Multinational companies (MNCs) moving assets offshore to another tax jurisdiction now face an exit tax of 12.5pc as a result of Budget 2019.
The new measure, which took effect from midnight last night, will tax unrealised capital gains where companies migrate residence or transfer assets offshore.
The “big surprise” from the Budget follows sweeping changes to the US tax code last year aimed at luring foreign intellectual property and services back to America.
The new exit tax regime, which is not expected to yield any revenue in its first year of operation, is a mandatory, Europe-wide measure that has been introduced by Finance Minister Paschal Donohoe a year ahead of a deadline of January 1, 2020, for member states to comply with the European Union’s Anti-Tax Avoidance Directive (ATAD).
The forthcoming Finance Bill will also provide for the introduction of a Controlled Foreign Company (CFC) regime as required by the ATAD. Together, the new rules will prevent the diversion of profits to offshore entities in low- or no-tax countries.
It had been feared that the exit tax, one of five legally-binding anti-abuse measures to prevent aggressive tax planning, could have been applied in Ireland at the current capital gains tax rate of 33pc rather than the announced 12.5pc.
“By introducing the measure from midnight, Minister Donohoe has given businesses certainty,” said John Gulliver, head of tax at leading law firm Mason, Hayes and Curran.
“It has also provided a disincentive to US-based MNCs to repatriate intellectual property to the US to take advantage of the special new US tax 13.125pc federal rate on foreign derived intangible income.
“Mr Donohoe has protected the Irish tax base by acting promptly, but with an opportunity to provide some transitionary relief in the forthcoming Finance Bill or any financial resolutions passed in the Dáil”.
Mr Donohoe said during his Budget speech that the early introduction of the exit tax will “provide certainty to businesses currently located in Ireland and considering investing in Ireland in the future”.
However, Peter Vale, tax partner at Grant Thornton Ireland, said that “the surprise element is never welcome”.
“The big surprise in the Budget from a corporate tax perspective was the introduction of a low 12.5pc exit tax,” said Mr Vale.
“While the reduction in the tax rate was not unexpected, the introduction from midnight of new tighter rules that impose the exit tax in line with more stringent EU rules was not anticipated. Under EU rules, Ireland was obliged to tighten its exit tax rules, but not before January 1, 2020. The early adoption of the new rules is a surprise.”
The onshoring of intellectual property assets into Ireland in recent years has contributed to a massive surge in corporation taxes.
Around €0.7bn of the 2018 over-performance is estimated as a “one-off”, Mr Donohoe warned yesterday, adding that he will assign a portion of the corporate tax overshoot to the State’s rainy day fund. “As these receipts are not expected to repeat next year, they do not feature in projecting receipts for 2019,” said Mr Donohoe.
One issue investors, particularly property companies, will be monitoring is the issue of transfer pricing rules, following the strongest Government remarks to date on the hot button issue.
“I have also committed to a review and update of Ireland’s transfer pricing provisions in 2019 to ensure our tax system is in line with new international best practice,” said Mr Donohoe yesterday.
At present, transfer pricing rules do not apply to non-trading companies such as property companies and other investment companies.
Any changes to the rules could affect the debt deductibility of property investment companies.
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