International developments continue to drive the Irish tax policy agenda. In the first half of this year attention was focused on the OECD negotiations on Pillar One. It was originally intended that those negotiations would complete in 2023 but an extension to the end of June 2024 has been agreed. Whether or not those negotiations can be successfully concluded will impact the international tax agenda for the rest of this year. If the jurisdictions comprising the Inclusive Framework on BEPS ("Base Erosion and Profit Shifting") can successfully conclude their negotiations on Pillar One, we should expect to see a proposal for a European directive to implement the agreement in the EU. The Commission has committed to implementing the OECD's Pillar One proposal by 1 January 2025. However, if negotiations fail, the international tax framework is likely to be further destabilised as jurisdictions will be expected to revisit proposals for digital services taxes and similar unilateral measures. The European Parliament has expressed interest in introducing a digital levy in the event Pillar One cannot be agreed. Any such developments are likely to provoke the US into taking retaliatory action (ie, the imposition of trade tariffs). The outcome of the negotiations cannot be predicted at this stage, but it will significantly influence international tax developments in the second half of the year.
For other EU tax developments, timing is important. The Commission's term is coming to an end and elections to replace the current European Parliament took place in June. This means that the EU priorities on tax matters may be redrawn over the coming months. Formalising the agreement on the FASTER Directive is likely to remain high on the agenda along with finalising the VAT in a digital age package. The current Commission remains keen to make progress on ATAD 3 (also known as the 'Unshell Directive') given that proposal was made over two years ago. However, discussions with Member States have been fraught despite a number of compromise versions of the proposal being issued. It seems likely that if an agreement can be reached on ATAD 3, it will be on a less ambitious version than the proposal made by the Commission in 2021. Other European tax files that are further from agreement (eg, BEFIT and the Transfer Pricing Directive) may be revisited by the next term of the Commission.
Beyond international and EU tax developments, we can expect other changes in Irish tax law in 2024. Work is on-going on the development of an Irish participation exemption for foreign dividends. A public consultation was held in the first half of 2024 on the design of the exemption and a further public consultation will be held over the summer months. It is anticipated that the forthcoming public consultation document will confirm the architecture of the participation exemption and will contain draft legislation. A public consultation on the introduction of a foreign branch exemption is expected later in the year.
KEY THEMES IN TAX
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: Work is ongoing.
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 [2021] IESC 24.
Latest stage: Heads of bill being prepared.
Finance Bill 2024
Every year, the Minister for Finance issues a budget statement outlining the proposed public spending for the following year and changes to Ireland's tax laws. The budget statement for 2025 is expected in October 2024 (although a November election could accelerate this timetable). Finance Bill 2024 should be issued in the week following the budget statement and will include legislation to implement the announced tax policy changes.
One of the key anticipated changes in this year’s Finance Bill is the introduction of a participation exemption for foreign dividends. In April 2024, the Department of Finance issued a public consultation document on the design of the participation exemption. On 8 May 2024, Matheson made a submission responding to that public consultation and suggested how it might be improved. The Department of Finance has confirmed that once they have had an opportunity to reflect on the submissions received, they will issue a further consultation document which is expected to include draft legislation. That document is expected during the summer months.
The Department of Finance has also confirmed that a public consultation on the introduction of a foreign branch exemption will be issued in the second half of 2024.
Latest stage: Expected in October 2024.
EU LEGISLATION IMPLEMENTED
Directive on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union
Date published: 22 December 2022
In line with the OECD / G20 agreement on a two pillar solution to address the tax challenges arising from the digitalisation of the economy, the EU published the EU Minimum Tax 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 with an annual global turnover exceeding €750 million in at least two of the preceding four years.
