European Union Anti-Tax Avoidance Disclosure (EU ATAD) Measures: Anti-hybrid rules
Anti-hybrid rules were introduced into Irish legislation by Finance Act 2019, in line with Ireland’s commitments to implementing the EU ATAD. The anti-hybrid rules are aimed at preventing companies from benefiting from differences in the tax treatment of payments on hybrid financial instruments and on payments by or to hybrid entities. Finance Act 2020 (The Act) includes technical amendments to the anti-hybrid rules in order to ensure that the rules operate as intended.
Finance Act 2020 includes an amendment that is intended to clarify that the anti-hybrid rules do not give rise to an adverse unintended issue in certain circumstances. The interaction of the existing legislation with simplification provisions under a foreign controlled foreign company (CFC) regime, whereby certain inter-company payments are disregarded, could potentially give rise to unintended consequences under the existing legislation. The amendment intends to provide that an Irish tax deduction is not denied in this scenario where no economic mismatch outcome arises. The amendment is intended to ensure that a position similar to Irish Revenue’s existing published guidance is now codified as part of the legislation.
The Act also provides clarification of the provision in respect of the application of the payment to a hybrid entity where the participator/parent of the recipient of the payment is a tax-exempt entity. The purpose of the amendment is to ensure that, in line with the Base Erosion and Profit Shifting (BEPS) Action 2 Report recommendations, only mismatches that are attributable to hybridity are neutralised by the Irish legislation.
Many of the anti-hybrid provisions only apply to mismatches between associated enterprises. In this context, the Act includes amending provisions relating to the timing of the test of association to address unintended consequences under the current legislation. The Act also includes a technical amendment to the definition of 'associated enterprises' in order to ensure compliance with ATAD.
EU Mandatory Disclosure Rules (DAC6)
The Act transposes the EU Directive regarding the mandatory disclosure of certain cross-border arrangements (known as DAC6) into the Irish Tax Code. The legislation introduces new obligations for ‘intermediaries’ (or the relevant taxpayer in certain circumstances) relating to the mandatory reporting of certain cross-border tax arrangements to Irish Revenue.
The Directive requires information on cross-border arrangements that meet certain hallmarks to be reported to the national tax authorities within specified time lines. The hallmarks are seen as characteristics or features that indicate a potential risk of tax avoidance. This information will be shared automatically between the member states every three months through a centralised database.
The primary reporting obligation rests with EU-based ‘intermediaries’. However, in certain specified circumstances, the reporting obligation rests instead with the taxpayer. The Directive came into force on 25 June 2018 and applies from 1 July 2020. Under transitional measures, the filing date with Irish Revenue for all reportable arrangements, where the first step of the arrangement was implemented between 25 June 2018 and 30 June 2020, was deferred to 28 February 2021. Reports for all arrangements made available for implementation, ready for implementation, or where the first implementation step is taken between 1 July 2020 and 31 December 2020 were deemed due by 31 January 2021. From 1 January 2021, a very narrow time frame applies. A report must be filed within 30 days of the earlier of the date on which the arrangement is made available for implementation, is ready for implementation, or the first implementation step is taken.
Specified intangible assets
Finance Act 2020 introduced amendments to balancing charge provisions (clawback of capital allowances/tax depreciation claimed) on the disposal of specified intangible assets where the capital expenditure was incurred on the provision of specified intangible assets on or after 14 October 2020.
Prior to this change, no balancing charge arose on a disposal of a specified intangible asset if the specified intangible asset had been held for more than five years. The amendment provides that all capital expenditure incurred on the provision of specified intangible assets on or after 14 October 2020 will be subject to a balancing charge on a subsequent disposal, regardless of when the balancing event may occur. In other words, all capital expenditure incurred on the provision of specified intangible assets on or after 14 October 2020 will be fully within the scope of the normal balancing charge rules.
It is important to note that this amendment should not apply to capital expenditure incurred on the provision of specified intangible assets prior to 14 October 2020, which will continue to fall outside the scope of a balancing charge, where it has been held for more than five years.