An Overview of Key Changes Contained in Finance (No 2) Bill 2023
The Finance Bill was published on Thursday 19 October. As expected, the main portion of the Bill is the legislation to implement the Pillar 2 regime, setting down a minimum effective tax rate of 15% into Irish law. The Bill also contains new measures on outbound payments to zero-tax jurisdictions along with other provisions relating to the R&D and digital gaming tax credits, the taxation of share options and improvements to the Employment Investment Incentive Scheme. We set out below a summary of these and other amendments contained in the Finance Bill.
Transposition of the EU Minimum Effective Tax Directive
As expected, the Finance Bill transposed the EU Directive on ensuring a global minimum level of taxation (“ the Pillar 2 Directive”), setting down a minimum effective tax rate of 15% into Irish law. Draft legislation was published in March and July along with a public consultation. Arthur Cox LLP submitted feedback to the July consultation.
The legislation will apply to large multinationals with a global turnover in excess of €750 million. Within the EU, it will also apply to wholly domestic groups. The Finance Bill contains provisions for implementing what are known collectively as the “GloBE” rules; two complementary rules which include an income inclusion rule (IIR), and a backstop rule known as the Undertaxed Profits Rule (UTPR). The IIR requires the ultimate parent entity to look down through its group on a jurisdiction-by-jurisdiction basis and impose a top-up tax on those entities that do not pay an effective tax of 15%. The UTPR in turn acts as a backstop rule in the event the group does not apply or fully apply top-up taxes under the IIR rule. The UTPR is seen as the more difficult rule to implement in practice.
The IIR will come into effect for fiscal years beginning on or after 31 December 2023 and the UTPR will broadly come into effect for fiscal years beginning on or after 31 December 2024 (subject to the safe harbours outlined below).
A key element of the legislation is the implementation of transitional and indefinite safe harbours to alleviate the significant compliance burden on in-scope taxpayers.
As flagged by the Department of Finance, the legislation contains provision for what is known as the qualified domestic top-up tax (QDTT). The QDTT ensures that Ireland will be allowed to apply a domestic top-up tax itself in the first instance to constituent entities of in-scope groups located there. Ireland have stated that they aim to acquire full “safe harbour” status from the OECD peer review process, meaning that in-scope groups with Irish constituent entities will not have to conduct calculations for applying the IIR for the Irish constituent entities with the top-up tax for that jurisdiction deemed to be zero. Conversely, Ireland will recognise a QDTT in other jurisdictions so that an Irish filing entity can exclude constituent entities in these jurisdictions from its GLoBE calculation and payment obligations.
Ireland has also implemented other safe harbours in line with the OECD’s Administrative Guidance of December 2022 and July 2023.
The legislation contains a transitional UTPR safe harbour which defers the application of the UTPR until after the 2026 fiscal year when the ultimate parent entity is in a jurisdiction with a nominal rate of corporate income tax of 20%.
The Country-by-Country reporting safe harbour will apply for a transition period encompassing any fiscal year beginning on or before 31 December 2026 and ending before 30 June 2028. It eases the compliance burden in the initial years by relieving in-scope MNEs from the obligation to compile detailed GLoBE Returns and allowing the top-up tax to be deemed to be zero in the transition period. In order to obtain the benefit of the safe harbour, the MNE must make an election and must demonstrate that it meets one of the following conditions:
- It has total revenue of less than €10 million and profit or loss before income tax of less than €1 million in the jurisdiction on its qualified CbC report for the fiscal year;
- Has a simplified ETR that equals or exceeds the prescribed transition rate for the fiscal year as defined in the legislation; or
- It reports profit or loss before income tax in the jurisdiction which is equal or less than the substance-based income exclusion amount for constituent entities resident in that jurisdiction under the qualified CbC report.
The legislation also contains provisions on the administration of the new tax including a transitional simplified jurisdictional reporting as set down in the OECD’s July 2023 Guidance and also transitional relief from the application of penalties. These transitional measures will apply for fiscal years beginning on or before 31 December 2026 and ending before 30 June 2028.