The directive was transposed into Irish law in Finance (No.2) Act 2023. The two main charging rules under Pillar Two to ensure the minimum effective tax rate of 15% is paid on a jurisdictional basis where a group operates are the income inclusion rule ("IIR") and the undertaxed profits rule ("UTPR"). The IIR, introducing a top-up tax, applies for accounting periods beginning on or after 31 December 2023. The UTPR, which applies a top-up tax where an IIR is not applicable, is to come into effect one year following the IIR for accounting periods beginning on or after 31 December 2024. Ireland has also introduced a qualified domestic top-up tax ("QDTT") to ensure collection of any top-up tax from in-scope domestic entities before the IIR or UTPR would apply in another jurisdiction. The QDTT has been designed with a view to obtaining safe harbour status such that a multinational group can exclude the group entities subject to the QDTT when calculating the IIR and UTPR in another jurisdiction.
Transposition date: The directive was transposed into Irish law by Finance (No.2) Act 2023 and the relevant legislation is set out in Part 4A of the Taxes Consolidation Act 1997.
Regulation on Carbon Border Adjustment Mechanism (CBAM)
Date published: 16 May 2023
The EU’s Carbon Border Adjustment Mechanism (CBAM) aims to promote lower carbon manufacturing and industrial processes and to tackle the challenges posed by climate change. The CBAM puts a fair price on the carbon emitted during the production of carbon intensive goods entering the EU, with a view to encouraging cleaner industrial production in non-EU countries. The objective of CBAM is to prevent carbon leakage from the EU, which occurs when businesses move their production to countries with lesser emission constraints than the EU. This regulation is directly effective and Revenue have published a guide on the practical aspects of the implementation of CBAM (see here).
Implementation: The implementation of the CBAM commenced on 1 October 2023 and the transitional phase will continue until 2026. Since 1 January 2024, importers of CBAM goods are obliged to register on the CBAM transitional registry and file quarterly reports of CBAM imports. CBAM applies to iron, steel, aluminium, cement, electricity, fertilisers and hydrogen that are produced outside the European Union (EU). During this transitional phase, importers of CBAM goods have a quarterly information reporting obligation under CBAM. For example, the April-June 2024 reporting period submission is due by 31 July 2024, with modifications possible until 30 August 2024. The report is submitted to the CBAM Transitional Registry. For importers of CBAM goods that are established in Ireland, the CBAM Transitional Registry can be accessed through the Environmental Protection Agency (which is the Irish national competent authority). From 1 January 2026, relevant importers will be required to purchase and surrender CBAM certificates in connection with imported goods in scope, the price of which will be calculated based on the weekly average auction price of EU ETS allowances expressed in €/tonne of CO2 emitted.
EU DIRECTIVES AWAITING IMPLEMENTATION
Directive amending Directive 2011/ 16/ EU on Administrative Co-operation in the Field of Taxation ("DAC8")
Procedure reference: 2022/0413/CNS
Date published: 8 December 2022
This directive is the eighth amendment to the Directive on Administrative Co-operation (Directive 2011/ 16/ EU) (“DAC8”). The DAC8 proposals seek to strengthen existing rules and expand the exchange of information framework to address tax issues related to digital currencies, cryptocurrency and e-money, including the lack of information at the level of EU tax administrations.
Transposition date: Member States are to transpose the provisions of the directive by 31 December 2025. The provisions will apply as of 1 January 2026.
EU DRAFT LEGISLATION
Proposal for a Directive on Business in Europe: Framework for Income Taxation (BEFIT)
Procedure reference: 2023/0321 (CNS)
Date published: 13 September 2023
In line with the Commission Communication on Business Taxation for the 21st Century ("Commission's Communication") adopted on 18 May 2021, the Commission is seeking to introduce a common set of rules to calculate the corporate tax base for groups operating in the EU. Under the BEFIT proposal, profits of the BEFIT group members will be consolidated into a single tax base and allocated between the group members. This proposal replaces prior failed proposals (CCCTB (common consolidated corporate tax base) and CCTB (common corporate tax base)). Under the proposal, the new rules will be mandatory for multinational groups operating in the EU with an annual combined revenue of at least €750 million (aligning with the Pillar Two rules). For groups headquartered outside the EU, their EU group members will comprise a BEFIT group if they earned at least €50 million of annual combined revenues in at least two of the previous four fiscal years or at least 5% of the total revenues of the group. Initially the consolidated tax base will be allocated to EU Member States based on the average taxable results in the previous three years. However, that allocation rule is intended to act as a transitional rule only. How allocation would work after the end of the transitional period is left open. If adopted BEFIT must be implemented by Member States by 1 January 2028 and the proposed provisions would apply from 1 July 2028.
