As the UK and US move towards lower corporate tax rates and the OECD BEPS project progresses, we examine the impact on Ireland's corporation tax regime in 2017.
It is almost 20 years since Ireland announced the introduction of a 12.5% corporation tax rate for trading income. In 1997, the Irish standard rate of corporate tax was 36%, just marginally above the current US Federal rate of 35%. With the UK moving towards a corporation tax rate of 17% and Trump proposing a 15% corporation tax rate, perhaps the only major surprise on international tax rates has been the time it has taken for the governments of the world's major economies to realise that a high corporate tax rate inhibits growth.
For Ireland's open economy, the change in other countries' tax rates and multiple other changes to the international tax environment provide opportunities for multinational groups to review existing operating structures and realign their businesses with the new international tax environment.
Brexit and the Trump Effect
As the UK moves towards triggering Article 50 and the US political scene shifts to a Republican majority control, Ireland can expect both the UK and US to reduce their corporate tax rates. However, the mere reduction of these countries' tax rates does not mean that the business case for using Ireland as a relatively low tax rate hub is diminished. In particular, US companies will continue to need access to the EU and with Brexit looming, the benefit of using Irish corporates as a platform to transact into one of the largest trading block in the world may become even more compelling.
In mid-2016 the EU passed its Anti-Avoidance Tax Directive. One aspect will be that Ireland will need to introduce a Controlled Foreign Company ("CFC") regime by the end of 2017. CFC legislation is designed to dissuade Irish parented groups from maintaining intellectual property and passive investment income in low- or no-tax territories. It will deem certain "passive" income and gains of such offshore entities as being liable to tax in Ireland. The introduction of such legislation is likely to cause existing offshore finance and other intellectual property companies to be brought onshore to Ireland, with the consequent increase in economic activity in Ireland. Moreover, if Ireland wishes to remain internationally competitive, it should amend its laws to exempt dividends from foreign subsidies as a quid pro quo for the introduction of a CFC regime. Such a...