Additional withholding tax measures on certain outbound payments
These new measures seek to prevent double non-taxation of income by denying the application of exemptions from withholding tax in certain circumstances. In broad terms, the new measures will apply to payments of interest and royalties and the making of distributions (including dividends) to associated entities in jurisdictions that are not EU Member States and are on the EU list of non-cooperative jurisdictions or zero-tax jurisdictions.
A zero-tax jurisdiction is one that generally subjects entities to tax at a rate of zero per cent on income, profits and gains, or does not generally subject entities, whether on a remittance basis or otherwise, to a tax on income, profits and gains.
Entities will be associated where one entity has direct or indirect control over the other (50% threshold) or both entities are under the mutual control of a third entity. Control can also be established where one entity exercises definite influence over the management of the other associated entity or where a third entity exercised definite influence over the management of both companies.
A payment will not be within the scope of the legislation if it constitutes an excluded payment. Examples of “Excluded Payments” include where the recipient is subject to a nominal rate of tax greater than zero per cent, where domestic tax is applied on the income profit or gain arising from the payment or where the payment is subject to a supplemental tax, including a foreign company charge, the UTPR, IIR, or QDMTT top-up taxes under the Pillar 2 regime. The definition of an excluded payment is based on whether it is reasonable to consider that the payment was subject to such types of taxation.
Where a payment of interest or royalties falls within the scope of these provisions, any existing exemptions from withholding taxes on these payments will be disallowed and reporting obligations will be imposed on the payor. In the context of interest, a carve-out was included where it is reasonable to consider that the company is not, and should not be, aware that any portion of the relevant payment of interest is made to an associated entity. In relation to distributions the exemptions from withholding tax contained in the TCA will not apply where the profits or gains from which the distribution is being made were not subject to taxation (as specifically defined) and the other conditions are met.
The new measures will apply from 1 April 2024 and for pre-existing arrangements will be grandfathered until 1 January 2025.
The introduction of these measures was not referenced in last week’s Budget speech but was well flagged in advance. The measures are being introduced as part of commitments made by Ireland to obtain funding under the Recovery and Resilience Fund. Draft legislation was published over the summer and a public consultation held. Arthur Cox made submissions to the Department as part of this process.
Interest deduction for qualifying finance companies
The Bill introduces new rules for the deductibility of interest for companies within the definition of a “qualifying financing company”. Broadly speaking the new rules will apply where a “qualifying finance company” owning 75% or more of the ordinary share-capital of a “qualifying subsidiary” borrows money to on-lend to that qualifying subsidiary.
For the purposes of computing the Case III or Case IV profits of the qualifying financing company for each loan, the qualifying finance company may deduct the amount of external interest paid by that company in the chargeable period in relation to such portion of the external loan that is matched with the relevant loan to the qualifying subsidiary.
The loan must be wholly and exclusively used for the purpose of the trade of the qualifying subsidiary and cannot be used for the redemption of or subscription for shares, or any other payments relating to shares or the capital structure of any company. The loan must be made at arm’s length.
R&D Tax Credit
In line with the announcement of the Minister for Finance in the Budget speech, changes are being made to improve the efficacy of the R&D tax credit in light of the introduction of the minimum 15% effective tax rate under the new Pillar 2 legislation.
Building on changes made in last year’s Finance Act, the rate of the credit is being increased from 25% to 30% of qualifying expenditure in respect of accounting periods commencing on or after 1 January 2024. The Minister stated in the Budget speech that this increase would maintain the net value of the existing credit for companies subject to new Pillar 2 regime, while also delivering a real increase in the credit to SMEs that will not be in scope of Pillar Two.
The amount of the first instalment as set out in section 766C TCA 1997 that is available to claimant companies in full in year one will be doubled from €25,000 to €50,000 for accounting periods commencing on or after 1 January 2024.
A pre-notification requirement will be introduced whereby companies that have not previously claimed the credit, or companies that have not claimed the credit in 3 years must notify Revenue in writing of certain information at least 90 days before the claim is filed. This will apply from 1 January 2024.