Latest stage: The Council has yet to adopt the proposal. Discussion on this proposal is on-going at working party level. The European Economic and Social Committee published an opinion on 7 May 2024 supporting the proposal and setting out certain recommendations. A number of EU Member States, including Ireland, have issued reasoned opinions in respect of the proposal. Under the EU legislative process, EU Member States can submit a reasoned opinion on a proposal where they believe that the proposal is in breach of the subsidiarity principle which limits the EU to acting only in cases where EU action is more effective than action taken at national, regional or local level. However, reasoned opinions can often be used by EU Member States to indicate broader concerns with an EU legislative proposal and, in some cases, can be understood to indicate that the EU Member State would be willing to vote against the proposal.
Proposal for a Directive on Transfer Pricing
Procedure reference: 2023/0322 (CNS)
Date published: 12 September 2023
This proposed directive is part of the BEFIT package and seeks to:
- incorporate the arm's length principle into EU law;
- establish a basic framework for applying transfer pricing rules under EU law; and
- clarify the role and status of the OECD transfer pricing guidelines for Multinational Enterprises and Tax Administrations.
If implemented, the proposal would not significantly impact how transfer pricing applies to Irish taxpayers given it is based on the same OECD principles that form the basis for the existing Irish rules.
The proposed directive would improve the procedures for dealing with transfer pricing adjustments on EU to EU transactions. For example, by introducing a fast-track procedure for corresponding adjustments and processes to facilitate taxpayers self-correcting intra-group pricing using compensating adjustments.
If approved and implemented, the most significant impact of the directive would be the new responsibilities assigned to various EU institutions for transfer pricing matters, most notably for the CJEU which would act as the ultimate arbiter in EU transfer pricing matters.
It is proposed that Member States will implement the transfer pricing rules by 1 January 2026.
Latest stage: The Council has yet to adopt the proposal. Discussion on this proposal is on-going at working party level. The European Economic and Social Committee published an opinion on 7 May 2024 supporting the proposal and setting out certain recommendations. The Council of the European Union has also published two reasoned opinions that it received on the draft directive, one from Sweden and another from Italy. Germany has also made a contribution raising concerns with the proposal through the official process. It may therefore be challenging to achieve unanimous support for the current draft of the proposal.
Matheson Insight
New EU Proposal for a Transfer Pricing Directive
Proposal for a Directive laying down rules to prevent the misuse of shell entities for tax purposes (ATAD 3)
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 original draft of the directive set out three ‘gateway’ criteria (related to passive income, cross border transactions and outsourced management and administration) to identify shell entities that are resident in the EU. Entities that met all three gateway criteria were required to report on whether they met minimum substance requirements through their annual tax returns. If an entity did not meet all of those minimum substance requirements (or did not provide sufficient documentary evidence) it would 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, certain regulated financial undertakings and domestic holding entities. An entity can also be exempted if it can prove that there is no tax advantage arising from its use.
Member States have been unable to agree to the draft directive as originally proposed. In September 2023, a revised draft of the directive removed the denial of access to tax treaty benefits and benefits under the Parent-Subsidiary Directive and the Interest and Royalties Directive and instead required information about those entities identified as shell entities to be exchanged between Member States. No agreement was reached on that compromise text. In June 2024, a further revised text was proposed which removed the substance requirements.
