Special Reports on BEPS released
While the legislation itself was enacted in June 2018, with application to income years commencing 1st July 2018 onwards, IR has only now just released five special reports on the new rules, each document covering a particular cross-border issue which has been affected by the changes.
The reports cover the following topics:
- Interest limitation – new rules to govern how an interest rate on borrowings between related parties should be determined. Naturally, where the parties are related, there is an opportunity for the lender to charge an interest rate higher than that which would arise in an arms-length arrangement with a third-party borrower, thereby providing a mechanism for lowering the taxable profit in the borrowing parties jurisdiction.
If your client’s total cross-border borrowing is less than $10m, then the new rules will not have an application to the financing arrangement, and instead, the more simplified transfer pricing rules may be applied. As guidance in this regard, IR has also stated that provided the interest rate set between the parties is no more than 3% above the applicable commercial base lending rate, then IR will generally not investigate further.
Of more relevance to most of us in my view, this document also covers the change to the debt/asset calculation, used to determine whether your client may have a thin cap issue in the first place. When computing the component of the total assets in the formula, you are now required to deduct non-debt liabilities from the total asset amount – trade creditors, employee and tax accrual provisions etc. Naturally, the consequence of the change is the potential higher debt/asset ratio resulting in potential exposure to the thin cap rules that your client may not have had previously. - The use of hybrids – new rules to counter inappropriate use of hybrid instruments/hybrid entities. Predominantly to prevent cross-border scenarios where for example the related parties end up getting a tax deduction in both jurisdictions, or scenarios where the income may be exempt in one jurisdiction but the payment is tax deductible in the other jurisdiction. IR’s commentary suggests that as the rules are quite specific, the actual application of the new rules is likely to be quite rare.
- Transfer pricing – the changes include an update to the OECD transfer pricing guideline reference from the 2010 version to the 2017 version, a greater focus on the economic substance of the transaction over the formal legal terms of the contract, and, increasing the statutory time bar from four to seven years. The most important change to appreciate in my view, however, is the shift of onus from the Commissioner to the taxpayer, to prove that the transfer pricing positions are correct and have been determined using arms-length conditions. As a consequence, I suspect we will see an increased level of transfer pricing scrutiny by the Revenue going forward.
- Permanent establishments – rules unlikely to affect most of us, only having an application where the multinational group has a global turnover in excess of $750m euros. The new rules may deem a PE to exist in situations where under the particular DTA it would not; and,
- Administrative issues – rules to define a large multinational group, to request information or to collect the unpaid tax from a multinational group, and commentary on Country-by-Country reports.
R&D Tax Credit Bill passed
The Taxation (Research and Development Tax Credits) Bill, first Introduced on 25th October 2018, has passed its third and final reading in the House and is now awaiting Royal Assent.
Introduced to encourage businesses to spend more on research and development activities, the new legislation will see businesses incurring eligible expenditure from 1st April 2019, entitled to receive a 15% tax credit. The first $225k of the tax credit is fully refundable, with any excess being carried forward to the following income year. A minimum $50k annual R&D spend is required before the regime will have an application to the taxpayer. The existing tax loss cash-out regime for predominantly start-up companies is not affected by the new regime (at least not for the time being).
Welfare Expert Advisory Group report slams existing welfare system
While we have recently experienced an arguably surprising rejection of the Tax Working Group’s CGT recommendation, I would suggest we will not see a similar reaction when it comes to the Government considering the recommendations made by the Welfare Expert Advisory Group.
Expect therefore to see some changes to the various family orientated tax credit regimes in the not too distant future if the Government adopts the recommendations to:
- increase Family Tax Credit rates
- replace the In-Work Tax Credit and the Independent Earner Tax Credit with a new tax credit (referred to as an Earned Income Tax Credit)
- repeal the Child Tax Credit; and,
- make the Best Start Tax Credit universal for the first three years of children’s lives.
Business Premises QWBA’s released
IR has just released two drafts QWBA’s for public consultation, both covering the business premises exclusion potentially available to taxpayers who would otherwise have triggered a taxable event upon the disposal of land under the various land taxing provisions.
The first QWBA is referenced PUB00316 and examines the business premises exclusion in taxing events triggered via application of sections CB 6 to CB 11 of the ITA07. The exclusion in this instance is contained within section CB 19 and is to apply in scenarios where there is land with a building on it that is occupied by the landowner mainly for carrying on a substantial business.
However, the exclusion is unlikely to apply to any extra land and buildings that are not occupied or reserved by the landowner mainly for carrying on a substantial business. Additionally, the business premises exclusion is not available if the landowner has engaged in a regular pattern of buying or building, then selling, business premises.
The QWBA explains what is meant by the term “business premises” and it is the Commissioner’s present view in this regard, that there must be a building of some sort on the land. Also required is that it is the landowner themselves who must occupy the land and that the landowner must carry on a substantial business from the land (reference then made to the business test case of Grieve v CIR). In this regard, IR will focus more on the size and scale of the business carried on from the land, and not the time and effort the landowner actually commit to the business undertaken.
The second QWBA (PUB00316) provides commentary on the bright-line test, and when the business premises exclusion may apply. In this instance, however, there is no business premises exclusion per se. It is instead the definition of residential land itself (which the bright-line rules only have an application to), that does not include land that is used predominantly as business premises.
Regarding the term “business premises” reference is naturally made to the previous QWBA, and once this definition has been satisfied, the two remaining requirements are that in order to satisfy the predominant test, more than 50% of the area of the land must have been used as business premises, and the land must have been used as business premises for more than 50% of the time the seller owned it.
Feedback on both QWBA’s is requested to be submitted no later than 7th June 2019.
