EU ATAD Measures: Anti-hybrid Rules
As required by ATAD 2, Finance Act 2019 introduced anti-hybrid legislation for payments made, or arising, on or after 1 January 2020. 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. A tax advantage arising from this is referred to as a hybrid mismatch outcome.
Hybrid financial instruments are broadly those which are treated as debt in one jurisdiction but equity in another, while a hybrid entity is typically viewed as opaque in one jurisdiction but transparent in another. This tax system arbitrage was resulting in companies qualifying for tax relief on payments which were not being taxed in the hands of the recipient (so-called Deduction No Inclusion (DNI) outcome) or in qualifying for tax relief in more than one jurisdiction on the same payment (Double Deduction outcome). The new rules will deny deductions for such payments or in certain circumstances will subject them to tax in Ireland.
The rules apply to payments between ‘associated enterprises’, broadly defined as entities in a 25% share capital ownership relationship (increased to 50% in certain circumstances), companies that are included in the same consolidated group for financial account purposes, or companies which exercise significant influence (defined in the Act) over the management of the other.
Once a payment is ‘included’ in the recipient location no deductibility restrictions apply. The definition of “inclusion” covers not just payments that are subject to tax in the overseas jurisdiction, but also payments to exempt foreign entities such as pension funds and government bodies. Furthermore, payments to entities that are located in a jurisdiction that does not impose tax on payments from sources outside that jurisdiction are treated as included. A CFC-type charge imposed under the laws of another territory are also treated as included.
Where a double deduction mismatch outcome arises, no restriction should apply if the payment can be offset against “dual inclusion income”. This is income which is subject to tax in both Ireland and the jurisdiction where the mismatch arises. While imported mismatches, covering payments which fund hybrid mismatches outside of Ireland, can also result in restrictions these do not apply where payments are made to other EU Member States.
EU Mandatory Disclosure Rules (DAC6)
The Act transposes the EU Directive on 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 it applies from 1 July 2020. Under transitional measures, the filing date with the Irish Revenue for all reportable arrangements the first step of which was implemented between 25 June 2018 and 30 June 2020 has been 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 will be due by 31 January 2021. From 1 January 2021, a very narrow timeframe will apply. 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.
With effect from 1 January 2020, the legislation has been updated to make reference to:
- the 2017 version of OECD Transfer Pricing Guidelines;
- guidance on the application of the approach to Hard-to-Value Intangibles; and
- the updated guidance on the application of the Transactional Profit Split Method.
Enhanced TP documentation requirements were introduced with effect from 1 January 2020, placing an obligation on taxpayers to prepare Master File and Local File reports in accordance with Chapter V of the 2017 OECD TP guidelines.
In order to manage and mitigate the compliance burden, the Master File and Local File requirements are subject to certain de minimis thresholds. The revenue-based thresholds set out in the legislation are as follows:
- A Master File must be prepared where total consolidated global revenues of the MNE group are €250 million or more in the chargeable period; and
- A Local File must be prepared where total consolidated global revenues of the MNE group are €50 million or more in the chargeable period.
An increased R&D tax credit on qualifying R&D expenditure of 30% for Micro and Small companies (i.e. those groups with fewer than 50 employees and annual turnover and/or balance sheet not exceeding €10m) has recently been provided for in legislation. However, this is subject to a Ministerial commencement order which has not yet been issued.