Latest stage: The Commission proposed this directive in late 2021 and a number of compromise texts have been proposed since then. The European Parliament approved an amended version of the directive on 17 January 2023. The proposed directive is currently subject to discussions within the Council where it must be approved unanimously by all EU Member States before it can be adopted into EU law.
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
Procedure reference: 2022/0154 (CNS)
Date published: 11 May 2022
The proposed directive (the "DEBRA 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 negotiation of this directive was temporarily suspended by the Council in December 2022 to be reassessed at a later date in the broader context of other reforms in the area of corporate taxation. On 16 January 2024, the European Parliament adopted its opinion formally approving the directive (this is non-binding but is to be considered by the Council). If the Council restart negotiations on this directive it must be approved unanimously by all EU Member States before it can be adopted into EU law.
Matheson Insight
Proposal for a Directive on Faster and Safer Relief of Excess Withholding Taxes
Procedure reference: 2023/0187 (CNS)
Date published: 19 June 2023
This directive aims to make withholding tax procedures in the EU more efficient and secure for investors, financial intermediaries and Member State tax administrations. The proposal is structured in two main parts (Chapters 2 and 3).
Chapter 2 provides for the creation of a standardised EU-wide digital tax residence certificate which Member States would be required to issue within an agreed time frame (14 calendar days) and would remain valid for the calendar year during which it was issued. Other Member States would be required to accept such certificates as proof of tax residence.
Chapter 3 provides common withholding tax relief procedures that must be applied to dividends from publicly traded shares and that can be applied to interest from publicly traded securities. In the first instance, it requires Member States that impose withholding tax on dividends which can be relieved under double tax treaties to establish national registers for certain financial intermediaries that handle payments of such dividends (described as Certified Financial Intermediary ("CFI") which includes financial institutions with assets of EUR 70 billion or more and central security depositories). The national register is to be publicly accessible on a dedicated portal and updated at least once a month. The Member State can remove CFIs from the national register and can also reject the registration of CFIs in certain circumstances (eg, if an inquiry is opened by a Member State or another jurisdiction, in relation to the CFI concerned, on potential fraud or tax abuse which may lead to a loss in withholding tax).
In Member States where a register is required, registered CFIs will be required to report details of dividend payments (including details of the recipient, the payer and the payment itself) on an on-going basis as soon as possible after the relevant record dates. Member States can opt to apply equivalent registration and reporting requirements in respect of interest payments from publicly traded bonds. Under the directive, registered CFIs will be permitted to claim withholding tax relief in line with the applicable double tax treaty either at source or under a quick refund system (a system where the payment is made taking into account the general domestic withholding tax rate followed by a request for refund of the excess withholding tax within 60 calendar days after the end of the period to request the quick refund) (or a combination of both). This development will be welcomed by investors who can face delays in claiming refunds of withholding taxes in certain Member States.
Once formally adopted the directive must be implemented by Member States by 31 December 2028 and the proposed provisions would apply from 1 January 2030.
Latest stage: The Council has reached political agreement on the proposed directive. As a number of amendments have been made to the proposal since the European Parliament provided its initial non-binding opinion in February it will be consulted again. However, any further opinion from the European Parliament will also be non-binding and, therefore, it is expected that following this consultation the Member States will formally adopt the directive.
Proposal for a Directive on Pillar One of the OECD Agreement
Procedure reference: TBC
Date published: TBC
The Commission has confirmed that implementing the OECD's Two Pillar Solution is a priority for 2024. The Council has already agreed a directive on Pillar Two which was implemented in Ireland in the Finance (No. 2) Act 2023. The timing of a Commission proposal on Pillar One will depend on progress made at OECD level.
Amount A is a core element of Pillar One. Broadly, Amount A aims to re-allocate a portion of the profits of the largest and most profitable multinational enterprises ("MNEs") to so-called 'market jurisdictions'. MNEs with consolidated annual revenue exceeding EUR 20 billion and a profit margin that exceeds 10% will be in-scope of Amount A, although there are exclusions for qualifying extractives businesses and regulated financial institutions.
