International tax update 

As part of a series on the changing landscape of international tax (Tax implications of Brexit, Recent changes to Irish corporate tax legislation) we have outlined below some of the initiatives which are currently being worked on by the OECD, the EU and Ireland, and will need to be factored into future planning.

The EU Anti-Tax Avoidance Directive (ATAD)

Interest limitation rules
ATAD will restrict the deductibility of interest in certain cases. Article 4 provides that exceeding borrowing costs shall be deductible in the tax period in which they are incurred only up to 30% of the taxpayer’s EBITDA. Companies that would be considered heavily leveraged may need to rethink their financing arrangements. “Exceeding borrowing costs” are defined as the amount by which the deductible borrowing costs of a taxpayer exceeds taxable interest receipts and other economically equivalent taxable revenues.

Several options are available to each member state: 

• A taxpayer may be given the right to fully deduct exceeding borrowing costs if the taxpayer is a “standalone entity”
• Taxpayers may be allowed to deduct exceeding borrowing costs up to €3m; the limit of €3m shall be considered for the entire group
• Excess borrowing costs may also be available to be carried forward to future years and potentially carried back for a period of three years
• Where the taxpayer is a member of group, further derogations are allowed by way of an equity/total assets ratio test or a group EBIDTA test

The interest limitation rules were due to have been transposed into Irish law by 1 January 2019 but have been deferred. As many domestic and multinational companies claim interest relief in Ireland, the new changes could have significant ramifications for many companies. All financial services industries will need to analyse the impact of the new rules, including the banking, insurance, investment management, leasing and securitisation sectors.

BEPS 2.0

In late 2020, the OECD released blueprint documents in connection with the project titled “Addressing the Tax Challenges of the Digitalisation of the Economy” (the BEPS 2.0 project).

Pillar One looks at the attribution of revenues to market jurisdictions and advocates the creation of a new taxing right and new nexus rules that move away from the traditional “physical presence” requirements.

Pillar Two deals with the imposition of global minimum tax and rules to minimise global tax competition.

The OECD/G20 Inclusive Framework on BEPS noted that political agreement on the scope and quantum of the Pillars still needs to be resolved, and the OECD will continue intensive discussions with the various dedicated working groups in the upcoming weeks and months in order to deliver a solution by mid-2021.

The Irish authorities have indicated that they will not take any unilateral action in respect of the digital tax review and will follow OECD guidance and recommendations. Again, this is a developing area which should continue to be monitored. 

For additional information or help with any international tax or global mobility issues, please contact a member of our tax team.