Deloitte response to the public consultation on the Tax Treatment of Interest in Ireland

Background
 

On 27 September 2024, the Minister for Finance launched a public consultation on the Tax Treatment of Interest in Ireland. As announced in the Minister’s Budget speech in 2023, this consultation forms part of a wider review of the regime which is currently underway. The purpose of the consultation is to review the taxation and deductibility of interest by businesses in Ireland with the overall aim of ensuring that Ireland’s tax system is resilient, supports competitiveness, protects the tax base and aligns with commitments made in the field of international taxation.

The preamble to the consultation document recognises that Irish tax legislation on the taxation and deductibility of interest is a complex area, and that proposed changes must take into account recent developments in the tax sphere including the implementation of Pillar Two minimum tax rules. As part of the consultation process, stakeholders’ views were sought on specific questions addressing the taxation and deductibility of interest, related anti avoidance rules, specific rules relating to financial services, withholding taxes and reporting obligations.

As part of Deloitte’s commitment to continuous dialogue on matters of tax policy, we provided our views to the Department of Finance.

Core recommendations
 

As an overall comment, recent developments in the Irish corporate tax landscape have been influenced significantly by global tax reform. The myriad of existing rules that apply to financing, coupled with recent tax developments has resulted in significant uncertainty and complexity for taxpayers. In light of this, we have outlined our key recommendations in respect of the taxation of interest, with a focus on enhancements to existing rules and a move towards a simpler, principle-based regime.

In summary, in our view:

• The treatment of trading and non-trading activities should be equalised for financing activities.
  
• Existing rules on interest deductibility are complex and require enhancement and simplification. We recommend the adoption of a broader relief for interest to allow taxpayers who incur an interest expense for the purpose of their trade, profession or business to deduct such expense when computing their profits charged to tax.
• The current regime whereby relief may be obtained for interest expenses incurred as a charge on income (“Section 247” interest) are onerous and should therefore be reformed and replaced with rules that are principle based.
• Specific enhancements to the deductibility of interest expenses in calculating taxable rental income are recommended. For example, we recommend amendment to existing legislation to permit interest relief on expenses incurred in the pre letting phase.
• The existing Interest Limitation Rules should be amended to address difficulties which can arise in a partnership context in identifying when parties are treated as “acting together”. Further enhancements are recommended with respect to the treatment of legacy debt and the large-scale asset definition.
• Many anti avoidance measures which exist in Irish law predate those contained in the EU Anti-Tax Avoidance Directive including Interest Limitation Rules and Anti-Hybrid measures. We have outlined a number of recommended enhancements to streamline existing anti avoidance provisions in Irish law, in particular with respect to section 130 TCA 1997.
• Targeted amendments should be made to section 110 TCA 1997 with respect to the treatment of interest. These recommended amendments would remove provisions from section 110 TCA 1997 which provide for anti-arbitrage rules, as in our view such measures are adequately catered for elsewhere in Irish tax legislation.
• Targeted amendments to the stock lending provisions contained in legislation are recommended.
• Consideration should be given to the redesign and reform of the Interest Withholding Tax (WHT) regime in Ireland. An overhaul and redesign of the existing interest WHT regime would look to apply such a tax in cases where there is genuine risk of tax avoidance or reputational damage to Ireland e.g., payments made to zero or low tax jurisdictions.
• Simplification must be at the forefront of this review and any changes or new provisions must aim to simplify the tax code and associated reporting obligations. In particular, the return of interest paid to non-residents under section 891A TCA 1997 represents an additional compliance burden and should be reconsidered as part of an overall simplification of the reporting obligations placed on taxpayers.

Overall comments
 

The ease of access to capital in global markets and the related tax deductibility of interest and financing costs is of critical importance in facilitating Foreign Direct Investment (FDI) and Domestic Direct Investment (DDI) and maintaining Ireland’s attractiveness as a location for companies’ operations. As the treatment of interest in Irish tax law is a complex area, further consultations on specific enhancements and reforms are expected in the future. We therefore welcome this public consultation as the first step towards overall reform and enhancement of the interest regime in Ireland.

We ask the Department of Finance to continue with the detailed consideration of proposals contained within our submission. We acknowledge the caution for any proposal to observe international best practice and maintain a robust tax regime. The necessity for amendments to the existing rules on interest to be as simple as possible and provide certainty to taxpayers while enhancing our competitiveness underlies our views and comments.

Next steps 
 

The Department of Finance will consider the responses to this consultation and may invite key stakeholders to meet with them and with Revenue officials to discuss the responses.