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Budget 2024 is not far away so what can be done for corporate investment

Tom Maguire discusses Budget 2024 and our corporate tax system

It has always been said that pe-budget submissions should be made as early as possible so let’s start the ball rolling. I’ve been writing in this column for a while on entrepreneurs and entrepreneurial companies. This column is about the taxation of companies generally. If there’s a theme here it’s that when it comes to investment simplicity eats complexity for breakfast, and our laws are complex.

And it’s going to get more complex. The government has previously confirmed that Ireland had committed to the OECD International Tax Agreements and that work is ongoing on how to give effect to the Pillar Two minimum effective tax rate of 15%. The Department of Finance have already issued one Feedback Statement on how Irish law will deal with that. A feedback statement contains a draft version of suggested law and that weighed in at around 100 pages and there’s more coming. This new-fangled 15% rate applies to corporate groups with consolidated revenues of at least €750 million so it’s not for everybody. My fellow tax partner, James Smyth, spoke about that in these pages previously.

But if we’re adding substantially to our law then wouldn’t it be good to take away a similar amount of complexity. Some tax nerds will be coughing into their muesli reading that but just bear with me.

We’ve already brought about some galactically complex legislation to our statute book in the past few years. This comprises stuff like Anti–hybrid and Reverse Hybrid rules, Interest Limitation Rules, Controlled Foreign Company (CFC) rules, Exit tax, substantial amendments to the Transfer Pricing, DAC6 mandatory reporting rules, as well as Country by country reporting. All this may sound like a form of “word salad” but each has a purpose of Exchequer protection by legislating against potential tax avoidance. Don’t get me wrong that’s only right and proper.

Most of these laws were required by EU directives so we didn’t have a choice but to bring them in, just like the Pillar Two stuff I mentioned earlier. However, we already had anti-avoidance law which means that mandatory EU law to solve perceived avoidance was brought about where we already had our own form of anti-avoidance law. This results in complexity beyond that of some of our competitors.

Take debt financing for a minute and readers may recall we had said that our laws were equally effective to the EU Interest Limitation Rule being suggested at the time. In general, a corporate tax deduction is available for interest on debt. “Available” is one thing but getting it requires looking at differing rules depending on whether the debt is used in the company’s trade or its investment activities with separate rules there depending on whether that investment is in rental property or shares. Sometimes the interest on the debt must be paid before a tax deduction is available, subject to other Ts and Cs, and sometimes it’s sufficient that the liability to pay interest has accrued. That’s before you get to the Interest Limitation Rule I mentioned above.

Therefore, consideration should be given to a review of our general interest deductibility rules at this time. For example, tax relief could be permitted for finance costs measured on an accounts basis where the monies have been applied for business purposes of the taxpayer concerned. This shouldn’t extend tax relief in an inappropriate manner and would be subject to the EU’s interest limitation rules in any event. Some other EU countries allow such an approach. You have to remember that the EU directive which brought in the interest limitation rule also required countries to bring in a General Anti-Avoidance Rule in law. That basically allows certain tax advantages to be taken away from a taxpayer if they’re not doing what they’re supposed to be doing; we already had such a rule since 1989 and we updated it in 2014 so we’re good on that score.

Some suggest that change in this area may have to be done incrementally. Many have differing views on that one, including yours truly, but if change has to be incremental then consideration could be given to removing some of the administrative issues regarding investing in corporates such as common directorships etc. where the debt finances a non-trading share acquisition. This is where the law gets technical but technicalities bring about dotting i’s and crossing t’s with the question of proportionality raising its head when such rules combine with the interest limitation rules mentioned earlier.

Staying in the area of investment when an Irish company receives dividends from a company in a foreign country then there is generally no Irish tax due to tax paid on that income in the foreign country and existing double tax relief rules contained in our law. Getting technical for a minute, that’s contained in “Schedule 24” of our tax acts. I mention this deliberately because I dare you to say “Schedule 24” to any tax adviser and just watch their reaction.

Therefore, the adoption of an appropriate exemption for foreign source dividends would be good move for Ireland. It would provide companies and investors with simplified compliance obligations in relation to such income. It would provide certainty of approach. Of course, it should noted that one of the main arguments against an exemption regime for foreign dividends has been the lack of CFC legislation. We have that now thanks to the EU directive I mentioned earlier.

On a similar matter, Ireland has an exemption on capital gains arising on the disposal of investments in certain trading companies/subgroups. This exemption, however, is limited to companies which are tax resident in the EU and countries with which Ireland has a double tax treaty. Consideration could be given to expanding this exemption to companies which are tax resident in other countries. This would further improve Ireland’s attractiveness as a location for group headquarters. Disapplication of the relief could be considered for countries on the EU Commission’s blacklist.

The issue of corporation tax is a huge one, both in terms of law and tax receipts, but the key is to make it as complex as it needs to be but no further.

Please note this article first featured in the Business Post on Sunday, 28 May 2023 and was re-published kindly with their permission on our website.

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