Trends and Developments

Living in Interesting Times – the Quest for Certainty

The winds of change that have swept through the international tax landscape in recent years show no signs of abating, and reform remains the order of the day. The scale of recent reformative measures has resulted in Ireland's tax code becoming broader and more sophisticated, but also more complex. This complexity has resulted in increased scope for disagreement between taxpayer and tax authority, as both sides seek to interpret and apply the new rules. In line with Ireland's well-established track record in international business, the increased scope for uncertainty and dispute has been counterbalanced by significant investments in resources for dispute avoidance and resolution.

This article will examine a number of recent developments and trends in key areas of Irish tax practice that are likely to have an impact on the quest for certainty in coming year

The OECD's two pillars

The OECD's two-pillar proposal will result in major reform of the international tax framework and the introduction of new rules and concepts. Ireland is actively engaged with both pillars and is likely to introduce relevant measures in line with EU timelines. As such, Ireland is expected to fully transpose the Pillar Two EU Directive (the "Directive") with effect for accounting periods commencing on or after 1 January 2024.

In light of the scale of the Pillar Two rules, there is considerable work to be done as part of Ireland's transposition to ensure that, among other things, the new rules can operate harmoniously within Ireland's tax code and not produce any unintended consequences. Some steps have already been taken to address identified anomalies, including the following.

  • Research and Development (R&D) tax credit: Ireland's R&D tax credit rules have been amended to ensure that the credit is a qualifying refundable tax credit for Pillar Two and US foreign tax credit purposes.
  • Knowledge Development Box (KDB): the effective tax rate of the KDB (ie, Ireland's patent box) will be increased to 10% (from 6.25%) to align with the Pillar Two "subject-to-tax rule" once agreement on implementation is reached at the OECD/G20 level. It remains to be seen what further changes will be required to align the KDB (which reduces a taxpayer's effective tax rate by way of tax deduction) with Pillar Two more generally.
  • Territorial tax system: in conjunction with the implementation of Pillar Two, Ireland is also considering moving towards a territorial corporation tax system, which will include a dividend participation exemption and a foreign branch exemption to replace the current credit-based system. This would better accommodate the implementation of the Pillar Two rules by providing for greater clarity and significantly less complexity in the tax code.

Ireland is also very likely to introduce a Pillar Two-compatible qualifying domestic top-up tax. In line with recent experiences, the government is expected to publish a number of consultations throughout 2023 on the transposition of the Directive, to minimise uncertainty and complexity in the legislative process and to ensure provisions are well considered and signposted in advance. In addition to the anomalies identified above, the interaction of Ireland's Pillar Two rules with US global intangible low-taxed income (GILTI) and foreign tax credit rules will be particularly important to many multinational taxpayers who have a significant presence in Ireland. From a policy perspective, Ireland is expected to take all reasonable steps available to minimise any uncertainty in this context.

Digital services taxes (DSTs)

The delayed implementation of the OECD's Pillar One proposal means that DSTs are likely to remain a feature of the international tax landscape for the short term at least. DSTs present several challenges for multinational taxpayers as they are typically structured to fall outside the scope of double tax treaties, which can give rise to uncertainty as to the creditability of the relevant DST.

Helpfully, Irish Revenue recently published guidance confirming that, when incurred wholly and exclusively for the purposes of a trade, the DSTs imposed by certain countries including Austria, France, Italy, Spain, the UK and India may be treated as tax-deductible expenses. Irish Revenue confirms that the deductibility of DSTs imposed by other countries will be confirmed on a case-by-case basis. As such, the list of countries specified in the guidance is expected to continue to grow as other DSTs are considered in practice.

Although Irish Revenue's published position aligns with established tax law principles on deductibility, the guidance has eliminated some of the uncertainty that existed in the market around the tax treatment of DSTs.

Transfer pricing (TP)

Ireland's TP rules were significantly expanded with effect from 1 January 2020; as such, the expanded rules are now live in the audit cycle. The expansion of the TP regime was accompanied by an enhancement in Irish Revenue's TP capabilities and, in practice, there has been a noticeable increase in TP-related queries and audits initiated by Irish Revenue in recent years. This increased audit activity has, in turn, resulted in an increase in TP-related disputes, and this trend is expected to continue over the coming years.

The TP queries taxpayers are facing from Irish Revenue range from general queries on the application and administration of group TP policies to specific queries on the suitability of a particular methodology or the approach applied to pricing intangibles.

Tax authorities in market jurisdictions continue to challenge the TP applied to transactions with principal companies in supply chains. In recent years, there has been an increased focus on the application of Chapter IX of the OECD's TP guidelines (the TPG) to group restructuring transactions, with many tax authorities adopting a narrow approach to such transactions in a bid to maximise taxing rights.

The recent trends in TP challenges are expected to continue in Ireland and internationally in the coming years, as additional tax periods are audited through the lens of the updated TPG.

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