IRISH LEGISLATION PASSED SINCE THE AUTUMN HORIZON TRACKER
Finance Act 2022
Date signed into law: 15 December 2022
The Finance Act 2022 included a number of amendments previously announced as part of Budget 2023, including:
- Research and Development (“R&D”) tax credit: The existing R&D tax credit is amended to ensure that it is a qualifying refundable tax credit for Pillar Two and US foreign tax credit purposes. The amendments are timing changes and do not affect the quantum of credit that a company is entitled to claim. A company will now have an option to request payment of the credit in a three year fixed payment schedule without offsetting it against other tax liabilities first. Existing caps on the payable element of the credit are also being removed. The new regime was introduced with effect for accounting periods commencing on or after 1 January 2022. Transitional measures will be in place for one year to assist the transition to the new payment system for companies that are already engaged in R&D activities.
- Knowledge Development Box (“KDB”): The KDB will be extended to accounting periods commencing before 1 January 2027 and the effective rate will be increased by ministerial order to 10% (from 6.25%) to align with the Pillar Two ‘subject to tax rule’.
See here for further discussion on the legislative amendments in relation to Pillar Two and here for further details of the amendments to the R&D tax credit.
Latest stage: Whole act commenced.
EU DIRECTIVES IMPLEMENTED IN IRELAND
Directive amending Directive 2011/ 16/ EU on Administrative Co-operation in the Field of Taxation ("DAC7")
Date published: 22 March 2021
This directive amends the existing rules (Directive 2011/ 16/ EU) on exchange of information and administrative co-operation and extends the EU’s tax transparency rules to digital platform operators. It requires new reporting obligations for digital platform operators in respect of revenues generated by sellers carrying out certain activities on digital platforms and automatic exchange of the information for tax authorities in Member States. The first reporting obligation for digital platform operators will arise on 31 January 2024. The directive also makes amendments with respect to joint audits from 1 January 2024.
Transposition date: Finance Act 2021 transposed the directive into Irish law. However, the relevant section has now been repealed and replaced in its entirety by Finance Act 2022 to ensure that the DAC7 rules are effectively implemented into Irish law.
IRISH PROPOSED LEGISLATION
Taxation and Certain Other Matters (International Mutual Assistance) Bill
This bill will transpose elements of the OECD Mutual Convention on Administrative Assistance and the EU / Switzerland Anti-Fraud Agreement.
Latest stage: Heads of Bill have been approved. Pre-legislative scrutiny has been waived.
Finance (Tax Appeals) Bill 2022
To amend the Finance (Tax Appeals) Act 2015 to allow for the appointment of non-temporary Commissioners with different tiers of responsibility and potential amendments to address the Supreme Court decision in Zalewski v An Adjudication Officer & Ors  IESC 24.
Latest stage: Heads of Bill being prepared.
EU DIRECTIVES AWAITING IMPLEMENTATION
Directive on the level of Taxation for Multinational Groups in the Union
Date published: 22 December 2022
In line with the OECD agreement on a two pillar solution to address the tax challenges arising from the digitalisation of the economy (the "OECD Agreement"), the EU published a directive to implement Pillar Two of the agreement, namely the measures to ensure a global minimum level of taxation for multinational groups. The objective of this directive is to impose a minimum effective tax rate of 15% on multinational groups above a certain size threshold.
The Pillar Two rules encompass two sets of rules: (i) the “GLoBE” rules (including the ‘income inclusion rule’ and the ‘undertaxed payments rule’); and (ii) the subject to tax rule. This directive proposes to implement only the “GLoBE” rules, with the subject to tax rule to be implemented in a later model treaty provision. The EU implementation of the “GLoBE” rules extends their scope to purely domestic groups of the requisite scale, to ensure compliance with the fundamental freedoms.
