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Tax Strategy Group | TSG XX/XX Title

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CORPORATION TAX

Tax Strategy Group – TSG 18/01 10 July 2018

Tax Strategy Group | TSG 18/01 Corporation Tax

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TSG 18/01

Tax Strategy Group – Corporation Tax Contents

Introduction ................................................................................................................. 3

Tax Trends ................................................................................................................... 5

Rainy Day Fund ................................................................................................................. 8

Implementation of EU Anti-Tax Avoidance Directives ................................................... 9

CFC Rules ......................................................................................................................... 10

Exit Tax ............................................................................................................................ 11

Anti-Hybrid and Anti-Reverse Hybrid Rules.................................................................... 12

Interest Limitation Rules ................................................................................................. 13

Other features of the Corporate Tax regime currently under review ........................... 15

Three Year Start-Up Relief .............................................................................................. 15

Film Tax Credit ................................................................................................................ 16

Loss Relief ....................................................................................................................... 18

Property Related Funds .................................................................................................. 21

Real Estate Investment Trusts .................................................................................... 21

Irish Real Estate Funds................................................................................................ 23

Recent International Developments ........................................................................... 27

BEPS Multilateral Instrument ......................................................................................... 27

Common Consolidated Corporate Tax Base - C(C)CTB ................................................... 28

Digital Taxation ............................................................................................................... 29

Common EU list of non-cooperative tax jurisdictions .................................................... 30

US Tax Developments ..................................................................................................... 30

Broader international tax debates.................................................................................. 31


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Introduction

1. Companies that are resident in the State, and non-resident companies which carry on

a trade in the State through a branch or agency, are liable to corporation tax. Ireland

operates a worldwide system of corporation tax – a company which is resident in

Ireland for tax purposes is subject to tax on its worldwide profits with credit given for

foreign tax paid on the same income. The rates of corporation tax are:

12.5% – applicable to trading profits calculated under Schedule D, Case I

and Case II;

25% – applicable to profits from certain land dealings, mineral and

petroleum activities and non-trading income such as investment income or

rental income; and

33% – applicable to chargeable gains.

An effective 6.25% rate may be applied to profits arising to certain intellectual

property assets which qualify for the Knowledge Development Box (KDB).

2. Ireland’s corporation tax regime is a core part of our economic policy mix and is a long-

standing anchor of our offering on foreign direct investment (FDI). The 12.5% rate,

which applies to a broad base, is internationally competitive and is notable for its long

term stability. Certainty, transparency and a commitment to open engagement with

stakeholders are cornerstones of the corporate tax regime.

3. 2013 saw a shift in the international tax landscape with the commencement of the

OECD Base Erosion and Profit Shifting (BEPS) project. The resulting BEPS reports,

published in October 2015, give countries the tools they need to ensure that profits

are taxed where economic activities generating the profits are performed and where

value is created. Ireland has been at the forefront in implementing the BEPS

recommendations on country-by-country reporting as well as introducing the first

OECD-compliant patent box, the KDB.

4. Ireland has also been to the fore in progressing multi-lateral tax reform at EU level,

through the agreement of the Anti-Tax Avoidance Directives (ATAD) and the Directives

on Administrative Cooperation (DAC). Work on transposition of these directives is

ongoing, as per the agreed schedules.

5. In addition to contributing to the agreement of new international standards for global

tax reform, Ireland has also been pro-active in taking steps at domestic level to ensure

that our corporate tax regime remains competitive and continues to contribute to


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employment and economic growth, while also meeting the newly-agreed

international tax standards.

6. Ireland commissioned an independent expert, Mr. Seamus Coffey, to carry out a

thorough review of our Corporation Tax Code and to make recommendations for any

reforms that may be needed. Mr Coffey delivered his review to the Minister for

Finance and Public Expenditure and Reform, Paschal Donohoe, on 30 June 2017. The

Review makes 18 recommendations under the terms of reference. In the review, Mr

Coffey noted that a number of the recommendations are very technical and complex

and will require further consultation. The Minister agreed with this approach as it

provides all stakeholders with an opportunity to provide input and better inform

policy making, and a public consultation was undertaken early in 2018 on a range of

matters relating to both the Coffey recommendations and ATAD implementation (the

Coffey/ATAD consultation).

7. It is important that these initiatives support an environment of certainty for

substantive business investment in Ireland. Research by the Economic and Social

Research Institute points out that a competitive corporate tax rate is a significant

factor in attracting FDI to Ireland, especially from countries outside the EU. This

research concludes that, in addition to maintaining a competitive corporate tax rate,

Ireland’s attractiveness to FDI would benefit from policies aimed at maintaining cost

competitiveness and enabling further Research and Development (R&D) investment.

Therefore, in the face of an ever evolving international tax landscape and recognising

the importance of certainty, it is imperative that Ireland maintains its commitment to

sustaining an attractive, stable corporate tax regime. This will allow us to compete

legitimately and to continue to promote genuine substantive investment in the State.


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Tax Trends 8. The yield from corporation tax over the last five years has been rising steadily, with

the yield for 2017 of €8,201m accounting for 16% of the overall tax yield.

Table 1 – Corporation Tax receipts 2013 to 2018*

*Estimated SPU 2018 Forecast Source: Revenue Commissioners

9. Corporation tax receipts in 2015 were €6.87 billion. This represented an increase of

€2.26 billion or 49% on the 2014 receipts. 2016 receipts of €7.35 billion represented

a year on year increase of €480 million (7%). 2017 receipts were €8.2 billion,

representing a year on year increase of €850 million or approximately 12%. These rises

confirmed that 2015 was not a one-off phenomenon but represents a sustained level

shift in corporation tax receipts.

10. In April 2018, the Revenue Commissioners published ‘Corporation Tax 2017 Payments

and 2016 Returns’1. The analysis demonstrates a €14.7 billion increase in trading

profits from 2015 to 2016 and a broad-based increase in profitability across most

sectors. 2016 also saw increases in capital investment as evidenced by a 30% increase

in capital allowances claims in respect of plant & machinery and a 24% increase in

respect of intangible assets. Improved trading conditions and increases of productive

capital stock have led to a higher level of profits and thus a higher tax yield.

