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By Ali Qassim
The Irish government should keep the rate of a future exit as low as possible to continue attracting multinational corporations, tax practitioners told Bloomberg Tax.
Multinationals are currently exempt from the nation’s capital gains tax exit rate of 33 percent—one of the highest in the European Union. But the Irish government will have to take these privileges away at the end of 2019 to comply with EU anti-tax avoidance legislation.
Under the EU’s Anti-Tax Avoidance Directive (ATAD), member nations are free to set their own exit rate on assets moved from their territory. The Irish government is expected to announce a decision on the rate in time for its annual fiscal budget in the fall.
Maintaining the 33 percent rate could have “serious consequences” for multinationals facing high rates of exit tax for the first time, Aisling Donohue, a partner at Dublin-based tax firm Andersen Tax, told Bloomberg Tax. That’s why the government should consider matching the exit rate to its existing 12.5 percent corporation tax rate, one of the most competitive in the region, she said. The low corporate tax rate has spurred many U.S.-based multinationals to base regional operations in Ireland, including the U.S.’s Intel Corp., Twitter Inc., Google Inc., Apple Inc., Pfizer Inc. and Citigroup Inc.The Taxation Strategy Group, made up of senior government officials and political advisers headed by the Department of Finance, revealed in a July 31 report that most tax practitioners favor a 12.5 percent exit rate.
The Irish Tax Institute, for instance, in its feedback to a consultation of ATAD measures, highlighted that Ireland’s 33 percent capital gains rate, the fourth highest among Organization for Economic Cooperation and Development countries, is “very penal.”
“We know investors consider exit even before making an investment in a country and so, Ireland’s very high CGT rates can act as a barrier to investment,” the Irish Tax institute said.
The Taxation Strategy Group, which isn’t a decision-making body but makes policy recommendations, also said the Irish government should try to make an “early announcement of the intended tax rate to allow companies to factor this into their planning.” Joe Tynan, senior tax partner at Dublin-based PwC, shared this view. “If a very broad-based exit tax is introduced,” companies “need to know what the rate will be in the future if their plans change and they want to exit,” he told Bloomberg Tax in an Aug. 2 email.
The Department of Finance is also making progress in implementing another ATAD measure: controlled foreign company rules aimed at preventing multinationals from shifting profits to controlled subsidiaries in low- or no-tax countries.
To determine whether the income of a CFC should be attributed to a parent company, the TSG is advising the government to attribute undistributed income arising from non-genuine arrangements put in place for the essential purpose of obtaining a tax advantage.
PwC’s Tynan said this option “makes sense for a country such as Ireland which has many foreign multinationals with subsidiaries beneath Ireland. It will tax undistributed income from non-genuine arrangements. It will suit many multinationals but not all. The focus will be on the detail.”
The TSG recommendations “suggest that they may bring in small profits and low-profit margin exemptions,” Tynan added.
Tynan also considers that “it is sensible” for the future CFC regime to grant a parent company an exempt ‘grace period’ in respect of newly acquired CFCs during which the parent can reorganize its business to eliminate the CFC if it wants to.”
The TSG underlined in its report that U.S. tax reforms haven’t led to an exodus of U.S.-based multinationals from Ireland. “While the competitive balance between the U.S. and Ireland has shifted, Ireland remains highly attractive as a location for U.S. companies to invest in and trade from,” it said.
Tynan said “this is because of the increased availability of international talent which is available in Ireland. There may be a perception that such international talent is less welcome in other territories.”
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