant arrangements entered into on or after 2 November 2017.
Revenue have publicly advised that the above distribution treatment is not expected to apply to bona fide transactions, and will only apply where a departing shareholder is party to how the payment is to be made directly or indirectly from the assets of the acquired company. While this clarification is helpful, the legislation itself does not contain such a bona fide test, and therefore an unnecessary technical doubt has been introduced into certain transactions.
For this reason advice should always be sought in respect of proposed future share sales and MBOs to avoid falling foul of this provision.
Annual Taxation Report 2017
The Department of Finance published its Annual Taxation Report for 2017 on 9 January 2018. Tax receipts for 2017 are the highest on record with a notable increase in corporation tax receipts.
The report contains a high focus on the increased importance of corporation tax receipts as a source of revenue over the past three years. The figures for corporation tax receipts have significantly increased since 2015, reaching €8.2billion last year and accounting for 16% of total tax receipts for 2017. This prompted the Minister for Finance to commission a review of Ireland’s corporate tax code, from which stemmed the Coffey report.
Notwithstanding the overall positive findings from the report, there are some notable concerns. Around two-fifths of corporation tax payments are made by a very small number of tax payers, with the top 10 accounting for 37% of total corporate tax receipts in 2017. More notably, the multinational sector accounted for almost 80% of total corporate tax receipts. This highlights the exposure to firm and sector specific shocks, as well as disruption from international tax policy.
The findings from the Coffey report suggest the increase in corporate tax receipts could be attributed to an increase in corporate trading profits since 2015, coupled with the exhaustion of corporate tax losses. The report concluded that corporate tax receipts could be sustainable in the short to medium term. However it noted that it is “impossible to be definitive” and with Brexit negotiations still on-going and the reform of the US tax system, there is most definitely a degree of uncertainty about the sustainability of such long term corporation tax receipts.
We would agree with the sentiment expressed in the Report regarding the sustainability of corporation tax receipts, although it is worth noting the trend towards an on-shoring of Intellectual Property. In the long term, provided our tax regime remains competitive, this should see an increase in corporate tax receipts here, which should be sufficient to counter the adverse impact of the factors noted above.