11. Other factors behind the increases included:

Losses – a reduction of over 13,000 in the number of companies that carried

forward losses in 2016 as compared to 2015 (almost double the comparable

reduction in 2015 of over 7,900). This resulted in nearly €261 million in

increased receipts.

Additional companies – €594 million in payments was received from roughly

19,400 companies that did not pay corporation tax in 2015.

12. Companies had 2 million employments in 2016 (530,000 were in multinational

companies) with combined Income Tax, USC and PRSI payments for their employees

of €16.7 billion (€7.6 billion for multinationals’ employees).

1 https://www.revenue.ie/en/corporate/documents/research/ct-analysis-2018.pdf

Receipts 2013 2014 2015 2016 2017 2018*

Corporation Tax €4,270m €4,614m €6,872m €7,351m €8,201m €8,505m


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Table 2 – Trading Profits and Corporation Tax Paid by Sector 2015 and 2016

Sector Profits 2015 Profits 2016 Variance Var % Tax 2015 Tax 2016 Variance Var %

Manufacturing €55,406m €65,946m €10,540m 19% €1,818m €1,874m €56m 3%

Financial and Insurance Activities €27,004m €23,877m -€3,12702m -12% €1,601m €2,064m €463m 28%

Information and Communication €20,224m €22,989m €2,765m 14% €1,345m €1,226m -€119m -9%

Wholesale and Retail Trade €15,279m €14,284m -€996m -7% €1,139m €993m -€146m -13%

Administrative and Support Services

Activities

€13,347m €15,214m €1,866m 14% €122m €177m €55m 45%

Professional, Scientific and

Technical Activities

€4,185m €6,689m €2,504m 60% €230m €322m €92m 40%

Transportation and Storage €2,898m €3,459m €561m 19% €175m €243m €68m 39%

Mining and Quarrying, Utilities €1,663m €1,707m €45m 3% €102m €40m -€62m -61%

Construction €1,318m €1,531m €213.78m 16% €113m €153m -€40m 35%

Human Health & Social Work

Activities

€373m €394m €21m 5% -€8m -€15m -€7m -88%

Accommodation and Food Service

Activities

€784m €974m €190m 24% €58m €84m -€26m -45%

Real Estate Activities €396m €528m €132m 33% €92m €90m -€2m -2%

Agriculture, Forestry and Fishing €394m €446m €52m 13% €41m €39m -€2m -5%

Other Activities and Sectors €656m €749m €93m 14% €39m €54m €15m 38%

Total €143,926m €158,675m €14,748m 10% €6,872m €7,352m €480m 7%

Source: Revenue Commissioners; Note – Figures are rounded, therefore variance and total figures may appear different


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Table 3 – Corporation Tax Paid by Sector 2016 and 2017*

Sector 2016 2017 Variance

Variance

%

Manufacturing €1,874m €2,090m €216m 12%

Financial and Insurance Activities €2,064m €2,303m €239m 12%

Information and Communication €1,226m €1,368m €142m 12%

Wholesale and Retail Trade €993m €1,108m €115m 12%

Administrative and Support

Services Activities

€177m €197m €20m 11%

Professional, Scientific and

Technical Activities

€322m €359m €37m

11%

Transportation and Storage €243m €271m €28m 12%

Mining and Quarrying, Utilities €40m €45m €5m 13%

Construction €153m €171m €18m 12%

Human Health & Social Work

Activities 2

-€15m -€17m -€2m -13%

Accommodation and Food Service

Activities

€84m €93m €9m 11%

Real Estate Activities €90m €101m €11m 12%

Agriculture, Forestry and Fishing €39m €44m €5m 13%

Other Activities and Sectors €54m €60m €6m 11%

Total €7,352m €8,201m €849m 12%

*Sectoral trading figures for 2017 will not be available until Corporation Tax Returns are filed later this year. Source: Revenue Commissioners https://www.revenue.ie/en/corporate/information-about-revenue/statistics/receipts/receipts-sector.aspx

2 The negative figures are related to refunds of withholding tax

https://www.revenue.ie/en/corporate/information-about-revenue/statistics/receipts/receipts-sector.aspx

https://www.revenue.ie/en/corporate/information-about-revenue/statistics/receipts/receipts-sector.aspx


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Rainy Day Fund 13. The establishment of a Rainy Day Fund will play an important role in enhancing the

resilience of the public finances. The objective of the Fund is to build up our fiscal

reserves so that we have room for manoeuvre in the event of a major shock to the

economy in the future. The Government has committed that a certain level of current

tax receipts, including corporation tax receipts, will be set aside and can be drawn on

in the event of such a shock.

14. As announced in Budget 2018, it is proposed to capitalise the Fund in the coming year

with €1.5 billion from the Ireland Strategic Investment Fund. €500 million will be

transferred from the Exchequer each year commencing in 2019 with the aim that by

2021 the Fund will amount to €3 billion, reaching €8 billion over the medium term.


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Implementation of EU Anti-Tax Avoidance Directives 15. Following the publication of the BEPS reports in October 2015, a decision was taken

at EU level to introduce the Anti-Tax Avoidance Directive (ATAD) as part of a package

of measures aimed at ensuring a common and co-ordinated approach to the

introduction of the BEPS anti-avoidance measures.

16. The first ATAD, presented in January 2016 and agreed by all Member States in July

2016, provided for five separate anti-avoidance measures to be transposed on an

agreed schedule between 2018 and 2023.

17. Immediately following the agreement of ATAD1, work commenced on extending the

anti-hybrid provisions it contained to include mismatches involving third countries, in

addition to mismatches that arise in the interaction between the corporate tax

systems of EU Member States.

18. A Directive to amend the ATAD, referred to as ATAD2, was adopted in May 2017. It

expands the territorial scope of the ATAD to third countries, and also to address hybrid

permanent establishment mismatches, hybrid transfers, imported mismatches,

reverse hybrid mismatches and dual resident mismatches. The six measures and the

implementation timelines are set out in Table 4 below.

Table 4 – ATAD Measures and Implementation Deadlines

Article Provision Implementation Deadline

4 Interest limitation rule 1 January 2019 or, where national targeted rules

for preventing BEPS are equally effective, the end

of the first full fiscal year following agreement

between the OECD members on a minimum

standard with regard to BEPS Action 4, but at the

latest until 1 January 2024.

