Ireland’s Finance Bill would update transfer pricing rules, adopt anti-hybrid tax provisions

By Warren Novis, Head of Transfer Pricing, BDO Ireland

On 17 October, the Irish government published Finance Bill 2019, which contains legislation to enact tax measures taking effect primarily from 1 January 2020. The bill includes several provisions affecting multinational enterprises including new OECD-compliant transfer pricing rules and documentation obligations, anti-hybrid provisions, and increased taxation on investment in Irish property.

The publication of Ireland’s Finance Bill 2019 occurred approximately one week after the Irish government announced budget headline measures on 8 October.

Irish finance bills pass through review and amendment stages before a law is finalised as a finance act. This article highlights relevant observations for international business.

Finance Bill 2019 implements broad corporate tax measures affecting investment and activity in Ireland. Many tax measures adopt international standards resulting from the OECD/G20 base erosion and profit shifting (BEPS) project and the EU Anti-Tax Avoidance Directive (ATAD).

Ireland’s Department of Finance held consultations with business and other stakeholders during 2019 to develop Irish tax policy objectives for Finance Bill 2019. Consultations were held on transfer pricing, ATAD measures, R&D credits, carbon taxes, and employment and entrepreneur tax incentives.

Ireland transfer pricing update

Ireland’s transfer pricing legislation will now contain OECD-standard rules and require formal documentation. Finance Bill 2019 introduces fixed penalties for lack of documentation and tax-geared penalties for other non-compliance.

Further, the legislation extends transfer pricing rules to non-trading and capital transactions as well as to previously grandfathered arrangements in force before 1 July 2010. 

Last, small and medium-sized enterprises (SME) will soon be required to comply with transfer pricing rules for significant transactions and to prepare streamlined documentation. SME rules will take effect at a later date as this legislation is subject to a Commencement Order by the Minister of Finance.

Anti-hybrid, interest limits, withholding

The Irish government legislated anti-hybrid tax rules in-line with ATAD requirements. These rules prevent tax advantages from the exploitation of differences in tax treatment of certain financial instruments or legal entities. 

Finance Bill 2019 does not introduce a general interest limitation rule also mandated by ATAD.  Ireland must legislate the interest limitation rule by 2024.

The dividend withholding tax rate increases from 20% to 25%. Significant exemptions from dividend withholding tax remain through domestic legislation and Ireland’s double tax treaties.  The exit tax regime first adopted in 2018 was amended to correct minor aspects of the original legislation.

Real Estate

Finance Bill 2019 legislates targeted measures affecting investment in Irish property.  An Irish real estate fund (IREF) will be subject to income tax if the fund (or any sub-fund) is leveraged with debt exceeding 50% of its asset costs, and/or if the fund’s interest expense is greater than 80% of profits measured before interest.

Real estate investment trusts (REITs) must comply with new direct and capital gains tax rules.  Finally, stamp duty applicable to non-residential property transactions increases from 6% to 7.5% with effect from 9 October 2019.

Tax incentives

For employers, the Irish government extended special employee tax incentives to 2022. These include the Special Assignee Relief Programme (SARP) and Foreign Earnings Deduction (FED). These incentives, first introduced in 2012, reduce the cost incurred by Irish employers to employ individuals in certain circumstances.

Tax incentives for R&D are slightly improved. Smaller companies can claim a 30% tax credit (from 25%) and all claims can increase the amount of eligible outsourced expense to educational institutions to 15% of the overall claim (from 5%).

Brexit

On account of Brexit, Finance Bill 2019 revises multiple references to EU member states to include the UK. These amendments allow for individuals resident in the UK to retain existing tax benefit (e.g. reliefs, entitlements or exemptions) for when the UK formally leaves the EU.

Ancillary legislative change is common during the review and amendment stages. Businesses operating or investing in Ireland may wish to defer important, tax-dependent decisions until the legislative process concludes with Finance Act 2019.