International Tax Policy

Overview

Internationally, countries either charge tax on the worldwide profits of resident companies or on domestic income but not foreign income. Many countries have moved towards charging tax only on domestic income. The United Kingdom exempts from corporation foreign dividends and foreign branch profits. The USA taxes worldwide profits with certain exemptions.

Ireland taxes worldwide profits of an Irish resident company but gives credit for foreign taxes paid. This extends to underlying income of the parent company in the case of dividends.

Tax cooperation and standards are driven by the OECD, which consists of so-called Western states including European states, North America, and certain Asian states. It has institutions but does not act by majority.

It is particularly active in the area of international taxation and promotes double taxation agreements. After the financial crisis, it promoted new common standards with a view to tackling tax avoidance, particularly by large multinationals.

Background

Ireland’s tax policy has been a key part of its industrial and economic policy for many years. Ireland has been very successful in attracting foreign direct investment, and the tax regime is a significant element of this success.

The Export Sales Rate was introduced in 1956, exempting tax on profits from the export of goods. This was phased out after Ireland joined the EU.

A 10% rate of tax applied to the manufacturing of goods, which was extended to the Shannon Free Zone and ultimately to certain financial services companies under the IFSC regime.

Following the phasing out of the 10% rate under transitional EU derogations, Ireland moved to a 12.5% rate on all trading income, regardless of whether income is derived from the sale of goods or services sourced inside or outside the state. This was designed to be non-discriminatory and therefore compatible with EU state aid requirements to prevent the subsidisation of businesses other than in accordance with the EU approval regime.

For many years, in addition to the low rate, Ireland allowed generous concessions in tax computation, which meant that the effective rate of corporation tax paid for many years was substantially less than the 12.5% headline rate.

Residents v Non- Residents

The impact of the 12.5% rate is significantly different between cases where the shareholders are Irish residents and non-residents. In the case of Irish resident shareholders or controllers, they might face personal income tax on employment income, director fees dividends, and other benefits at a marginal rate of income tax, together with USC and PRSI, at a rate of 52% or more in some cases.

In the case of foreign non-resident shareholders, they might not be taxed in Ireland at all in many cases. They may, of course, be subject to tax on dividends and other sums required in their jurisdiction. Some larger corporate groups have successfully organised their tax holdings to take advantage of the low rate of Irish corporation tax while also being subject to reduced or no tax in other jurisdictions.

Challenges to Irish Low Tax

There has been growing international pressure against large multinational corporations, particularly those dominant in new technologies, which pay very little tax due to their ability to game the international tax system.

Direct taxes on income are excluded from EU jurisdiction. However, the European Commission has sought to challenge certain aspects of Ireland’s tax treatment on state aid grounds, particularly in the so-called Apple case.

The second decade of the 21st century has seen a very substantial increase in corporation tax take by the State. As many of the exemptions and concessions were phased out, many multinationals in Ireland paid an effective higher rate of tax closer to the 12.5% headline rate.

Irish Response

As part of the response to OECD initiatives and to counter accusations by some internationally of being a tax haven, Ireland published its international tax strategy in 2014. It promised to continue to compete fairly for new foreign direct investment and confirmed its commitment to mitigate aggressive tax planning. The roadmap for Ireland’s tax competitiveness, published in 2014, outlined a 12 action point plan.

Ireland enhanced its foreign direct investment offering in the mid-2010s with the Knowledge Development Box, expanded R&D credit, and special assignee relief programme. The Knowledge Development Box regime has been approved by the EU and OECD.

The Coffey Report followed a review initiated by the Department of Finance seeking to achieve high standards in international tax transparency, aligning with OECD programmes including the BEPS project. It sought to maintain the 12.5% corporation tax, ensured fair treatment, and sustained corporation tax receipts.

The Report recommended updating certain rules to comply with OECD requirements, including transfer pricing adjustments. It also supported tax transparency by disclosing cross-border transactions and recommended the introduction of controlled foreign company (CFC) rules.

It suggested an exemption for foreign-sourced dividends and foreign branch profits from connected companies or alternatively a simplification of the foreign tax credit provisions.

EU ATA Directive

The Department of Finance undertook a consultation on the report in 2018 with a view to implementing the anti-tax avoidance directive, CFC rules, exit taxes, and anti-hybrid rules, updating transfer pricing to reflect OECD guidelines, and possibly adopting an exemption for foreign branch profits and dividends.

CFC rules were updated in the Finance Act 2018. Transfer pricing and anti-hybrid rules were introduced and updated in the Finance Act 2019.

Rules limiting interest deduction pursuant to the ATA directive were introduced by the Finance Act 2021.

Administrative Cooperation

Ireland has agreed to participate in certain information exchange programs including FATCA and non-resident exchange with the USA, and legislation regarding investments held by non-residents.

New directives for administrative cooperation involve the automatic exchange of taxpayer information pursuant to the 2018 directive.

Multilateral Amendments & BEPs

The OECD has promoted measures to counter base erosion and profit shifting (BEPS). Ireland has implemented most of the key provisions in various Finance Acts.

Ireland has adopted the Multilateral Instrument, which updates many double taxation agreements incorporating BEPS amendments. The Multilateral Instrument was ratified in 2018 and deposited with the OECD. It effectively updated Ireland’s double taxation agreements, containing measures to prevent abuse of treaty relief.