5 Exit Tax 1 January 2020

6 General anti-abuse rule

(GAAR)

1 January 2019

7 & 8 Controlled Foreign

Company (CFC) rules

1 January 2019

9 Hybrid Mismatches 1 January 2020

9a Reverse Hybrid

Mismatches

1 January 2022


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CFC Rules 19. Controlled Foreign Company (CFC) rules are an anti-abuse measure, designed to

prevent the diversion of profits to offshore entities in low or no tax jurisdictions.

Where CFC rules apply they have the effect of attributing the income of such an entity

to its parent company. Member States must introduce CFC rules, or bring existing

national CFC rules into alignment with the ATAD where relevant, by 1 January 2019.

20. CFC rules are often a feature of tax regimes with territorial elements, such as

participation exemptions. General CFC rules do not currently exist in Irish law,

therefore work is under way to introduce the required legislation in Finance Bill 2018

and is being informed by responses to the Coffey/ATAD consultation held early in

2018.

21. In broad terms, an entity will be considered a CFC under ATAD rules where it is subject

to more than 50% control by a parent company and its associated enterprises, and the

tax paid on its profits is less than half the tax that would have been paid had the

income been subject to tax in the hands of the parent company.

22. ATAD allows Member States to develop CFC rules to target entire low-taxed

subsidiaries, specific categories of income, or income which has artificially been

diverted to the subsidiary. Member States may choose one of two options to

determine whether the income of a CFC should be attributed to a parent company:

A. Option A attributes certain categories of undistributed passive income of a CFC

to the parent company.

B. Option B attributes undistributed income arising from non-genuine

arrangements put in place for the essential purpose of obtaining a tax

advantage.

23. Following consideration of the Coffey/ATAD consultation submissions received, it is

intended that Ireland will elect for the Option B approach when introducing CFC rules

in Finance Bill 2018. Consideration is now being given to additional elements of

optionality consequent on the Option B approach, including:

A. Whether to include the de-minimus derogations allowed under ATAD for:

i. entities with accounting profits of no more than €750,000, and non-

trading income of no more than €75,000;

ii. entities of which the accounting profits amount to no more than 10

percent of its operating costs for the tax period.


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B. ATAD allows for the use of white, grey or black lists of third countries in

determining the application of CFC rules to subsidiaries in those locations.

Should Ireland consider using such lists, and if so what criteria could be used?

C. ATAD CFC rules are not sufficient to target ‘cash box’ subsidiaries, cash/capital

rich companies with few or no employees in low tax jurisdictions where there

are no significant people functions in the State relating to the management of

those assets and risks. Should Ireland’s transposition exceed the ATAD

standard and develop measures to address such ‘cash box’ companies?

D. The purpose of CFC rules is to prevent businesses from structuring in such a

way as to divert otherwise taxable profits to a low/no tax location. Many

established CFC regimes therefore allow an exemption to provide a parent

company an exempt ‘grace period’ in respect of newly acquired CFCs (for

example subsidiaries acquired following the acquisition of another company or

corporate group) during which the parent can reorganise its business to

eliminate the CFC if desired. Should such a ‘grace period’ be allowed, and if so

for what period?

Exit Tax 24. The ATAD Exit Tax regime is designed to ensure that, where a taxpayer migrates its tax

residence out of a State while holding assets, or makes certain transfers of assets out

of a State, in circumstances where those assets have increased in value and therefore

hold an unrealised gain, the State will tax any capital gain which has accrued in its

territory even though the gain has not yet been realised at the time of exit.

25. Ireland currently has a limited Exit Tax regime which was introduced in 1997 as an

anti- avoidance measure. This was as a result of the identification of a number of

transactions whereby an Irish company migrated its residence to avoid the charge to

Irish Capital Gains Tax. The intention of the current regime was to influence behaviour

rather than to serve as a tax raising measure and it is understood that it has been

effective in this regard. The current exit tax is applied at the rate of capital gains tax,

currently 33%.

TSG Members are invited to comment on the transposition of CFC rules, including in

particular the options under consideration outlined in paragraph 23 above.


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26. The ATAD exit tax is significantly broader in scope and will impose a tax charge on all

unrealised gains of migrating companies / assets transferred abroad, irrespective of

any future intentions as to the disposal of the asset(s). Under the terms of the ATAD,

the current exit tax must be replaced by an ATAD-compliant exit tax regime to take

effect no later than 1 January 2020.

27. While the structure of the exit tax is prescribed by ATAD, the rate of the tax is a matter

for each individual Member State. Responses to the Coffey/ATAD consultation

focussed primarily on the rate to be applied in calculating the exit tax, with the

majority favouring a 12.5% rate for assets in use for the purposes of a trade.

28. There are indications that the widespread implementation of the BEPS reforms are

prompting multi-national corporations to re-consider their corporate structures and

to begin moving assets currently held in low-tax jurisdictions to onshore locations

where they have substantial presence, often in the US or the EU. In view of this long-

term planning, stakeholders have proposed that Ireland should consider making an

early announcement of the intended exit tax rate to allow companies to factor this

into their planning.

Anti-Hybrid and Anti-Reverse Hybrid Rules

29. These rules are intended to counteract tax mismatches where the same expenditure

item is deductible in more than one jurisdiction, or where expenditure is deductible

but the corresponding income is not fully taxable.

30. Following agreement of ATAD2, the territorial scope of the provisions was extended

to include also hybrid mismatches involving non-EU countries, and also to address

hybrid permanent establishment mismatches, hybrid transfers, imported mismatches,

reverse hybrid mismatches and dual resident mismatches.

TSG Members are invited to give their views on the introduction of an ATAD-compliant

exit tax.


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31. Implementation of these rules will be extremely complex. The text of the ATADs is

relatively brief and focusses on the high-level concepts agreed. It now falls to Member

States to draft the detailed legislation required to implement these concepts, and to

integrate it successfully with existing legislation. Responses to the Coffey/ATAD

consultation noted these measures as sufficiently complex and technical to require a

separate, detailed consultation process.

32. It is planned to launch a consultation paper considering both general and detailed

technical issues relating to the interlinked issues of hybrid entities/instruments and

interest in Q3 2018. Given the complexity of these issues, it is intended that the

consultation will be open for a period of c. 12 weeks, with a view to consideration of

submissions beginning post-Finance Bill 2018.

