Corporation tax rivalry in Ireland
Companies operating in Northern Ireland will need to understand how to meet new tax compliance challenges from 2018, explains Donald Drysdale.
Irish corporation tax
If I mention “Ireland” and “corporation tax” in the same sentence, you’re probably thinking about Apple.
The Republic of Ireland has long had an aggressively low corporation tax rate, successfully attracting inward investment. A European Commission announcement in August claimed that the Republic had granted Apple tax benefits of up to €13bn that were illegal under EU state aid rules, and ordered Ireland to recover this illegal aid.
Ireland and Apple are both likely to fight strongly against this decision, and appeals may take many years to resolve. This process, and the attendant uncertainties, will test the EC’s ability to use state aid law to limit tax competition among member states. It may also discourage some multinationals from engaging in unduly complex structures in attempts to reduce their exposure to tax in particular jurisdictions.
Meanwhile, north of the border
The Corporation Tax (Northern Ireland) Act 2015 allows for devolution of power to the Northern Ireland Assembly to set a Northern Ireland rate of corporation tax. This rate will apply to certain Northern Ireland trading income, creating fresh tax competition within the UK.
The Westminster government will bring the Act into effect, devolving the rate-setting power, once the Northern Ireland Executive demonstrates that its finances are on a sustainable footing. The Executive has committed to setting a rate of 12.5% in April 2018. This rate is significant because it equates with the rate in the Republic, and might thus prevent businesses from being drawn away from the UK by a temptingly lower rate in the south.
Northern Ireland corporation tax will remain part of the UK corporation tax regime, administered by HMRC under a Memorandum of Understanding with the Northern Ireland Department of Finance and Personnel. The Northern Ireland Assembly will set the rate of tax, and its block grant will be adjusted to reflect the fiscal costs of a reduction in the rate of corporation tax.
Draft guidance published by HMRC on 26 September explains the main rules and key concepts of the Northern Ireland corporation tax legislation.
The Assembly will have the power to set the Northern Ireland rate. The rate, in general, will apply to all the trading profits of a company that is a micro, small or medium-sized enterprise (SME) if its employee time and costs fall largely in Northern Ireland. It will also apply to a corporate partner’s share of the profits of a partnership trade if that company and partnership are both SMEs and the partnership’s employee time and costs fall largely in Northern Ireland.
The rate will also apply to the profits of a large company, and (in the case of corporate partners not covered by the SME rules) to a corporate partner’s share of the profits of a partnership. In these cases it will apply to profits attributable to a Northern Ireland trading presence – termed a ‘Northern Ireland regional establishment’ (NIRE). The trading profits attributable to the NIRE will be computed using internationally recognised principles with some modifications and adaptations.
In an accounting period in which a large company or partnership is within the regime – and therefore referred to as a ‘Northern Ireland company’ or ‘Northern Ireland firm’ – its trading profit or loss will be split between ‘Northern Ireland profits or losses’ (taxed or relieved at the Northern Ireland rate) and ‘mainstream profits or losses’ (taxed or relieved at the main UK rate).
Special rules will apply where a company or partnership making profits overall (or, alternatively, making losses overall) makes a Northern Ireland loss (in conjunction with a mainstream profit) or a mainstream loss (in conjunction with a Northern Ireland profit). HMRC’s draft guidance also explains concepts necessary to understand how the legislation works – in particular ‘qualifying trades’, ‘excluded trades’, ‘excluded activities’ and ‘back-office activities’.
The draft guidance describes how the rules governing intangible fixed assets will apply to protect against tax avoidance arising from the shifting of income streams and/or manipulation of disposals of assets. It makes no reference to the Finance Act 2014 anti-avoidance provisions relating to the transfer of assets or income streams through arrangements seeking to manipulate the flexibility of partnerships (whether mixed or not) to reduce tax by exploiting the differing tax attributes of the partners, but it might be prudent to bear these in mind.
The guidance explains how the rules governing capital allowances and balancing charges will be adapted in calculating Northern Ireland profits and losses. It also sets out the application of research and development (R&D) relief and expenditure credits to expenditure incurred for the ‘Northern Ireland trade’ of a Northern Ireland company.
Separate sections in the guidance relate to remediation of contaminated or derelict land,
the application of the various ‘creative reliefs’, and the patent box rules – all in relation to a Northern Ireland company. A final section explains how the rules will be adapted to deal with partnerships at least one of whose members is a company.
As Scotland is discovering, fiscal devolution can bring confusion and conflict and comes at an administrative cost. Businesses operating across the UK, including Northern Ireland, will need to take this into account.
Currently the uncertainties caused by Brexit are of particular concern. Businesses deciding where to locate may need to weigh up carefully the relative merits of Northern Ireland, within the UK, and the Republic of Ireland, within the EU. The repercussions of Brexit will become clearer over time, but not necessarily by April 2018 when the Northern Ireland rate of corporation tax may be implemented.
Article supplied by Taxing Words Ltd