The Finance Act 2020 mandated the disclosure of aggressive tax planning in respect of cross-border transactions. The Multilateral Instrument includes provisions regarding dispute resolution between tax authorities.

There are new provisions for the taxation of the digital economy, the subject of an EU draft promoted by the OECD, due to take effect by 1 January 2024.

EU Directives 2020

On 20 December 2021, the European Commission proposed a directive to implement into EU law the Pillar Two Global Anti-Base Erosion (GloBE) Model Rules published by the OECD. The proposed directive closely follows the Model Rules but extends the scope to large-scale purely domestic groups to ensure compliance with EU fundamental freedoms. The Commission issued a call for feedback on this proposed directive until 6 April 2022.

The proposed directive has been the subject of discussion at the Economic and Financial Affairs Council (ECOFIN) with several compromise texts being published. It includes a proposal for a derogation for six consecutive fiscal years beginning from 31 December 2023 from the mandatory application of the Income Inclusion Rule (IIR) and the Undertaxed Profit Rule (UTPR), available on an optional basis for EU Member States in which no more than 12 ultimate parent entities are located.

The compromise text also notes that while the purpose of the directive is to implement Pillar Two, there is a need to ascertain that Pillar One is implemented as well. To this end, the directive includes a clause obliging the Commission to prepare a report reviewing the progress achieved by 30 June 2023 regarding the implementation of Pillar One and, if appropriate, submit a legislative proposal to address these tax challenges in the absence of the implementation of the Pillar One solution.

Although EU Member States have made progress on the directive, they have not yet reached an agreement.

Worldwide Initiative

In June 2021, G7 countries agreed in principle on a global minimum corporation tax rate of 15%, allocation of taxing rights between countries in relation to the largest and most profitable multinationals, and the removal of unilateral digital taxes and similar measures.

Later in 2021, 130 countries, members of the G20 OECD Inclusive Framework, agreed on a statement on the two-pillar solution to address the tax challenges arising from the digitalisation of the economy. Ireland signed the revised statement in late October 2021, agreeing to an effective tax rate of at least 15% for multinationals with annual revenue of €750 million or more.

Profit Allocation

A key part of the arrangements is the determination of profit allocation between jurisdictions.

The OECD has worked on arrangements for the allocation of profits. The G20 OECD Pillar One framework provides for the allocation of profits on a unified agreed basis. The effect would be to allocate tax over and above that allocated under traditional residence rules for corporations covered.

• Amount A gives a taxing right to residual profit allocated to market countries using a formula applied at the group level regardless of physical presence.
• Amount B is a fixed return for baseline marketing and distribution functions.
• Amount C is an additional return based on transfer pricing analysis for marketing and distribution activities in the country that go beyond the baseline level.

Amount A is based on the generation of revenue in the country over a period. It applies if state-specific sales exceed the threshold. The total profit of the group would be determined based on consolidated financial accounts.

The residual profit would exclude routine profit. A proportion of the deemed residual profit would be attributable to the countries and allocated accordingly.

Business Covered

Certain broad groups are identified as participating in a sustained and significant manner in the life of a country without physical presence. These include:

• Automatic digital services to a large user base in multiple jurisdictions (social media platforms, search engines, etc.)
• Consumer businesses generating revenue from selling goods and services commonly sold to consumers.

Amount B standardises remuneration of basic marketing and distribution activities.

Companies covered by Amount A include multinational enterprises with global turnover of €20 billion and profitability above 10%. This would be reduced to €10 billion after seven years of successful implementation.

Amount A may be allocated where there is at least €1 million revenue in the jurisdiction, or €250,000 for smaller jurisdictions. 25% of residual profit (in excess of 10% of revenue) is to be allocated, where residual profits are already taxed in the jurisdiction.

There are provisions for dispute resolution between countries.

Minimum Rate and Base Erosion

The Pillar One and Pillar Two proposals deal with global anti-base erosion and minimum tax. They provide additional taxing rights when another jurisdiction has not taxed income at a sufficiently high rate. The Income Inclusion Rule faces a top-up tax, ensuring that the minimum effective rate of 15% is achieved by multinational corporations.

If the parent jurisdiction does not impose a qualifying Income Inclusion Rule, the Under-taxed Payment Rule applies, denying deductions or securing an equivalent adjustment to achieve the minimum tax rate.

The Subject to Tax Rule applies to interest, royalties, and other payments made by developing countries and provides for withholding tax on these payments.

The rules apply to multinational enterprises with annual consolidated revenue of €750 million in two of the last four years. This is identified by country-by-country reporting. The top-up tax, the difference between the effective tax and the minimum rate of 15%, is paid by the parent in its jurisdiction.

If the jurisdiction does not apply an Income Inclusion Rule, the Under-taxed Payment Rule denies deductions or adjustments to ensure the minimum effective tax is achieved. There is an exclusion for companies in jurisdictions where aggregate revenue and profit do not exceed €10 million in revenue and €1 million in profit.

The EU has implemented the BEPS action plan and adopted the Anti-Tax Avoidance Directive, seeking to coordinate the implementation of BEPS in the EU.