33. While anti-hybrid rules must be transposed by 1 January 2020, the deadline for anti-

reverse-hybrid rules is 1 January 2022, so it is likely that further consultation will also

be held in advance of this later deadline.

Interest Limitation Rules 34. Following from the Common Approach agreed in BEPS Action 4, ATAD requires

Member States to implement an interest limitation ratio, designed to limit the ability

of entities to deduct borrowing costs when calculating taxable profits. It is intended

to prevent the use of excessive leveraging and interest payments to shift profits to

other jurisdictions.

35. The ATAD interest limitation rule operates by limiting the allowable tax deduction for

‘exceeding borrowing costs’ (in broad terms, net interest costs) in a tax period to a

maximum of 30% of Earnings Before Interest, Tax, Depreciation and Amortisation

(EBITDA).

36. The general implementation date for the ATAD interest limitation rule is 1 January

2019, but a derogation is provided in Article 11 such that Member States having

national targeted rules for preventing BEPS risks which are equally effective to the

ATAD interest limitation ratio may defer implementation until agreement on a

TSG Members are invited to give their views on the proposed process for the

development of anti-hybrid and anti-reverse hybrid rules.


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minimum standard for BEPS Action 4 is reached at OECD level, but no later than 1

January 2024.

37. Ireland’s existing interest limitation rules are different in structure to the ATAD rule as

they are purpose-based tests designed to limit qualifying borrowings, supplemented

by extensive anti-avoidance provisions relating to connected party transactions. It is

our opinion, supported by case study data, that Ireland’s existing interest rules are at

least equally effective to the rules contained in the Directive, and a notification in this

regard has been filed with the European Commission.

38. Initial responses from the Commission to affected Member States indicate that a

stringent, ratio-based, approach is being taken to assessing whether national targeted

rules are ‘equally effective’ to the ATAD Article 4 provision. As the Irish targeted

national rules are structurally different to the ATAD EBITDA ratio rule and related

reporting requirements are designed to capture data relevant to our existing regime,

it is unclear as yet if agreement will be secured in relation to the derogation.

39. Furthermore, following recent US tax reform, the European Council recently proposed

corresponding with the OECD with a view to accelerating work on reaching agreement

for a minimum standard approach under BEPS Action 4, which would trigger an earlier

implementation date for the ATAD interest limitation rule than 1 January 2024 (even

where the derogation is availed of).

40. Introduction of the ATAD interest limitation rule will be a complex process. It will

require consideration of how the new EBITDA ratio will interact with Ireland’s existing

interest rules including whether they should be layered over, and/or replace parts of,

Ireland’s existing extensive anti-avoidance rules relating to interest. It will also require

careful integration with ATAD anti-hybrid rules which, inter alia, will relate to the debt

or equity treatment of a transaction.

41. It is therefore proposed to incorporate detailed technical consultation on the

introduction of the ATAD interest limitation rule with the hybrids consultation, to be

launched in Q3 2018.

TSG Members are invited to give their views on the proposed process for the

development of an ATAD compliant interest limitation rule.


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Other features of the Corporate Tax regime currently under review

Three Year Start-Up Relief 42. The three year corporation tax relief for certain start-up companies commenced in

2009. The objective of the relief is to provide support to new business ventures in their

critical early years of trading, thereby creating additional employment and economic

activity in the State and supporting the broadening of the corporate tax base.

43. The relief is granted by reducing the corporation tax payable on the profits of a new

trade and the gains on the disposal of any assets used for the purpose of this trade.

The relief is available in full to start-up companies with corporation tax payable of

€40,000 or less in an accounting period. Marginal relief applies where the corporation

tax liability is between €40,000 and €60,000. No relief is available to start-up

companies with a corporation tax liability of €60,000 or above.

44. From 2012 onwards, the quantum of relief is linked to the amount of Employers’ PRSI

paid by a company in an accounting period, subject to a maximum of €5,000 per

employee. The limit of €40,000 still applies, with marginal relief available for liabilities

between €40,000 and €60,000. This amendment to the relief was designed to make it

more employment focused.

45. From 2014 onwards, the relief was amended such that start-up companies may now

carry forward the relief if they incur a loss or do not have a sufficient amount of profits

and tax payable in any of the first 3 years of trading to avail of the full benefit. The

amount of relief available is still related to the start-up companies’ Employers’ PRSI

contributions in its first 3 years. This amendment increased the flexibility of the

scheme for new start-up businesses, which often do not make profits in their early

years.

46. As is best practice for measures of this nature, the scheme has a sunset clause to

prompt review and is currently due to expire at end-2018. A tax expenditure review

of the relief is currently being carried out. This review will make recommendations as

to whether the review should be extended in its current form, amended and then

extended, or allowed to expire. Consideration will be given to the relevance of the

relief, its cost, the uptake of the relief and its current objective.


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Film Tax Credit

47. The Scheme is intended to act as a stimulus to the indigenous film industry in the

State, creating quality employment opportunities and supporting the expression of

the Irish culture.

48. Prior to 2015, film relief took the form of an investor tax relief which provided an

incentive to individual and corporate taxpayers to invest in Irish film production.

Finance Act 2013 amended the scheme such that, rather than providing relief to

investors, from 1 January 2015 a payable tax credit of 32 per cent is payable directly

to a producer company. The tax credit reduces the corporation tax of the qualifying

period in respect of which the return filing date immediately precedes the application

for a film certificate. Where the tax credit exceeds the tax due for the qualifying period

(as reduced by the tax paid), the tax credit will be a payable credit.

49. The credit is limited to 32% of the lowest of:

a. eligible expenditure;

b. 80% of the total cost of production of the film; or

c. €70,000,000.

50. The minimum amount that must be spent on the production is €250,000 and the

minimum eligible expenditure amount to qualify is €125,000.

51. The relief also contains a requirement that the Minister for Culture, Heritage and the

Gaeltacht may include conditions in relation to employment of personnel, including

trainees, for the production of the film. Each production must employ two trainees

for each €355,000 of corporation tax credit claimed, up to a maximum of 8 trainees.

However queries3 have been raised as to the effectiveness of this measure in requiring

the provision of quality training to support the development of indigenous talent.

3 Parliamentary Question 59, 20 June 2017

TSG Members are invited to give their views on the potential extension of the relief; the

term of any extension; and any amendments to the current structure that should be

considered.