As provided in the OECD Agreement, the directive will only apply to entities located in the EU that meet the annual threshold of at least €750 million of consolidated revenue in at least two of the four preceding years, and certain exclusions set out in the OECD Agreement are carried over into this directive. The directive also extends the application of the ‘income inclusion rule’ to purely domestic groups established in a Member State if they reach the €750 million threshold in line with the EU’s fundamental freedom of establishment.
Transposition date: Member States are to transpose the provisions of the directive by 31 December 2023 and apply these provisions for accounting years starting on or after 31 December 2023 except the ‘undertaxed payments rule’, which will apply for accounting years starting on or after 31 December 2024. Ireland plans to implement the directive, together with a “Qualified Domestic Minimum Top Up Tax”, in this year’s Finance Bill (to be published in October 2023).
Directive amending Directive 2006/112/EC as regards Rates of Value Added Tax
Date published: 6 April 2022
Under this directive, the existing EU rules (Directive 2006/ 112/ EC) on setting reduced rates of VAT are amended and Member States are granted more freedom in setting VAT rates (provided that the average weighted rate exceeds 12%) and to what they apply. In addition a list of goods and services has been agreed to which reduced rates cannot apply.
Transposition date: 31 December 2024.
Directive on Introducing Certain Requirements for Payment Service Providers
Date published: 2 March 2020
Under this directive (amending Directive 2006/ 112/ EC) payment service providers will be required to keep records in respect of cross-border payments made to payees who receive a relatively high volume of cross-border payments. Payment service providers will make these records available to EU tax authorities. The directive is intended to facilitate tax fraud detection by EU tax authorities.
Transposition date: 31 December 2023
Public Country by Country Reporting: Directive on Disclosure of Income Tax Information by Certain Undertakings and Branches
Date published: 1 December 2021.
Under the terms of the directive on public country-by-country reporting (“CBCR”), multinational corporate groups with consolidated group revenue in excess of €750 million for each of the last two consecutive financial years, and which are active in more than one EU jurisdiction, will be required to publicly report certain information, including their employee headcount, revenue (from related and unrelated parties), pre-tax profit, income tax accrued and income tax paid on a country-by-country basis for each Member State.
Companies will also be required to report this information for certain “third countries”, ie, each country that is listed on the EU blacklist or that has been listed for two consecutive years on the EU grey list. Information in respect of all other third countries can be compiled on an aggregated basis and provided as a single line item.
EU branches of undertakings located outside the EU can also trigger a reporting requirement where their parent undertaking satisfies the €750 million revenue threshold. Where the parent of a multinational group is established outside the EU, a reporting obligation will arise where an EU subsidiary constitutes a “medium” or “large” undertaking, as defined in the EU Accounting Directive 2013/ 34/ EU. Broadly, this means that a multinational group will be required to file a CBCR report where it has an EU subsidiary that exceeds at least two of: a balance sheet of €4 million; net turnover of €8 million; or average number of employees of 50 during a financial year.
The directive provides for a ‘safeguard clause’ whereby certain business-sensitive information can be temporarily omitted from public disclosure. Any such omitted information must be published within five years of its original omission. However, information concerning tax jurisdictions listed on the EU blacklist may not be omitted. The safeguard clause (along with a number of other clauses) will be reviewed as part of a planned wider review of the impact and effectiveness of the directive which it has been agreed will be completed by 22 June 2027.
The information must be made accessible to the public free of charge on the website of the relevant undertaking. The information must be made available for a minimum of five consecutive years. The European Commission intends to provide a common template which must be adopted when making a CBCR report. The CBCR report must be published within 12 months of the balance sheet date of the relevant financial year. In-scope multinational corporate groups with a 31 December year-end will need to publish this information on the group’s website in respect of the 2025 financial year (ie, the first reportable financial year for companies with a 31 December year-end) and by December 2026 (ie, the first reporting deadline for companies with a 31 December year-end).
Transposition date: This directive was approved and came into force on 21 December 2021. Member States must transpose the directive into national law by 22 June 2023 with reporting requirements applying for all financial years starting on or after 22 June 2024. The Irish Department of Enterprise, Trade and Employment carried out a consultation on the implementation into Irish law in Q1 2021. A policy position paper is under consideration following on from the consultation and the transposition deadline of 22 June 2023 is expected to be met.
