Ireland’s latest Finance Act provides tax clarity for multinationals

The changes will help affected taxpayers and their advisers with resolving areas of uncertainty in what remains a new, complex set of tax rules to navigate and sends a clear message that Ireland will continue to honour its commitments to an ongoing global tax reform project – both at an EU and OECD level.

Background

The OECD adopted a ‘two pillar’ solution to address the tax challenges arising from the digitalisation of the global economy, including the Pillar Two global anti-base erosion model, or GloBE, rules and Amount B of Pillar One.

Ireland transposed the EU Minimum Tax Directive, which was based on the Pillar Two GloBE rules, into its domestic laws in 2023, with the relevant provisions coming into effect for accounting periods starting on or after 31 December 2023. Since then, the OECD has published the third and fourth sets of administrative guidance in relation to the Pillar Two GloBE rules, in December 2023 and June 2024 respectively.

The Pillar Two measures incorporated into the Finance Act 2024

The main changes in the Finance Act 2024 relating to Pillar Two involve the incorporation of important aspects of the OECD’s administrative guidance into Irish primary legislation.

In the case of the December 2023 administrative guidance, noteworthy amendments relate to the transitional country-by-country reporting safe harbour so that it will now include detailed provisions for hybrid arbitrage arrangements.

As a result of those changes, when determining whether the transitional country-by-country reporting safe harbour applies to a multinational group, any expense or loss arising from a hybrid arbitrage arrangement entered into after 15 December 2022 will be excluded from the multinational group’s profit and loss in respect of the jurisdiction.

The 2024 Act also legislates for several elements provided for in the June 2024 administrative guidance. These include expanding the definition of hybrid entity and clarifying the meaning of “owner” in assessing whether a flow-through entity is a tax transparent entity or reverse hybrid entity. The law also includes amendments to provide for allocating certain covered taxes to a constituent entity that is a hybrid entity or a reverse hybrid entity and allow for an election to exclude the allocation of certain deferred tax expenses and benefits to a jurisdiction.

Other changes

Apart from legislating for elements of the Pillar Two GloBE administrative guidance, the 2024 Act aims to clarify some aspects of the domestic top-up tax calculation. These changes follow on from the Irish Department of Finance’s close engagement with industry stakeholders following the introduction of the Pillar Two rules, including the domestic top-up tax, in Finance Act (No.2) 2023.

The 2024 Act also transposed elements of Amount B of Pillar One that set out a simplified transfer pricing approach for determining the arm’s-length amount of certain marketing and distribution arrangements. This follows the agreement by members of the OECD/G20 Inclusive Framework in February this year on a political commitment on “covered jurisdictions” under Amount B, which would be provided for from 1 January 2025, known as Phase One of Amount B. The list of covered jurisdictions was finalised and agreed in June and includes 66 low- and middle-income countries as defined by World Bank Group classifications.

Phase One of Amount B has been reflected in the Irish transfer pricing rules as a result of the 2024 Act, satisfying Ireland’s commitment as a member of the OECD/G20 Inclusive Framework. For chargeable periods starting on or after 1 January 2025, where a covered jurisdiction with which Ireland has a bilateral tax treaty in effect applies the Amount B approach, the Amount B rules will be switched on for a qualifying arrangement.

Separately, the definition of transfer pricing guidelines in the Irish transfer pricing rules has been updated to include the OECD Pillar One Amount B report published in February and added as an annex to the OECD’s transfer pricing guidelines, as well as the supplemental guidance released in June this year.

Our view

Ireland’s 12.5% corporation tax rate has represented one of the cornerstones of its corporate tax policy for several decades that – along with its competitive physical, regulatory, and commercial framework for business – underlines the country’s status as a key foreign direct investment hub. This has enabled Ireland to provide a low-corporation-tax profit centre for the Europe, Middle East, and Africa operations of multinational enterprises.

The introduction of the minimum effective corporation tax rate of 15% for accounting periods starting on or after 31 December 2023, as part of the implementation of Pillar Two measures last year, was a significant milestone for Ireland in terms of its overall corporate tax policy and attractiveness as a gateway to the European market and beyond.

The new section introduced by the 2024 Act into the main Taxes Act regarding Amount B effectively seeks to provide for the political commitment in respect of Amount B, although additional documentation requirements and anti-avoidance rules have been included in the section, and there is perhaps less for affected taxpayers to get interested or concerned about here. The same could be said in relation to the updates in the 2024 Act relating to the Pillar Two GloBE administrative guidance.

For multinational enterprises and large domestic companies, there will be no surprises in terms of how Ireland has implemented the rules around Amount B into its domestic laws and the third and fourth sets of the OECD administrative guidance. However, affected taxpayers will need to remain vigilant on additional administrative guidance released as part of the base erosion and profit shifting (BEPS) 2.0 project.

A version of this article was first published by Bloomberg Tax.