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52. In terms of administration, a Certificate is issued by the Revenue Commissioners but

both the Minister for Culture, Heritage and the Gaeltacht and the Revenue

Commissioners have specific responsibilities in relation to the certification process.

The Minister for Arts, Heritage and the Gaeltacht has responsibility to ensure that it is

appropriate for the Revenue Commissioners to consider the issue of a Certificate for

a film, having regard to –

The categories of film eligible for certification, and

The contribution a film will make to either or both the development of the film

industry in the State and the promotion and expression of Irish culture.

53. The Revenue Commissioners have responsibility to ensure that all other aspects of the

project, including the financial aspects, have the potential to satisfy the requirements

of the law. The Revenue Commissioners will not issue a Certificate unless they have

received an authorisation from the Minister for Culture, Heritage and the Gaeltacht

and they are satisfied with the other aspects of the proposal.

54. As a tax expenditure of the Taxes Consolidation Act 1997, Section 481 is subject to the

requirements of the Department of Finance tax expenditure guidelines and is required

to be reviewed periodically. Section 481 is currently subject to a review under the

guidelines due to be completed in July.

55. As is best practice for measures of this nature, the scheme has a sunset clause and is

currently due to expire at end-2020. However, in view of the long development period

associated with screen productions, stakeholders have requested that an early

decision be made in relation to the potential extension of the credit beyond that date.

TSG Members are invited to give their views on the potential extension of the relief; the

term of any extension; and any amendments to the current structure that should be

considered, including in particular changes to the training requirement. It should be

noted that this relief is an approved State Aid, therefore any changes to the regime

must comply with State Aid requirements.


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Loss Relief

56. The availability of relief for losses incurred in a business is a well-established feature

of corporation tax regimes. It recognises the fact that a business cycle runs over

several years, and that it would be unbalanced to tax profits in one year and not allow

relief for losses in another. Losses incurred in a trade are a fact of business life, and

the provision of relief for such losses is a standard feature of our tax code and that of

all other countries in the OECD.

57. Under existing loss relief provisions in the Taxes Acts, any unrelieved trading losses of

a company for an accounting period may be carried forward for offset against trading

income of the same trade in future accounting periods. Trading losses carried forward

may only be offset against future trading income of the same trade and not against

any other profits, passive income or gains. Unused trading losses may be carried

forward until they are fully offset or the trade ceases.

58. According to data provided by the Revenue Commissioners, the value of trading losses

carried forward fell by 1.7% at end 2016.

Table 5 – Trading Losses by Sector

Sector 2015 2016 Variance Variance %

Financial and Insurance

Activities €124,175m €112,796m -€11,379m -9.2%

Administrative and Support

Services Activities €37,966m €37,966m €1,654m 4.4%

Information and

Communication €10,534m €11,281m €747m 7.1%

Construction €9,999m €11,369m €1,370m 13.7%

Manufacturing €8,305m €8,857m €552m 6.6%

Transportation and Storage €8,382m €8,513m €130m 1.6%

Wholesale and Retail Trade €7,628m €7,991m €364m 4.8%

All Other Sectors €11,347m €14,158m €2811m 24.8%

Total €218,335m €214,585m -€3,751m -1.7%

Source: Revenue Commissioners


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59. While the Financial and Insurance activities sector has consistently had the highest

losses of any sector in recent times, there has been a reduction in both overall losses

in this sector and the share of losses concentrated in this sector. The value of losses

carried forward by the financial and insurance activities sector into accounting periods

ending in 2016 fell by more than €11 billion (-9%). While the losses in this sector are

still substantial, this highlights that corporate taxes losses are being significantly

utilised in this sector.

60. It is important to note that around €40 billion of losses brought forward (from the

€214 billion at end 2016) relate to companies that are in liquidation or are otherwise

unlikely to be in a position to ever use these losses. The bulk of such losses are

recorded by companies in the financial sector.

61. Approximately 90% of the losses forward claimed on 2016 returns were by companies

that had been claiming losses forward for five years or more.

62. The only substantial increases in trading losses carried forward were in administrative

& support services at €1.6 billion (+4.4 per cent), construction €1.3 billion (+13.7 per

cent) and in other sectors €2.8 billion (+25 per cent).

63. Banks are now subject to the same loss relief provisions as other corporate entities.

Prior to 1 January 2014, s.396C TCA 1997 imposed a 50% annual restriction on the

level of profits that NAMA-participating banking institutions could shelter using losses

carried forward. This restriction was removed in Budget 2014 in view of the State’s

subsequent acquisition of substantial shareholdings in the banks and the capital

requirements introduced under the Capital Requirements Directive IV.

64. It should be noted however that the State has also imposed a bank levy, in part to

recognise the fact that many of the banks would not pay corporation tax for many

years due to the level of losses carrying forward, and to ensure a level of current

revenues to the State. It generates an annual yield to the State of c.€150 million.

65. In response to questions on the matter, Minister Donohoe has noted that he does not

intend to change the treatment of losses for Irish banks and that he views the bank

levy as the appropriate method of ensuring the banks contribute to the Exchequer.

However, following a commitment during Committee Stage of Finance Bill 2017,

Department officials have prepared a paper for the FinPer Committee to examine in

further detail the possible consequences of changes to the treatment of tax losses in

respect of banks and/or all corporate entities.


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66. The paper examines three separate proposals:

A. Reintroduce the “NAMA” restriction for AIB and BOI (the remaining NAMA

participating institutions), or for the ‘bailed out’ banks (including PTSB).

B. Introduce a wider loss restriction to include all retail banks in Ireland.

C. Introduce a system of loss restrictions, such as a sunset clause, for all

companies.

67. The Department of Finance’s analysis indicates that the reintroduction of a restriction

focused on the banking sector would be likely to have a number of significant negative

consequences including:

A weakened capital position for each of the banks that the State has an

investment in, and particularly for PTSB assuming a mechanism could be

found to reintroduce the restriction to cover other ‘bailed out’ banks as well.

The valuation of the State’s investments would be materially impacted and

we have estimated this could be in excess of €400m.

Damage to the State’s credibility in international markets as investors

invested in the AIB IPO on the understanding that there were no plans to

change the policy with respect to tax losses.