Under the Amount A proposal, 25% of an in-scope MNE's profit that exceeds the 10% threshold is allocated to market jurisdictions. Market jurisdictions are typically the jurisdictions where the ultimate customers of the MNE are located or where the users of the MNEs services are located. Relief for tax on the profits allocated under Amount A is given by the jurisdictions where the MNE is most profitable. The allocation to a market jurisdiction can be reduced to the extent residual profits are reported there under the marketing and distribution safe harbour.
If Amount A is agreed, it will replace existing digital services taxes and other similar measures that have been adopted in a number of jurisdictions. In addition, it will preclude participating jurisdictions from introducing future similar taxes.
The OECD Inclusive Framework on BEPS (the “Inclusive Framework”) published the text of the multilateral convention (“MLC”) to implement amount A of Pillar One on 11 October 2023 with a view to opening the MLC for signature by the end of June 2024.
The Co-Chairs of the Inclusive Framework issued a statement on 30 May 2024 confirming that a deal on Pillar One is close and that the intention remains to hold a signing ceremony by the end of June 2024.
A minimum of 30 jurisdictions representing the headquarter jurisdictions of at least 60 percent of in-scope multinational enterprises, must sign and ratify the MLC before it enters into force.
The second element of Pillar One is Amount B which proposes to apply standardised transfer pricing approaches to baseline marketing and distribution activities. The simplified and streamlined approach proposed under Amount B may only be applied by Low Capacity Jurisdictions (the list of which is yet to be agreed) and is optional for those jurisdictions.
The Commission has noted they were committed to implementing the OECD's Pillar One proposal by 1 January 2025. It is likely that we will see an EU Directive on Pillar One later this year.
Latest stage: A proposal for a draft directive on Pillar One is expected to be published now the MLC has been published by the OECD but no specific timeline has been announced.
Proposal for Council Directives amending three EU legislations i.e. Directive 2006/112/EC, Council Implementing Regulation EU 282/2011 and the Council Regulation on Administrative Cooperation EU 904/2010
Procedure reference: 2022/0407 CNS
Date published: 8 December 2022
On 8 December 2022, the European Commission published its new EU VAT proposals on VAT in the Digital Age ("ViDA"). The ViDA proposal consists of amendments to three pieces of EU legislation: the VAT Directive (2006/112/EC), Council Implementing Regulation (EU 282/2011) and the Council Regulation on Administrative Cooperation (EU 904/2010). The proposal is divided into three main objectives –
(i) Digital reporting requirements (“DRR”) – these proposals aim to modernise the VAT reporting obligations by introducing digital reporting requirements, which will standardise the information that needs to be submitted by taxpayers on each transaction to the tax authorities in an electronic format and at the same time it will impose the use of e-invoicing for cross-border transactions.
(ii) Platform economy – These proposals address the challenges of the platform economy, by updating the VAT rules applicable to the platform economy in order to address the issue of equal treatment, clarifying the place of supply rules applicable to these transactions and enhancing the role of the platforms in the collection of VAT when they facilitate the supply of short-term accommodation rental or passenger transport services.
(iii) Single VAT registration – These proposals aim to remove the need for multiple VAT registrations in the EU by improving and expanding the existing systems of One-Stop Shop (OSS) / Import One-Stop Shop (IOSS) and reverse charge in order to minimise the instances for which a taxpayer is required to register in another Member State.
Latest stage: The package was considered by the Economic and Financial Affairs Council (ECOFIN) at a meeting on 14 May 2024. The Council exchanged views on the ViDA package but agreement was not reached on all aspects. While the DRR and single VAT registration pillars were approved, Estonia maintained its objection to the use of the 'deemed supplier' rules for the platform economy in ride and accommodation sectors. The Council will continue to work towards an agreement, with the next ECOFIN meeting schedule for 21 June 2024.
Matheson Insight