Paschal Donohoe (Dublin Central, Fine Gael) | Oireachtas source

I move amendment No. 35:

In page 50, to delete lines 10 to 15 and substitute the following: “ “(iii) under section 835AAE for total spare capacity (within the meaning of Part 35D) arising to the company in an accounting period beginning before the change of ownership for any accounting period after the change of ownership.”.”.

I am introducing several amendments to section 31, which introduce new ATAD-compliant interest-limitation rules to Irish legislation. The majority of the amendments I am proposing to the section are technical adjustments to ensure the correct operation of the legislation as intended. The remaining amendments correct cross-referencing and typographical errors in the Bill as initiated. I commend these amendments to the committee.

As the amendments are all technical in nature, with the agreement of committee members I will read the note giving an overview of section 31 to facilitate debate on both the amendments and the section. Because of the highly technical nature of this section, if members wish to put questions to me on the section, I may ask my officials with the consent of the Chairman to respond back to some of them and I may ask that we go into private session to do that. This is because this is exceptionally technical and I do not want to give an answer to any question from a member that may prove to be technically incorrect at a later point.

Section 31 is very lengthy and introduces highly complex new requirements to the corporation tax code. With the permission of the committee, I will speak a little longer on this than I normally would so the Oireachtas is fully informed of what I am doing and why.

Section 31 introduces a new interest-limitation rules as required by the EU anti-tax avoidance directive, ATAD, by inserting a new part 35D into the Taxes Consolidation Act 1997. Interest-limitation rules form part of the recommendations of the OECD base erosion and profit sharing, BEPS, project, with the ATAD providing the basis for co-ordinating implementation of anti-BEPS measures by EU member states. Following enactment of this Bill, Ireland will have completed transposition of the directive.

The interest-limitation rule is intended to limit base erosion through the use of excessive interest deductions. These rules are complex. Deputies will be aware that my Department held an initial public consultation on these rules and the anti-hybrid rules in November 2018. This was followed by two feedback statements that were publicly made available by my Department in December 2020 and at the start of this summer, in July.

Ireland has pre-existing rules to prevent excessive interest deductions that operate in a different manner from the ATAD rule. The current Irish approach can best be summarised as one which limits interest deductions to be available only in specific scenarios largely based on the purpose of the borrowing. This is combined with targeted anti-avoidance rules which have evolved over time to combat abusive arrangements. The new ATAD rule will impose a new additional limit which links a taxpayer's allowable net interest deductions directly to its earnings. It limits the maximum net deduction to 30% for earnings before tax and before deductions for net interest expense, depreciation and amortisation. When this threshold is breached, interest deductibility is deferred until there is sufficient interest capacity to allow deduction.

The key features of the provision are as follows. The interest limitation rules apply to all corporation taxpayers but with certain erosions and reliefs as provided for in ATAD where the risk of base erosion and profit sharing is thought to be minimal. There is a de minimisexemption for companies with interest of not more than €3 million in a year. Stand-alone companies, in other words companies with no associates, group companies or permanent establishments outside Ireland, are outside the scope of the rule. Interest on borrowings in respect of long-term public infrastructure projects and interest on legacy debt, the terms of which were agreed before 17 June 2016, are also outside the scope. A group of Irish companies may, where certain conditions are met, be treated as a single taxpayer for the purposes of the restriction. The rules also take into account the debt provision of a multinational group when assessing whether interest deductions are being taken in Ireland. Finally, disallowed interest may be carried forward to the succeeding accounting periods where it may qualify for deduction if the company has sufficient interest capacity to deduct interest on its earnings before the earnings before interest, taxes, depreciation and amortisation, EBITDA, limit. Where a company has spare capacity in a year, this may be carried forward for up to five years. The new interest-limitation legislation applies to accounting periods commencing on or after 1 January 2022.