68. Although the (re)introduction of a loss restriction measure on some or all of the

banking sector would generate additional corporation tax revenue for the State in the

short term4, it may also require re-consideration of the bank levy.

69. With regard to a broader restriction on loss relief for all companies, some other

jurisdictions apply a ‘sunset clause’ to limit the carry forward of losses and/or a

restriction on the amount of profits in any year that can be sheltered by losses.

However it must also be noted that in most cases these countries do not limit the

‘sideways’ offset of losses carried forward against other sources of income and gains.

Any proposal for a general restriction in loss relief carried forward would therefore

also need to consider the current position with regard to sideways loss relief.

4 The previous measure applied a 50% restriction on the amount of profits in any year that could be sheltered by losses, with the balance of the losses carried forward to future years. It therefore did not reduce the total relief for the losses, but rather extended it over a longer period.

TSG Members are invited to give their views on:

1. A loss-relief restriction focussed on the banking sector, and potential

consequential implications for the bank levy.

2. A wider loss-relief restriction for all companies, and potential consequential

implications for the nature of loss relief.


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Property Related Funds

70. During the course of the Committee Stage debate on Finance Bill 2017 it was agreed

that the 2018 corporation tax TSG paper would give consideration to the REIT and IREF

regimes for the taxation of property held by corporate entities / funds, with particular

reference to their impact on the residential property market.

Real Estate Investment Trusts

71. Section 41 of the first Finance Act of 2013 introduced the regime for the operation of

Real Estate Investment Trusts (REIT) in Ireland. A REIT is a quoted company, used as a

collective investment vehicle to hold rental property. There is a diverse ownership

requirement, so no one person or group of connected persons can control the REIT.

A REIT is exempt from corporation tax on qualifying income and gains from rental

property, subject to a high profit distribution requirement to shareholders i.e. the Irish

distribution requirement is 85% of property profits. They provide the same after-tax

returns to investors as direct investment in rental property, by eliminating the double

layer of taxation at corporate and shareholder level which would otherwise apply.

72. When the REIT regime was introduced, amongst the intended benefits listed included

the following:

Bringing new sources of capital into the Irish property market;

Reducing dependence on bank financing in the property market, and freeing up

available bank financing for use in other industries;

Facilitating collective investment in property, providing the benefits of risk

diversification to investors of all sizes; and

The promotion of professional management in the Irish property market.


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73. REIT investors are taxed as follows:

Irish Investors:

Individuals: Taxed at their marginal rates.

Corporates: Taxed at 25%.

Institutional portfolio

investors:

Generally exempt: pension funds, life policies,

investment undertakings (where an investment

undertaking is an Irish Real Estate Fund (deriving

25% or more of its value from Irish property) the REIT

dividend will form part of the IREF profits which may

be subject to a 20% IREF withholding tax).

Dividend Withholding Tax (DWT) at the standard rate of 20% is deducted by the

REIT from dividends paid to individual shareholders and is available as a credit

against tax liabilities.

Foreign Investors:

For all foreign investors, the REIT will withhold DWT at the standard tax rate of 20%.

Foreign investors resident in treaty countries may be able to reclaim some of this DWT

under the relevant tax treaty. Tax treaty rates on dividends vary from treaty to treaty,

but the most common rate applicable to small shareholdings would be 15% – this

means that Ireland would retain taxing rights of 15% on dividends paid from Ireland.

Other:

Where a REIT has not made reasonable steps to prevent a distribution being paid to

an investor who owns more than 10% of the shares in a REIT, the REIT is subject to

corporation tax at 25% on the amount of that distribution. This acts as a deterrent to

ensure that REITs are widely held.

74. REITs are listed companies, and are required to be listed on the main market of a

recognised stock exchange in an EU member state. They will therefore be obliged to

comply with European Directives including the Prospectus Directive, Transparency

Directive, Market Abuse Directive and the Markets in Financial Instruments Directive.

75. In addition, depending on the structure of a REIT and its management, a REIT may be

considered to be an Alternative Investment Fund for the purposes of the Alternative

Investment Fund Managers Directive which was introduced across the EU in July 2013.


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76. There are currently five REITs operating in the Irish market, two of which are active in

the residential property market. Records suggest that the majority of REIT investment

is focussed in the commercial sector.

77. Research undertaken by Revenue Statistics Branch using corporation tax returns and

Local Property Tax (LPT) payments estimated that the value of properties returned by

REITs on the LPT system is €387m. It should be noted however that this is the LPT

valuation and not the current valuation, and that property constructed from 2013 on

is not yet subject to LPT.

Irish Real Estate Funds

78. The Irish Real Estate Fund (IREF) regime was introduced in Finance Act 2016. The

legislation addresses concerns raised regarding the use of collective investment

vehicles to invest in Irish property. The investors had been using the structures to

minimise their exposure to Irish tax on Irish property transactions.

79. The key features of the regime are:

IREFs are investment undertakings (excluding UCITS) where 25% or more of the

value of that undertaking is made up of Irish real estate assets. Where the main

purpose of the fund is to invest in Irish property, this will also fall into the regime

regardless of the amount of property held.

Any rental income or development profits earned by the IREF will be included in

the calculation of the IREF's profits.

Where an IREF makes an actual distribution or on the redemption of units in the

IREF, non-resident investors will be subject to a withholding tax of 20%.

In line with provisions in the wider tax code, exemptions have been included

where the payments/redemptions are made to a pension fund, another

investment undertaking, life assurance fund and their EU equivalents. Charities,

credit unions and the NTMA are also exempt.

The new regime applies to accounting periods beginning on or after 01 January

2017.

80. Table 6 on the next page sets out the value of Irish real estate being held by Irish funds

as per Central Bank statistics. The data shows a considerable slowdown in the increase

in the level of Irish real estate being held by Irish funds since the introduction of the

IREF regime.