Published Initiative on Business in Europe: Framework for Income Taxation (BEFIT)
In line with the Commission Communication on Business Taxation for the 21st Century (the “Commission Communication”) adopted on 18 May 2021, the Commission launched an initiative on 13 October 2022 to introduce a common set of rules for EU companies to calculate their taxable base while ensuring a more effective allocation of profits between EU countries, based on a formula. Under the BEFIT proposal profits of the EU members of a multinational group will be consolidated into a single tax base. The proposal will feature a different apportionment formula from the prior proposals (CCCTB and CCTB) to better reflect global developments, in particular by taking account of digitalisation.
Latest stage: The Council has not adopted the CCCTB or CCTB proposals to date and the Commission Communication states these proposals will be withdrawn and replaced by BEFIT. A public consultation concerning the BEFIT proposal closed on 5 January 2023, and it is expected that a proposal will be adopted by the Commission in Q3 2023.
Published Initiative on Withholding Taxes – New EU System to Avoid Double Taxation
The Commission launched an initiative in September 2021 to introduce a common EU-wide system for withholding taxes on dividend or interest payments, including a system for tax authorities to exchange information and co-operate with each other. It is stated that this initiative aims to tackle the burdensome withholding tax relief procedures for cross-border investors in the securities market. The within scope stakeholders of this initiative are primarily cross-border portfolio investors.
Latest stage: The public consultation closed in June 2022. The proposal for a directive was expected to be published in Q4 2022 but has not yet been published.
EU DRAFT LEGISALTION
Published Initiative on Proposed Amendment to Directive on Administrative Co-operation
Procedure reference: 2022/0413/CNS
Date published: 8 December 2022
The Commission launched an initiative in Q4 2020 regarding the eighth amendment to the Directive on Administrative Co-operation (“DAC8”). The DAC8 proposals seek to strengthen existing rules and expand the exchange of information framework to address tax issues related to cryptocurrency and e-money.
Latest stage: The Commission adopted the initiative on 8 December 2022. The draft text for DAC8 has been submitted to the European Parliament for consultation and the Council for adoption. It is expected that DAC8 will apply from 1 January 2026.
Proposal for a Directive on Pillar One of the OECD Agreement
Procedure reference: TBC
Date published: TBC
The Commission has stated that a directive for implementing the provisions in Pillar One of the OECD Agreement, namely the reallocation of taxing rights on multinational enterprises with a global turnover exceeding €20 billion, will be proposed.
Broadly, Pillar One aims to re-allocate profits of the largest and most profitable multinational enterprises to the jurisdictions where the customers and users of those enterprises are located. The proposal also aims to remove and standstill the patchwork of independent national digital services taxes and other similar measures which are being adopted in an ever-increasing number of jurisdictions. In practical terms, Pillar One places multinational enterprises with a global turnover above €20 billion and profitability above 10% in-scope.
It will function by creating a new ‘special purpose’ nexus rule which results in the allocation of what is referred to as ‘Amount A’ to any market jurisdictions in which that multinational enterprise derives at least €1 million in revenue. Extractives and regulated financial services are excluded from the scope of Pillar One.
The threshold for the special purpose nexus rule (which applies to determine whether a jurisdiction qualifies for the Amount A allocation) is lower for smaller jurisdictions with GDP lower than €40 billion. This includes jurisdictions such as Malta, for example, where the threshold has been set at €250,000. Pillar One will use a revenue-based allocation key which will allocate 25% of the ‘residual profits’ (defined as profit in excess of 10% of revenue) to market jurisdictions which fall within the parameters of the special purpose nexus. A second amount, ‘Amount B’, aims to use the arm’s length principle to standardise remuneration received by related party distributors engaged to perform baseline marketing and distribution activities for those multinational enterprises. The Commission has proposed to allocate15% of the residual profits, which would be reallocated to Member States under Pillar One, to the EU budget.
