Sasha Kerins, David Sites, and Matt Stringer spoke with Peter Vale about the key international tax developments and shared their experience and insight into the principal considerations for companies operating in Ireland, the EU, the UK and the US.
The Irish Revenue’s position on the tax treatment of employees who have found themselves “stuck” in Ireland or forced to work abroad due to the Covid-19 pandemic seems to be at odds with the OECD guidance on the topic. Many concessions in the Irish tax system in 2020 have not followed through to 2021 despite the continued impacts of the pandemic. Conversations continue to focus on compliance documentation and tax planning, as well as monitoring employees working location; the tax consequences are a key consideration underpinning all such conversations.
From a US perspective, in addition to companies monitoring their employees’ mobility and workforce issues, the importance of ensuring supply chains are fit for purpose is equally important; supply chain challenges have become more prevalent due to Covid-19. Many businesses have adapted their supply chains to survive and this often has raised tax and transfer pricing issues. Technology has been pushed to the fore, automation and leveraging data with the right technology is now a significant consideration.
In the UK, there is a greater focus on how businesses will work in the future with an increased reliance on a mobile workforce, flexibility in working practices and enhanced technology. All of these bring tax changes and new tax risks.
There have been significant changes to transfer pricing rules in the last two years unique to Ireland. Firstly, a key focus of discussions is on documentation and preparation to satisfy the new requirements. Secondly, the carve out for non-trading loan transactions is no longer available and ensuring certainty with regard to interest deductibility will be a challenge going forward. In addition, the lack of comparable benchmarking data due to the impact of Covid-19 can make the transfer pricing compliance process more difficult and challenging.
In the US market, many taxpayers see the current environment as an opportunity to obtain certainty. Tax authorities generally are increasing their capabilities in Mutual Agreement Procedures (MAP)[1] and Advance Pricing Agreements (APA)[2], both of which give taxpayers the certainty they seek when it comes to transfer pricing.
While the APA provides certainty to taxpayers and will continue to be so in the future, there is a word of caution - APAs agreed may not be fit for purpose due to COVID impacts on the transfer pricing landscape. Taxpayers have to decide between revisiting APAs with the relevant tax authorities or the impact on “not fit for purpose agreements”.
Broadly the OECD BEPS Pillar 1.0 proposals are a reform of the tax treatment of digital companies through the allocation of a greater share of companies’ profits to market/user jurisdictions, as opposed to the location of residency or control.
There is a view that OECD BEPS Pillar 1.0 proposals are likely to be more of a revenue raising measure than the Pillar 2.0 proposals[3]. It is recognised that it will be incredibly difficult to get a consensus on the OECD’s Pillar 1.0 proposals.
While the announcement by US treasury secretary Janet Yellen that the US will resume negotiations at the OECD on BEPS Pillar 1.0 is positive, it is recognised that digital services tax will impact many US companies given these companies have a digital presence in many jurisdictions.
Other reasons why the Biden administration is willing to negotiate at the OECD on Pillar 1.0 is possibly due to recognition that there are still pockets of low tax income in the US. Additionally, no one wants countries adopting unilateral Digital Service Tax measures or possible trade wars.
The UK already has a Digital Services Tax (“DST”) which the UK Government expects to repeal upon conclusion of OECD measures relating to Pillar 1 & 2. The impact of replacing a domestic DST with a Pillar 1 approach may not materially alter the UK tax take, depending on the design principles.
In Ireland, it is acknowledged that a certain amount of tax revenues will likely be lost should Pillar 1.0 be introduced. However, the recent multiple new jobs announcements by certain multinational companies indicates that Ireland remains an attractive location for foreign direct investment despite the changing tax landscape. Ireland’s updated Corporation Tax Roadmap published recently sets a clear direction for future Irish tax policy and this certainty is positive for FDI.
The EU has indicated it will push ahead with its own plans for a digital tax by June 2021 even though EU Finance Ministers have publicly stated they would prefer the EU to wait until negotiations take place at the OECD and a global consensus is agreed. EU initiatives and recent developments at the EU with the publication of DAC 7, meaning operators of online platforms will have to disclose certain information to tax authorities from 2023, indicate that the EU will not wait for the OECD.
OECD BEPS Pillar 2.0 proposes a global minimum effective tax rate. The US treasury secretary has also indicated that the US will take steps to align the US GILTI (Global Intangible Low-Taxed Income)[4] system with the Pillar 2.0 proposals. The big questions is if the US GILTI will become a country-by-country type tax. As part of any negotiations, the US may offer to amend GILTI and bring it in line with Pillar 2.0 proposals.
The UK continues to support both OECD Pillar 1.0 and 2.0 proposals at OECD level. The increase in the UK corporation tax rate from 19% to 25% from April 1, 2023 may indicate the first move in the end of the “race to the bottom” for many investment jurisdictions.
Recent developments and publicly stated targets by the OECD and EU have almost certainly set the path for further significant change in global tax over the coming years. The world is changing, business models are adapting and tax legislation will move, and must do so, to reflect this.
In summary:
[1] Mutual Agreement Procedure – where a taxpayer is subject to tax on the same income in Ireland and in a DTA country (other than in accordance with that DTA), the taxpayer has the right to request each jurisdiction to resolve the matter under a mutual agreement procedure.
[2] In general, a bilateral Advance Pricing Agreement is a binding agreement between two tax administrations and the taxpayers concerned. This is entered into by reference to the relevant double taxation convention. It governs the treatment for tax purposes of future transactions between associated taxpayers.
[3] For more information on the OECD BEPS proposals visit our website.
[4] GILTI refers to a category of income that is earned abroad by US controlled foreign corporations and is subject to special treatment under the US tax code. The GILTI is intended to prevent erosion of the US tax base by discouraging multinational companies from shifting their profits from easily moved assets, such as intellectual property (IP) rights, from the US to foreign jurisdictions with tax rates below US rates.