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Table 6 – Value of Irish Real Estate held by Irish Funds

Value of Irish Real

Estate Assets Held

by Irish Funds

Quarterly Increase

Quarter-on-

Quarter

% increase

31/03/2014 €2,662m n/a n/a

30/06/2014 €3,919m €1,257m 47%

30/09/2014 €4,838m €919m 23%

31/12/2014 €5,745m €907m 19%

31/03/2015 €6,020m €275m 5%

30/06/2015 €7,534m €1,514m 25%

30/09/2015 €7,904m €370m 5%

31/12/2015 €10,518m €2,614m 33%

31/03/2016 €10,897m €379m 4%

30/06/2016 €11,648m €751m 7%

30/09/2016 €11,921m €273m 2%

31/12/2016 €15,674m €3,753m 31%

31/03/2017 €15,931m €257m 2%

30/06/2017 €15,091m -€840m -5%

29/09/2017 €16,471m €1380m 9%

29/12/2017* €16,141m -€330m -2%

29/03/2018* €16,568m €427m 3%

Source: Central Bank of Ireland

* Correct as at 2/7/18 – data not yet final and may be subject to review

81. As noted above, as part of the Finance Act 2017 process, Minister Donohoe agreed

that officials would consider the impact of both REITs and IREFs on the Irish property

market in the 2018 Tax Strategy Group paper. However, due to the lack of availability

of data in relation to the recently-introduced IREF regime, it is not yet possible to carry

out a detailed assessment. The IREF regime is currently in its infancy and the first

returns are due to be filed by 31 July 2018. In order to improve the quality of data


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available, the Revenue Commissioners have requested detailed information as part of

the IREF return including classification of property held and location by region. An

example of the data request is set out in Appendix 1. Once received, these returns

should provide a basis on which to analyse the market impacts in greater detail.

82. Data is currently available from the Residential Tenancies Board which illustrates the

scale of large-landlord participation in the residential rental market. The following

tables 7 and 8 provide figures in relation the number of tenancies per landlord and

the amount of tenancies held by the top 20 landlords. This data demonstrates the

continuing preponderance of small landlords in the Irish market, with almost 70% of

landlords holding just one tenancy and over 91% holding three or fewer tenancies.

The top twenty largest landlords account for just 2.83% of total tenancies.

Table 7: Number of Tenancies per Landlord

No of

Tenancies

Individual

Roles

Company

Roles Total Landlords % of Landlords

1 120,485 3,375 123,860 69.71%

2 27,677 898 28,575 16.08%

3 9,975 416 10,391 5.85%

4 4,597 257 4,854 2.73%

5 2,491 188 2,679 1.51%

6 1,563 163 1,726 0.97%

7 1,022 116 1,138 0.64%

8 677 82 759 0.43%

9 521 70 591 0.33%

10 - 20 1,792 385 2,177 1.23%

20+ 541 386 927 0.52%

Totals: 171,341 6,336 177,677 100.00%

Source: Residential Tenancies Board


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Table 8 : Top-20 Landlords by Number of Tenancies (as of May 2017)

No. of

Tenancies

Registered

% of

Total

Tenacies

Type

No. of

Tenancies

Registered

% of Total

Tenacies Type

1 1,931 0.60% Company 11 283 0.09% Company

2 1,074 0.33% Company 12 276 0.09% Company

3 809 0.25% Company 13 270 0.08% Company

4 481 0.15% Company 14 263 0.08% Company

5 468 0.14% Company 15 261 0.08% Company

6 413 0.13% Individual 16 258 0.08% Company

7 378 0.12% Company 17 258 0.08% Company

8 362 0.11% Company 18 237 0.07% Company

9 354 0.11% Company 19 236 0.07% Individual

10 298 0.09% Company 20 231 0.07% Individual

Top 20 landlords – combined % of total tenancies 2.83%

Source: Residential Tenancies Board

TSG Members are invited to give their views on the REIT and IREF regimes.


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Recent International Developments

83. The last few years have seen significant developments globally on international

corporate tax reform. Ireland has been an active participant in, and supporter of, this

work through various international fora.

84. Ongoing work at international is twofold – work on the implementation of the various

BEPS recommendations and consideration of what further reforms may be needed to

ensure tax is paid where value is created.

BEPS Multilateral Instrument

85. On 7 June 2017, Ireland signed the ‘Multilateral Convention to Implement Tax Treaty

Related Measures to Prevent BEPS’. This convention, which is commonly referred to

as the ‘BEPS Multilateral Instrument’ has now been signed by 78 countries.

86. The Multilateral Instrument provides a mechanism for countries to transpose a range

of BEPS recommendations into their existing bilateral tax treaties. Some

recommendations are considered to be “minimum standards” which countries have

committed to, while others are recommended best practices that countries can

choose to adopt.

87. Ireland has 74 tax treaties and the Multilateral Instrument will enable Ireland to

update the application of the majority of these treaties to ensure they are BEPS

complaint without the need for separate bilateral negotiations.

88. The Multilateral Instrument must be ratified by Ireland before it comes into force. The

approach Ireland proposes to take to the various options in the Multilateral

Instrument will become binding on Ireland on foot of the ratification of the

Multilateral Instrument in Irish law. The application of Ireland’s tax treaties will be

modified where both Ireland and the relevant treaty partner have fully ratified the

convention in their domestic law.

89. Ireland took the first steps towards ratifying the Multilateral Instrument in Finance Act

2017 and will seek to complete the process before the end of this year. The

Multilateral Instrument will then start to have effect for Ireland from the beginning of

2020.


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Common Consolidated Corporate Tax Base - C(C)CTB

90. The European Commission re-launched its proposal on a Common Consolidated

Corporate Tax Base sometime on 25 October 2016.

91. The proposal takes a twostep approach – first Member States will seek to agree a

common corporate tax base (a CCTB) and only if agreement can be reached on this,

will discussions begin on agreeing the Consolidation of that tax base. The

Commission’s proposal is that the CCCTB would be mandatory for large companies

with group turnover of more than €750 million. It would also be open to smaller

companies to opt in to the CCTB and calculate their profits using the CCTB rules rather

than the Member States domestic tax rules.

92. A common corporate tax base (CCTB) would consist of agreed rules for how a company

calculates its taxable profits in each Member State. The Member State would then

apply its own tax rate to those profits. The CCTB is by necessity a very complex

proposal. Each Member State currently applies different rules in terms of what

income is taxable, what deductions are allowed, what credits are given etc.

93. The discussions between Member States to date have focussed on the CCTB proposal

Member States have yet to reach any consensus on what an appropriate common

base may look like. Member States are also attempting to examine what the impact

would be on their tax system if a common base was introduced.

