The release of the OECD's Base Erosion and Profits Shifting (BEPS) reports are a significant milestone in the ongoing development of international tax policy. This project, which focusses on 15 different action areas, has been completed in a very tight two year time frame and has been put forward as the remedy to the problems in international taxation. Will the project achieve all of its lofty goals? Certainly not, however, the output from these reports will frame the international tax agenda for years to come.
From an Irish perspective the easiest way to judge the impact will be by looking at the progress made in each of its three main themes: substance, coherence and transparency.
The BEPS project seeks to better align taxing rights with real value generating activity. The transfer pricing actions are central to this substance theme and it is through these actions that the OECD plans to close down aggressive tax structures which use “Caribbean Cash Box” companies, i.e. companies with significant levels of capital that are used as zero tax financing or IP holding locations. If the OECD are successful in their efforts here to close down these “offshore” structures then it stands to reason that there will be a significant amount of multinationals seeking a new home for their functions currently sitting on these sunny isles. Ireland’s tax regime, for more than 50 years, has sought substance based FDI and has used tax as an economic lever to achieve this goal. As such, many multinationals already have a significant presence here which means that they may be more likely to “onshore” some of their activities to Ireland rather than elsewhere. Furthermore, in a time where sustaining very low corporate tax rates may be more and more difficult, Ireland's 12.5% rate may well become even more attractive. In this regard the outcomes of the action on treaty abuse are interesting. The risk for Ireland
could be that companies with real economic substance and value generating activity here may not qualify for benefits. The report has two proposed anti-abuse rules.
The first rule is a mechanical test and the OECD have said that further work is needed to finalise this test, hence it will be interesting to see the outcomes of this further work. The other test, which focusses on the principal purpose establishing operations in a given jurisdiction, is likely to be the favoured option for a lot of countries. However the subjective nature of this test could lead to uncertainty for companies and the interpretation of this rule by tax authorities across the world will be very interesting.
The theme of coherence focuses mainly on mismatches and loopholes in the tax codes of different countries. These actions tend to be more “tax technical” and address areas such as interest deductions, taxation of foreign subsidiaries and scenarios that lead to outcomes which are not in line with international norms (i.e. a taxable deduction in one location without corresponding taxable income in the other location). The potential impact of these actions on Ireland will be mainly seen by the rules changes of others.
Transparency is certainly an area where the OECD will, and can quite rightly, claim a win. Two main items have been agreed at OECD level. The first is in relation to the automatic exchange of rulings information between member states, which will allow counter parties to see what tax ruling has been received in the other state. The second is the introduction of country by country reporting which will mean that all multinational enterprises of a certain size (revenues greater than €750m) will be required to submit a report detailing certain facts about their operations in all jurisdictions around the world. This report will highlight weakness or potentially aggressive tax structures being operated by MNCs. The increased transparency will also add another layer of compliance for MNCs and, as is stated in the latest PwC Tax Function of the Future" report on Global tax transparency and risk management, MNCs are likely to have to increase the capabilities and effectiveness of their tax functions going forward. This sounds simple but it will require companies to disclose significant additional information to a very wide range of authorities around the world. This will be more challenging than may be anticipated and it may be calculated in a different way to financial statements and tax returns which is likely to give rise to additional requests for reconciliation. From a transparency perspective Ireland should generally have nothing to fear as our tax regime is laid out in statute, we do not offer legally binding rulings and, as stated, Ireland generally attracts FDI with real substance. However, Ireland should be careful about increasing the compliance burden further on companies.
Looking forward to this year's budget and the Finance Bill it appears that the only items that may be introduced relating to BEPS are the aforementioned Country by Country reporting and the Knowledge Development Box (whose likely attractiveness has been blunted by the BEPS project). However, in years to come the Department of Finance are likely to have significant decisions to make in relation to Ireland's implementation of the BEPS proposals such as when to make changes, the interaction with the EU and how to encourage the continued development of both the FDI and Irish domestic business sectors.
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