The existing proposed directives on Digital Services Taxes (procedure references 2018/0072 (CNS) and 2018/0073 (CNS)) will be withdrawn, as per the Commission’s Communication. However, the Directive on the level of Taxation for Multinational Groups in the Union (Pillar Two) includes a provision requiring the Commission to submit a report to the Council by 30 June 2023 assessing the situation regarding the implementation of Pillar One internationally and, if appropriate, the Commission will submit a legislative proposal in the absence of the implementation of the Pillar One solution.
Latest stage: The Progress Report on Amount A of Pillar One prepared by the OECD Secretariat was published in July 2022 and sets out a new timeline for Amount A to enter into force in 2024. Therefore, publication of this proposed directive has been delayed into 2023.
Proposal for a Directive laying down rules to prevent the misuse of shell entities for tax purposes
Procedure reference: 2021/0434 (CNS)
Date published: 22 December 2021
The purpose of this legislation is to prevent the misuse of shell companies for tax purposes, amending Directive 2011/ 16/ EU. The legislation will tackle legal entities of minimal substance which do not perform any economic activities and are used for the purposes of tax avoidance and evasion.
The directive sets out three ‘gateway’ criteria to identify shell entities. Entities that meet all three gateway criteria are required to report on whether they meet the minimum substance requirements through their annual tax returns. If an entity does not meet all of the minimum substance requirements (or does not provide sufficient documentary evidence) it will be classified as a shell entity and will be denied access to tax treaties and denied tax benefits under the Parent-Subsidiary and Interest and Royalties Directives.
Certain entities are excluded from the proposed directive, such as listed companies, regulated financial undertakings, domestic holding entities and entities that have at least five full-time employees exclusively carrying out income-generating activities. An entity can also be exempted if it can prove that there is no tax advantage arising from its use.
Latest stage: The Commission proposed this directive in late 2021. The European Parliament has now approved the Commission’s draft directive. It is currently subject to discussions within the Council where it must be approved unanimously before it can be adopted into EU law. It is intended that the directive will come into force as of 1 January 2024.
Proposal for a Directive laying down rules on a debt-equity bias reduction allowance and on limiting the deductibility of interest for corporate income tax purposes ("DEBRA")
Procedure reference: 2022/0154 (CNS)
Date published: 11 May 2022
The proposed directive seeks to introduce two new tax measures: (i) an ‘allowance on equity’ that would provide a tax deduction to taxpayers that increase their equity capital compared to their previous tax year and (ii) a proposal to further refine the existing interest limitation rule. DEBRA is proposed to apply to all taxpayers subject to ‘corporate income tax’ in EU Member States. A number of exclusions are proposed, including exclusions for AIFs, UCITS, AIFMs, credit institutions, insurance undertakings, certain securitisation entities and other taxpayers.
Latest stage: The proposal is currently in discussions within the Council. The directive has a target implementation date of 1 January 2024.
Read more: Matheson Insight Article on the DEBRA directive.
Proposal for a Council Directive amending Directive2006/ 112/ EC as regards the Introduction of the Detailed Technical Measures for the Operation of the Definitive VAT System for the Taxation of Trade between Member States
Procedure reference: 2018/0164 (CNS)
Date published: 25 May 2018
This proposal, if adopted, would significantly change the existing VAT system as it applies to business to business (“B2B”) transactions involving cross-border supplies of goods, implementing a destination basis to such supplies. That change would also require changes to the place of supply rules for B2B transactions. In addition, the Mini One Stop Shop system which currently is available to suppliers in respect of certain business to consumer transactions would be extended to apply to B2B transactions. Finally, the proposal would introduce a new concept of ‘certified taxable person’ which could alter the person accountable for VAT on certain supplies.
Latest stage: On 12 February 2019, the European Parliament voted in plenary to adopt the proposal with amendments. The Council has yet to adopt the proposal. Discussion on this proposal is on-going at working party level.