Last year, Ireland faced significant pressure from the US Senate in connection with the tax positions adopted by multinationals such as Apple, Google and Adobe. Singled out and labelled by Senators John McCain and Carl Levin as a “tax haven”, the country had to take steps to preserve its reputation as an open and regulated country. Following its initiative under the EU Presidency to counteract tax fraud and aggressive tax planning, Ireland published its International Tax Strategy on 15 October. This decree, or Charter, would be used to promote the jurisdictions openness to commerce and tax transparency.

A feature of the Charter was to actively participate in the OECD's Base Erosion and Profit Shifting project. One of the 15 actions to be addressed under this project is the concept of double non taxation. The OECD proposes to issue its initial recommendations on the matter in September 2014. Against a background of harsh and unfair international criticism, particularly from the US, it was announced in October 2013 by the Minster for Finance that domestic legislation would be introduced to tackle the issue of double non taxation.

Ireland 's International Tax Charter

As part of Irelands endeavour to demonstrate its commitment to a transparent tax regime, the country published its international tax charter on 15 October. This will be used to guide the country in its approach to international corporate tax issues.

Summarised below are the key elements of the charter. The charter has clearly been drafted to be in keeping with the ongoing work of the OECD. The first measure under the charter will address the issue of double non taxation and “stateless” companies.

Source: Department of Finance

Existing Situation

Ireland has two tests for corporate tax residency:

1. Central Management and Control Test

Regardless of its place of incorporation, a company that is centrally managed and controlled in Ireland is regarded as Irish tax resident. Broadly speaking, management and control is located where the strategic management decisions are taken by the board as opposed to the day to day operational decisions.

2. Incorporation Test

A company incorporated in Ireland is regarded as Irish tax resident, irrespective of the location of its central management and control, subject to the following two exemptions:

• The treaty exemption
  This is where a company is not regarded as resident in Ireland under the terms of a Double Taxation Agreement (DTA) between Ireland and another country.
• The trading exemption
  The Irish incorporated company, or a related company, carries on a trade in Ireland; and either the company is ultimately controlled by persons resident in an EU Member State or in a treaty country or the company, or a related company, is listed on a stock exchange in the EU or a treaty country.

However, should the company satisfy one of the above two exemptions, it still must satisfy the central management and control test i.e. it cannot be centrally managed and controlled in Ireland.

Application of the above tests has resulted in the creation of what is now commonly referred to as “stateless” companies. In situations where an Irish incorporated company came within one of the above two exemptions and was centrally managed and controlled in another country (e.g. United States), it would not have been regarded as Irish tax resident. Consequently it would be outside the charge to Irish tax. The difficulty (or opportunity, depending on your perspective) arose if the country in which the company was centrally managed and controlled only applied an incorporation test (e.g. United States). Application of these provisions resulted in the company not being within the charge to foreign tax as it was not incorporated in that jurisdiction. This hybrid mismatch resulted in the company not being liable to tax in either territory.

This inconsistency is subject to review by the OECD as part of the BEPS project and in turn has led to the expansion of the Irish incorporation test (i.e. Section 23A TCA 1997).

New Legislation

In his October 2013 Budget speech, Minister for Finance Michael Noonan T.D. announced that he would be “bringing forward a change in the Finance Bill to ensure that Irish registered companies cannot be stateless in terms of their place of tax residency.” This change was included in Finance Bill (No.2) 2013 and subsequently enacted in Finance (No.2) Act 2013.

The new legislation (Section 23A(5) TCA 1997) specifically targets the inconsistencies which can arise between existing Ireland's corporate tax residency rules and those of treaty partner countries. The new rules ensure that an Irish incorporated company must be considered tax-resident somewhere and cannot remain “stateless”. This move signals Ireland's commitment to working with the OECD on Base Erosion and Profit Shifting (BEPS) in the areas of international coherence and countering international “double no tax” arrangements.

The new legislation closes off the above loophole. An Irish incorporated company is now treated as Irish tax resident if;

• it is managed and controlled in another Treaty State or EU Member State; and
• the company is not regarded as tax resident in any territory.

The amendment applies from 24 October 2013 for all companies incorporated on or after that date, and from 1 January 2015 for companies incorporated prior to 24 October 2013. Accordingly, there is scope for any existing company which will be impacted by this amendment to review its corporate structure.

What Lies Ahead?

The introduction of the new residence test should be seen as a positive step. It is hoped that it will demonstrate globally that Ireland is not a tax haven but is an open and well regulated economy. It is questionably though as to the level of impact the provision will have. It will not close off well known and commented upon tax structures such as the “double Irish”. However, given the ambitious BEPS timetable for 2014 and 2015, it is questionable as to whether these type of structures have an approaching expiry date anyway. If Ireland is to adhere to the terms of its international tax charter, it is important that it should be proactive in implementing the recommendations of the BEPS project. How this story will unfold will provide interesting reading over the coming months.

Cormac Kelleher is a Tax Manager with Mazars.

Email: ckelleher@mazars.ie