Dodwell: BEPS reform is forcing Ireland to reform tax rules
The latest work by the OECD tax policy team to review global tax rules is beginning to have an impact, particularly in Europe where Switzerland and Ireland are reforming their current tax rules, says Bill Dodwell, head of tax policy at Deloitte
One unsurprising outcome of the OECD’s Base Erosion and Profit Shifting (BEPS) project is that countries which have prospered as low-tax intermediaries are starting to think about life after BEPS.
In Europe, Ireland and Switzerland are considering how they can continue to prosper in a so-called BEPS-compliant manner. Perhaps they might not end up with as much revenue as before – but for both maintaining employment is vital. Indeed, for Ireland it’s essential that it remains attractive to US multinationals, since they employ directly and indirectly some 20% of the workforce.
Ireland’s BEPS strategy proclaims it will always retain its 12.5% corporate tax rate on trading income. It also signals its willingness to comply with BEPS and support an international consensus on corporate taxation.
Surprisingly it’s taken two attempts to deal with the exploitation by US multinationals of Irish incorporated but non-resident companies (known in the press as ‘Double-Irish’). The first lame effort simply required that companies had to be resident somewhere.
The more recent effort makes it clear that all new Irish companies will be tax resident in Ireland and existing non-resident companies are given six years before they too are treated as resident.
The first lame effort simply required that companies had to be resident somewhere
Ireland has also announced it will introduce a BEPS-compliant knowledge development box. Recent developments mean that such incentive regimes will only be permitted for patents and similar intellectual property – and then they must be linked to research and development (R&D) activities in the same country.
This may limit the scope for the Irish incentive. However, Ireland has also announced a significant expansion in its onshore intangibles regime. An Irish company may buy intangibles assets from a related party and depreciation and interest on acquisition debt can then wipe out any taxable profit.
It is pretty easy to see who this might be aimed at – but we might wonder what the Forum on Harmful Tax Practices will think about it. Ireland also continues to classify interest income as trading.
Swiss reform
Switzerland has plans for major tax reform from 2019. It will get rid of the current principal company and finance company/branch arrangements and replace them with lower tax rates and a special goodwill or intangible deduction – with the intention that existing structures should end up with broadly similar tax charges.
It also plans a notional interest deduction, so that equity-funded finance companies can continue with low effective tax rates, no doubt noting that such deductions are not within the scope of the Hybrid Mismatches Action. It too wants a patent box for its pharmaceutical sector.
The major countries behind BEPS have focussed on substance – people – and both Ireland and Switzerland have emphasised employment. However, new approaches to transfer pricing will spread profit among all countries which have significant functions. Clearly there’s room for low-tax options – but employees may need to move if they are to achieve the desired potential.
