The pace of change in international tax is dramatic. Each month brings new initiatives and developments at both national and supra-national levels. In this update, we focus on recent changes which are relevant to our clients.
The OECD Base Erosion and Profit Shifting ("BEPS") reports were finalised in October and endorsed by the G20 in November 2015. The implementation phase has now begun and we are seeing this across a range of areas. If BEPS is ultimately about aligning tax with substantive economic activity, Ireland's attractiveness as a well-developed fully functioning economy seems destined to increase. We are not yet close to a conclusion on BEPS; however we are, in the words of one commentator, at the "end of the beginning".
The OECD's Common Reporting Standard ("CRS") and Country by Country Reporting ("CbCR") initiatives have arisen out of the overall BEPS project. Implementing rules for both CRS and CbCR came into effect in Ireland at the start of 2016. Clients should assess whether they have the systems and processes in place to deal with these new reporting regimes.
The EU's Anti Tax Avoidance Package was published in January 2016 and is described briefly. EU VAT rules continue to evolve. The recent decision of the European Court of Justice in the X NV case is significant for investment funds and managers in Europe. Although the case will be welcomed by investors using Irish regulated funds for property investment, it should be considered as to how it may affect non-regulated fund and special purpose vehicle ("SPV") structures.
Tax litigation is increasingly common. The recent high profile EU State Aid cases are merely one aspect of this, and tax authorities are increasingly seeking to challenge historic tax planning. We highlight some of our recent experiences in this area and outline how Maples and Calder's approach can benefit clients.
EU Anti Tax Avoidance Package
The European Commission's release of an Anti Tax Avoidance Package on 28 January 2016 has attracted significant comment. The proposals could be viewed as an attempt to ensure that EU Member States implement the OECD BEPS final reports (5 October 2015) in a co-ordinated manner. The form of the proposals is likely to change as they are reviewed by the European Parliament and the European Council, and would generally require unanimous consent from all EU Member States. Hence, while we will highlight some of the elements of the package over this and future updates, it is too soon to recommend any definitive action.
The proposed Anti Tax Avoidance Directive will, if implemented in its current form, result in legally binding measures including interest limitation rules, provisions on exit taxes and a general anti avoidance rule. The interest limitation rules would restrict interest deductibility, in some circumstances, where the interest accrued exceeds a yearly maximum of 30% of EBITDA (or, if higher, €1m per year). Any excess interest above the maximum may be deductible in future years. This interest limitation rule does not capture financial undertakings, such as investment funds, although they may be subject to review at a later time. In our view, many of these proposals are novel and will require consideration as they evolve.
OECD Common Reporting Standard Implementation - Implications for Irish Investment Funds and SPVs
On 18 December 2015, the Regulations implementing CRS in Ireland were approved by the Irish Parliament. The CRS automatic exchange of information regime has, to a large extent, been inspired by the US FATCA Model 1 IGA mechanics and it should be possible for relevant Financial Institutions (as defined in the legislation) to capitalise on the on-boarding and accounts classification processes that were put in place for FATCA.
The detail relating to CRS is contained in the OECD Standard for Automatic Exchange of Financial Account Information in Tax Matters (the "OECD Standard"). CRS became effective from 1 January 2016 for early adopters (including Ireland) and the regime obliges Financial Institutions to collect certain information in relation to investors ("Account Holders") and report that information to the Irish Revenue Commissioners. This information will then be passed to the tax authorities of the participating jurisdiction where the investor is resident. Unlike FATCA, there are no withholding requirements under CRS.
CRS applies to Financial Institutions. The definition of Financial Institution is similar to the definition under FATCA. It includes depositary and...