The process of implementing ATAD starts with the release ofFinance Bill 2018, as some measures are required to become effective on 1 January 2019.
The following is a summary of some of the key changes.
CFC legislation
Ireland is required to introduce controlled foreign company (CFC) legislation for the first time, with effect from 1 January 2019.
CFC rules tax the profits of overseas subsidiaries before they are repatriated, representing a significant development for multi-national companies.
The ATAD provides member states with options in relation to the implementation of the CFC rules. Ireland has signalled its intention to elect for the option that broadly seeks to tax undistributed income arising from non-genuine arrangements.
Most multinationals will welcome this approach, and it is also the OECD-endorsed option. Helpfully, Ireland may also adopt relieving provisions, such as introducing a small profits and low-profit margin exemption.
Interest limitation
Also, 1 January is the implementation date for the ATAD’S fixed-ratio interest limitation rule (which essentially will limit a taxpayer’s interest deduction to 30% of their earnings before interest, tax, depreciation and amortisation).
However, member states can defer implementation to 1 January 2024, at the latest, where their existing rules are “equally effective” to the ATAD interest limitation provisions.
Ireland has notified the EU Commission of its intention to defer the implementation of the measures, arguing that our interest deductibility rules are “equally effective”.
However, the paper suggests a strict interpretation of “equally effective” by the commission, such that only a ratio-based approach is acceptable, and states that it is “unclear as yet if agreement will be secured in relation to the derogation”.
As the timing of the OECD’s work on interest deductibility may be accelerated, a consultation on the interest limitation ratio rule and the ‘linked’ issue of hybrids will be undertaken by the Department of Finance in Q3 of 2018 (anti-hybrid rules are designed to deal with the differences in tax treatment of an entity or instrument in two or more countries that results in no tax in both countries).
Exit tax
Irish tax legislation currently provides for an exit tax on companies transferring their tax residence out of Ireland, subject to an exemption.
However, the ATAD requires a much broader regime that will impose a tax charge on all unrealised gains of migrating companies and assets transferred abroad – including transfers between a head office and its branch – with an effective date no later than 1 January 2020. The ATAD does not contain an exemption.
The broadening of the exit tax rules, combined with our high rate of capital gains tax (33%), is unwelcome.
Helpfully, the paper notes that respondents to the Coffey consultation recommend that Ireland should reduce the rate of tax applicable to gains on the disposal of trading assets to 12.5%.
Losses
Another issue of particular interest to both indigenous and multinational companies will be the discussion on Ireland’s loss relief rules. Although the primary focus is on banks, it does reference a wider proposal that could limit the benefit of losses for all companies.
Other measures
The paper signals Ireland’s intent to complete the ratification process of the multilateral instrument before the end of the year.
The EU Commission’s ongoing work on the common consolidated corporate tax baseand digital tax is also referenced, noting Ireland’s commitment to engage in the commission’s work, despite its disagreement with the proposals.