A new information requirement has also been introduced in the content of an R&D Claim. A claimant company must provide details in the claim of the amount of non-refundable R&D tax credits that are being carried forward and are available for offset against future corporation tax liabilities of the company. This provision shall apply in respect of accounting periods ending on or after 31 December 2023
A new provision is introduced to allow a successor group company to claim unused R&D credit of a related predecessor company where certain conditions are met. This provision will apply in respect of claims made in an accounting period commencing on or after 1 January 2024
Digital Gaming Credit
Several amendments were made to the operation of the digital gaming credit. These amendments ensure that it aligns with the new Pillar 2 definition of a non-refundable tax credit and obtain the more advantageous treatment for the calculation of the effective tax rate. The changes primarily relate to the manner and timeline for payment of the credit for accounting periods commencing on or after 1 January 2024.
Changes to accountable person for the taxation of Share Options
From 1 January 2024 the mechanism by which tax is paid on gains realised on the exercise, assignment or release of a right to acquire shares or other assets will no longer be taxable by the employee under the self-assessment system. From this date, the employer will become responsible for accounting for the income tax, USC and employee PRSI as part of the payroll process (the Pay As You Earn “PAYE” System).
Angel Investor Relief
The Minister announced the introduction of capital gains tax relief for angel investors in innovative SME start-ups. The wording of the relief was not included in the Finance Bill and will be included at Committee Sage.
Improvements to the Employment Investment Incentive Scheme
The Finance Bill amends the EIIS to standardise the minimum holding period required to obtain relief to 4 years in all cases and to increase the limit on the amount that an investor can claim relief for such investments from the current rate of 250,000 to €500,000 per year of assessment within the four years. Of particular note is that the rate of relief given will no longer be a standard rate of 40%, but will vary from 20% – 50% depending on the basis upon which the company seeking investment is eligible for relief, and on whether the investment is direct or made through a qualifying investment fund. The changes will apply from 1 January 2024.
The Finance Bill also makes a number of amendments to bring the legislation in line with updates to the EU State aid legislation known as the General Block Exemption Regulation or “GBER”. Examples include:
- Providing for a reduction in the level of investment required by a qualifying company seeking expansion risk finance from 50% to 30% of the average annual turnover, where the investment will be used to significantly improve the environmental performance of the company or for other environmentally sustainable investments.
- In addition to the current limit of 7 years following its first commercial sale, there is an extension of the availability of the relief to undertakings that have been operating in any market for less than 10 years following the date of incorporation.
- Follow-on risk finance investment in eligible undertakings after either of the initial or expansion risk finance must now be “provided for” in the business plan rather than “foreseen” as is currently required.
- The limits on the amounts a RICT group can raise through the issue of qualifying shares has been amended to increase the lifetime limit on the amount of risk finance investment that may be raised to €16.5 million (previously, the limit was €15 million) with a correlating increase in the amount that may be raised in any 12-month period to €5.5 million.
The Irish Department of Finance announced their intention to legislate for their longstanding practice of extending the exemption from Irish Stamp Duty for American depository receipts (ADRs) to include transactions in DTC of US listed shares. The Finance Bill provides from an exemption from stamp duty on certain transfers of Irish shares in the US or Canada. The exemption will apply to shares listed on a recognised stock exchange located in the US or Canada and the trade must be settled through a securities settlement system located in the US or Canada.
This extension is being enacted in recognition of the fact that book-entry transactions have now overtaken ADRs as the primary way in which Irish shares are traded in the US. There will no longer be a necessity to obtain Revenue clearance and this will result in a smoother, more efficient DTC process. DTC is likely to require a legal opinion in place of the clearance from Irish Revenue.
Tax Administration – Joint Audits
The Finance Bill transposes the provisions of the EU Directive DAC 7 to allow for the facilitation of cross-border audits with other EU Member States for in-scope entities. The Finance Bill also clarifies the ability of Revenue to make enquiries into the accuracy of a return made, or failure to make a return under the Mandatory Disclosure Regime transposing DAC 6 into domestic law.