As ever in the International Tax space, the pace of developments is snappy. We are seeing two major international tax matters come to the fore at the moment – the beginning of the Post US Tax Reform Era and the impact of the Multi-Lateral Instrument on decision making.
The Post US Tax Reform Era
The last quarter of 2017 was spent following the roller coaster ride of US Tax Reform. Whilst the detailed impact of the reforms is still being worked through, the first positive outcome is that a major period of uncertainty is now over. There is a clear perception in the market that, in one fell swoop, US corporate tax has become far more affordable – and in overall terms, this perception appears to be accurate.
US reform impacts Ireland Inc in two ways. For Irish businesses expanding into the US, the cost of doing business in the US has probably reduced. However, this factor appears to us at Baker Tilly Hughes Blake to be largely academic. The drive to expand into the US was all about the size and economic power of the US market. Clients never enjoyed the cost of US corporate tax (or the bureaucracy involved in staying compliant there) but this has always been swatted away as an acceptable cost of doing business.
The other impact is whether or not US businesses will retain their drive to expand abroad into Ireland, or if the carrot and stick of the new US rules will confine these impulses. To date we have seen no let up in US businesses extending their reach and using Ireland as a hub for European or EMEA expansion. It is a confirmation of our long held view that whereas Ireland’s attractive international tax regime is one of the reasons for locating a business here, it is only one of many reasons. It must not be forgotten that the Irish corporate tax rate is still circa half the US rate. Additionally, we have the talent, the technology and the infrastructure to make an international expansion a success. Plus, our stable business environment and being in a time zone sweet spot between the US and Europe means that US tax reform will not quench US FDI to Ireland.
The Multi-Lateral Instrument (MLI)
7 June 2017 was a major date in international tax reform – the MLI was signed in Paris with the ultimate impact that circa 2,000 international tax treaties will be amended. If that event didn’t make the headlines, it is for two possible reasons. First, whereas the MLI was signed in 2017, the new rules will only become law at future dates from 2019 onwards. Secondly, exactly how the MLI is implemented is extremely complicated, so the precise changes take some time to digest.
We have been looking at the impact of the MLI for a number of clients and a pattern of the journey of working through it has emerged. First, all the stakeholders need to become comfortable with the Irish adoption of the MLI – which means getting to grips with the opt ins that Ireland has chosen under the MLI. Next, all the stakeholders carry out the same process with all the other relevant treaty countries relevant to the business. At that point, the net effect of the MLI is calculated – in essence by distilling down to the lowest common denominator of the Irish and the Foreign Country proposals. Finally, the impact of these changes is applied to the client’s circumstances.
The MLI has had an impact on the relevant rules (Double Tax Treaty articles) for all cases that we have examined in detail so far, in particular when it comes to Treaty Abuse provisions. However, the final analysis of the impact of the MLI in all the cases we have encountered to date has been: extra care is needed due to the MLI in order to stay compliant, but the overall impact is not detrimental to existing structures or ways of doing business. It is early days yet before a final determination of the impact can be made.
Whereas 2017 was very much a year of anticipating changes to international tax rules, 2018 has been about dealing with and adapting to new rules – a far more positive scenario from a professional and commercial perspective. Whereas change is a constant, hopefully a period of greater certainty in international tax has arrived. For now, at least.
For more information contact Donal Leahy at, firstname.lastname@example.org