EU and Direct Tax
Direct taxes on income and gains are not an EU competence. They are a matter for the member states exclusively. The basic principles in relation to the scope of direct taxes both for companies and individuals in double taxation agreements and cooperation between tax authorities are derived from OECD standards.
Direct taxes on income and gains are not an EU competence.In contrast to direct taxation, the EU has extensive powers in the area of indirect taxation, in particular, value added tax excise and customs duties.
Direct taxes on income and gains in the form of income tax capital gains tax and corporation tax are a matter for the member states exclusively. The basic principles in relation to the scope of direct taxes both for companies and individuals for double taxation agreements and cooperation between tax authorities are derived from OECD standards.
OECD Primary Forum
The OECD is an intergovernmental body that Western European states including the UK and Ireland are members as are other developed economies, such as the United States Canada Japan and many others. It has no law making powers and acts unanimously. It publishes templates for treaties for relief of double taxation and cooperation in taxation matters.
Ireland has double taxation agreements with many countries including, in particular, the United Kingdom. The principles in that agreement reflect the OECD template agreement at the time it was entered.
EU Facilitative Measures
EU has taken measures in relation to the to facilitate the single market by way of directives The EU may take measures in the area of direct taxes unanimously. It has done this in the context of implementing international standards on a consistent basis.
The EU parent subsidiary directive applies to group interest, royalty and dividend payments. It provides for exemptions from dividend withholding tax payments and relief from double taxation in respect of dividends paid by a company resident in one EU state to that in another where the recipient holds at least 5% of the share capital in the subsidiary. The recipient is either exempted from tax or allowed the credit for the profits from which the distribution was made. The Irish Brexit Omnibus Act introduces relief and it is intended to introduce further measures to reinstate the status quo.Similar considerations arise under the interest and royalty directive.
Without the EU legislation, the position is complex as it falls back to the double taxation agreement between the relevant states. There may be an exemption from withholding tax depending on the treaty. The treaty withholding rates for Ireland / UK are zero for interest and zero for royalties. A charge of 5 to 15% may apply to dividends. It may raise issues for cross-border licensing and loan funding.
The mergers directive allows for the automatic transfer of assets to a successor with the transferor being dissolved without being liquidated. It allows for relief from taxation for the transfer of assets which might otherwise be taxed as a gain or income received. More generally there are reliefs from corporation tax (in particular on deemed gains that would otherwise apply) which facilitate mergers acquisitions and reconstructions of the capital and ownership of companies generally.
Freedom of Establishment and Tax
There have been cases where the European Court held that particular tax rules were discriminatory in that they impeded the exercise by EU individuals or companies of the right of establishment on the same terms as residents of the host state, The provisions apply to group relief and change of residence.
There is the possibility of increased taxes in other EU states against UK businesses. They no longer required to satisfy the terms of the four freedoms in respect of their domestic businesses becoming established and providing cross-border services into the United Kingdom.
The provisions on relief on intergroup losses were required under these principles to be extended to EU group companies.The so-called Brexit Omnibus Act passed in March 2019 reintroduces provision to allow the surrender of losses between 75% group members to include the UK at the same basis as EU groups, to cover that fact that the UK will no longer be an EU state for the purpose of the relevant provisions.
There are a number of very specific reliefs applicable to capital gains tax corporation tax and stamp duty that might otherwise arise on the transfer of assets and other elements.of such reorganisation. The EU freedom of establishment required that the legislation allowing for reliefs from the various taxes to facilitate mergers reconstructions and reorganisations of companies must be afforded to EU companies on the same terms as domestic companies.
Merger relief derives from a 2005 directive and was given effect in Ireland in 2008. In essence, it allows cross-border mergers, divisions transfers of assets and exchange of shares on a tax neutral bases across the EU. The Irish 2008 regulations apply to a cross-border merger. There are also a number of domestic tax provisions applicable under the Taxes act rather than the regulations giving effect to the directive.
This is important in that it allows the reorganisation and restructuring of company groups tax on a neutral basis throughout the EU. These exemptions and reliefs do not apply to non-EU states so that considerable taxation risks apply. The so-called Brexit Omnibus Act passed in March 2019 s reintroduces the reliefs albeit in different terms for UL companies after Brexit.
General Tax Rate
When Ireland first joined the EU, it had a number of favourable tax reliefs which were permitted for a period by the EU Commission under EU state aid rules but were required to be phased out over a period. The former zero percent export sales relief was phased out by 1980. The favourable 10% manufacturing tax rate later extended to Shannon-based companies and IFSC companies was phased out in the first decade of the century as the state aid approval period expired.
The Irish state moved from a general corporation tax of 40% to 12.5% for trading profits between 1996 and 2003. This being a general rate of tax, it was not subject to the EU state aid regime.
The general rate of corporation tax in the UK has been progressively reduced by Conservative governments since 2010. The main rate was reduced to 19% in 2017 and had been intended to be reduced to 15% but for the intervention of Brexit and fiscal pressure.
The power to set corporation tax rates within certain limits was devolved to Northern Ireland in 2015 and it had been intended that it would reduce its rate to that in the Republic of Ireland 12.5 %. The new Northern Ireland Executive announced in January 2020 that it is not pursuing a lower tax rate for fiscal and budgetary reasons.
State Aid and the Apple Case
The EU has used the state aid rules set out in the treaty and other legislation to invalidate favourable tax breaks which constitute a form of hidden state subsidy. The EU has distinguished between generally applicable tax provisions that are within the powers of the state to legislate and individual tax rulings.
In the Apple case, the European Commission deemed certain individualised favourable tax rulings in favour of Apple to be state aid and thereby invalid. The case is under appeal to the Court of Justice of the European Union.
EU Directives and OECD Reform I
The EU has introduced some directives by agreement implementing international OECD driven tax changes. The anti-tax avoidance directive deals with a number of anti-abuse measures namely
- controlled foreign company rules to deter profit shifting to low tax countries
- switchover rules to prevent double non-taxation of certain income
- exit taxation to prevent companies from avoiding tax when relocating assets
- interest limitation to discourage artificial debt arrangements designed to minimise tax
- general anti-abuse rules to counteract aggressive tax planning.
These provisions have been largely incorporated in Irish tax or already existed.
The administrative cooperation directive requires country by country reporting between EU states’ authorities on tax-related information from multinationals operating in the EU. This is a transparency provision to allow EU states information needed to detect and prevent tax avoidance schemes.
EU Directives and OECD Reform II
The base erosion rules commenced in 2019 and 2020. The rules build on global standards developed by the OECD in 2015 on Base Erosion and Profit Shifting (BEPS) and should help to prevent profits being siphoned out of the EU where they go untaxed. In detail:
All Member States will now tax profits moved to low-tax countries where the company does not have any genuine economic activity (controlled foreign company rules)
To discourage companies from using excessive interest payments to minimise taxes, Member States will limit the amount of net interest expenses that a company can deduct from its taxable income (interest limitation rules).Member States will be able to tackle tax avoidance schemes in cases where other anti-avoidance provisions cannot be applied (general anti-abuse rule).
Further rules governing hybrid mismatches to prevent companies from exploiting mismatches in the tax laws of two different EU countries in order to avoid taxation, as well as measures to ensure that gains on assets such as intellectual property moved from a Member State’s territory become taxable in that country (exit taxation rules) will came into force as of 1 January 2020.