94. The Department and the Revenue Commissioners are carrying out analysis of the CCTB

to identify the extent to which it would change the existing Irish tax base. Our initial

view is that the CCTB would narrow our tax base, and therefore result in less corporate

tax revenue being paid in Ireland. This primarily relates to the inclusion of additional

allowances and expenditures within the proposed CCTB and the fact that Ireland

would have to abolish two of our three corporate tax rates under a CCTB.

95. The third “C” in the proposal, Consolidation, relates to how profits are attributed to

each country in the EU. A CCTB would give countries common rules for how to

calculate profits but it would not impact on where the profits, and therefore taxing

rights, are attributed. Currently, Member States use transfer pricing rules to

determine how profits are attributable to each country. Transfer pricing looks at

where the real value adding activities happen and attributes a proportionate share of

the profits to those activities.


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96. Consolidation would replace the transfer pricing approach with a formula for dividing

profits among Member States. This formula would be based on where sales happen,

where staff are located and where a company’s assets are. Each corporate group’s

total EU taxable profits would be added together and divided among countries under

this formula. Each country would then tax the profits attributed to it at its own

corporate tax rate. Consolidation would not impact a country’s tax rate but would

have a significant impact on how much tax would be paid in each Member State. It is

inevitable that any consolidation formula that includes sales would disproportionately

impact the corporate tax receipts of small exporting Member States.

97. Under a consolidation regime, companies would file a single tax return for all their

activities in the EU through one tax authority, rather than having to file a tax return in

every country where they have a taxable presence.

98. In line with the commitment in the Programme for Government, Ireland is engaging

constructively with this proposed reform while critically analysing the proposals and

considering whether it is in Ireland’s long term interests. Unanimity will be required

before any proposal on CCTB or CCCTB is adopted.

Digital Taxation 99. A major area of focus for international tax reform is the question of where digital

companies should pay tax.

100. On 21 March the European Commission published two proposed Directives which

seek to tax certain digital activities differently within the EU. One, a ‘temporary’

solution for a 3% levy (called the Digital Services Tax) on turnover from certain digital

service activities. The second, "comprehensive solution" requires an overhaul of

international taxation, establishing the concept of a "digital permanent

establishment", allowing countries taxing rights over the digital business carried out

by a company in that country, even where that company has no physical presence

there.

101. If adopted in its current form, the Digital Services Tax proposals would result in a

significant shift in how corporate tax is paid and may have unanticipated negative

consequences for EU Member States and companies. Therefore it is important that

these proposals are properly considered and analysed.


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102. On 15 May, both Dáil and Seanad Éireann issued reasoned opinions to the European

Commission that both digital tax proposals were in breach of the principle of

subsidiarity.

103. Ireland will continue to actively engage on these matters with our fellow Member

States and the related debate ongoing at OECD level so that we have a system of

international taxation which is appropriate to meet the challenges and opportunities

that arise from the digitisation of the economy.

104. Ireland is committed to working with our international partners to reaching a fair and

appropriate solution to the ongoing work digital tax which ensures that tax is paid

where real value creating activities take place. The Department will seek input from

various stakeholders as appropriate as part of this ongoing analysis.

Common EU list of non-cooperative tax jurisdictions 105. At EU level, a common list of non-cooperative tax jurisdictions was agreed before the

end of 2017.

106. The listing was based on criteria agreed by Member States. These criteria focus on

compliance with international standards on tax transparency and harmful tax

practices and on a country’s commitment to the OECD BEPS process.

107. An additional criterion also requires that countries with a zero, or almost zero, tax rate

should be subject to further scrutiny. This work is still ongoing with a view to reaching

decisions on whether individual zero tax countries should be listed by the end of 2018.

108. Discussions are also underway in the Code of Conduct Group as to what ‘defensive

measures’ Member States may apply against countries that are included on the list.

US Tax Developments 109. US tax reform was agreed at the end of 2017. The key changes made, from an

international tax perspective, were:

A reduction in the US corporate tax rate to 21% from 35%

A one-off ‘repatriation tax’ on existing overseas profits of US multinationals. The

proposed rate will be either 8% or 15.5% depending on whether the profits had

been invested or were held in cash.


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A move from a worldwide tax system which taxes US companies on their global

activities to a territorial system which would only tax US companies on their

activities that take place in the US.

The introduction of two novel anti-avoidance provisions – the GILTI and the BEAT.

The GILTI measure is aimed to ensure that US headquartered groups must pay a

minimum rate of tax of 13.125% on their foreign profits or else they will have to

pay some US tax on a current year basis. The BEAT applies additional tax where

large US based MNCs make large tax deductible payments from the US to a non-US

group company.

110. While companies still working through the potential impact of US tax reform, the

changes have not resulted in the relocation of existing activities out of Ireland by US

MNCs. While the competitive balance between the US and Ireland has shifted, Ireland

remains highly attractive as a location for US companies to invest in and trade from.

US business will also still want to locate substantial operations within the European

Union to benefit from access to the EU Single Market.

111. Our initial analysis is that the anti-avoidance measures introduced should have a

major impact on the ability of US MNCs to engage in aggressive tax planning practices.

Where a US MNC pays less than 13.125% of tax on its non-US profits, it will have to

pay additional US tax on a current year basis. This change could significantly reduce

the incentive for US companies to engage in aggressive tax planning practices.

Broader international tax debates

112. In addition to the items above, there are broad themes that continue to be discussed

between countries on international tax. Broad issues including what type of tax

measures constitute harmful tax competition between countries and how best to

adapt tax rules for the modern world remain under discussion in various international

fora. Ireland remains committed to having a global international tax framework that

ensures tax is certain, sustainable, internationally agreed and that ensures that tax is

paid where value is created.

113. In this context, there is also of course debate around the role of the EU State Aid

regime and taxation. There have been a number of tax and State Aid decisions made

by the Commission in respect of Ireland and other EU Member States which are only

now being considered by the EU courts. In the specific Irish context it is worth nothing


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that an agreement to recover the alleged State Aid was concluded between Ireland

and Apple in April 2018. The recovery process is well underway with an expected

completion date of end of Q3 2018. Consideration of the legal issues in the Apple case

may commence before the end of 2018.

115. The Tax Strategy Group may wish to consider these issues.


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Appendix 1

tsg template draft€¦ · employment and economic growth, while also meeting the newly-agreed...

Documents