Written answers

Tuesday, 13 November 2018

Department of Finance

Corporation Tax Regime

Photo of Catherine MurphyCatherine Murphy (Kildare North, Social Democrats)
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165. To ask the Minister for Finance the reason he declined to opt for the type of controlled foreign corporation, CFC, rules model A that the majority of EU countries have found to be the most effective in tackling corporate tax avoidance; and if he will make a statement on the matter. [46568/18]

Photo of Catherine MurphyCatherine Murphy (Kildare North, Social Democrats)
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166. To ask the Minister for Finance the analysis he and his officials undertook to determine that the model B approach to CFC rules is a more effective approach in tackling corporate tax avoidance than the model A approach; if he consulted with his European colleagues on CFC rules; and if he will make a statement on the matter. [46569/18]

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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I propose to take Questions Nos. 165 and 166 together.

The first Anti-Tax Avoidance Directive (ATAD), presented in January 2016 and agreed by all Member States in July 2016, provided for five separate anti-avoidance measures to be transposed on an agreed schedule between 2018 and 2023. One of these measures was the introduction of Controlled Foreign Company (CFC) rules, or the alignment of existing national CFC rules with ATAD where relevant, by 1 January 2019.

CFC rules are an anti-abuse measure, designed to prevent the diversion of profits to offshore entities in low or no tax jurisdictions. Where CFC rules apply, they have the effect of attributing certain undistributed income of such an entity to its parent company.

ATAD provides that Member States may choose one of two options to determine whether income of a CFC should be attributed to a parent company:

A. Option A attributes certain categories of undistributed passive income of a CFC to the parent company, or

B. Option B attributes undistributed income arising from non-genuine arrangements put in place for the essential purpose of obtaining a tax advantage.

These options were unanimously agreed by all Member States on the introduction of ATAD and each Member State must choose between the options in transposing ATAD – neither option is specified to be more effective than the other in tackling corporate tax avoidance. European Commission officials have indicated in discussions their view that Member States do not have the option to incorporate both options, or a hybrid containing elements of both options, when transposing ATAD.

CFC rules introduce a significant new administrative burden both for businesses and for Revenue authorities, therefore my officials engaged in extensive consultation in advance of Finance Bill 2018. In October 2017 my Department published a consultation paper on the Coffey Review recommendations and the implementation of ATAD, inviting submissions on a range of issues including the implementation of ATAD CFC rules and the choice between Options A and B. Responses to this consultation were summarised in the Corporation Tax Roadmap and have been published in full on my Department’s website.

The 2018 Tax Strategy Group paper for corporation tax indicated that, following consideration of the consultation submissions received, it was intended that Ireland would opt for the Option B approach when introducing CFC rules. The paper, which invited comments and discussion on the options set out, was discussed at the TSG meeting in July this year and subsequently published on my Department’s website.

Reasons for electing for the Option B approach include:

- Consistency with the existing Irish tax policy focus on the taxation of activities with substance in, or a nexus to, Ireland.

- Consistency with long-standing policy in developing anti-avoidance rules based on principle purpose tests.

- The similarity of Option B to the established CFC rules in the UK, a major trading partner and a jurisdiction with a structurally similar tax system.

- Greater ease of administration for business and Revenue, in view of the calculation of profits to be attributed under internationally understood arms-length transfer pricing principles.

- Focusing on CFC income which has been artificially diverted from Ireland ensures that a proportionate response is applied to the profit shifting risks that exist within an Irish context.

The Corporation Tax Roadmap, published in September, again indicated that an Option B approach was planned. Subsequently the CFC Feedback Statement, also published in September, set out the rationale for the proposed approach and again invited feedback on a range of policy decisions.

My officials have engaged with the European Commission in relation to the implementation of ATAD on many occasions over the last year. The Corporation Tax Roadmap, which confirmed our election for Option B was brought to the attention of the relevant European Commissioners and Commission Services and all other EU Member States.

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