June 1, 2022
Ireland launches consultation on Pillar Two implementation
On 26 May 2022, Ireland announced a public consultation on how the Organisation for Economic Co-operation and Development (OECD) Pillar Two framework under BEPS 2.0 will be implemented into Irish law.
Pillar Two primarily consists of two interlocking domestic rules, together referred to as the Global Anti-Base Erosion (GloBE) rules, which will introduce a global minimum effective tax rate of 15% for in-scope businesses. The remaining element of Pillar Two, the Subject to Tax Rule, is a treaty-based rule which will apply where certain intra-group cross-border payments are subject to low levels of taxation. It is noted that the intention is that the legislation with be transposed into Irish law via future Finance Act(s).
The consultation notes that transposition is likely to involve four key elements:
Income Inclusion Rule (IIR)
The IIR will apply to groups whose ultimate parent entity is an Irish resident and whose annual consolidated revenue is at least €750 million (m).
The top-up tax will apply to the Irish parent, any constituent entities located in Ireland, elsewhere in the European Union (EU) and outside the EU.
The IIR will also apply to Irish intermediate parent entities of foreign headquartered groups where those Irish entities are more than 20% owned by minority investors or are controlled by a parent entity that is not located in a jurisdiction which has introduced Pillar Two.
The IIR will impose a top-up tax on the Irish parent entity based on their interests in the constituent entities located in jurisdictions where the effective tax rate (ETR) is less than 15%. The ETR for this purpose is computed under the GloBE rules on a jurisdictional basis.
Undertaxed Profits Rule (UTPR)
The UTPR allows a top-up tax to be collected where the IIR does not apply. Tax arising under the UTPR can be collected by group entities regardless of whether they are parent entities.
UTPR top-up tax is allocated among jurisdictions where the group operates using an allocation key based on employee costs and the value of tangible assets per jurisdiction.
Qualified Domestic Top-Up Tax (QDTUT)
The GloBE Model Rules provide that a domestic top-up tax will be directly creditable against liabilities otherwise arising under an IIR or UTPR.
Under the draft EU Directive each Member State may elect to apply a QDTUT to the constituent entities of a group located within its borders. The draft Directive provides that implementation of a QDTUT will be sufficient to satisfy the requirements of Pillar Two meaning that other Member States are assured sufficient tax has been paid by companies in the jurisdiction applying a QDTUT and no further top-up tax would be required. As such the application of a QDTUT is in effect a "safe harbour." The consultation notes that it is an EU rule which is expected to have wider global application.
The consultation notes that:
It is very likely that Ireland will introduce a QDTUT as part of the Pillar Two implementation process.
The consultation expressly seeks stakeholder views on considerations relevant to its introduction including revenue protection to ensure collection of top-up tax due and minimizing the administrative burden for in-scope groups having regard to the potential benefits of the safe harbour provision in the draft Directive.
Subject to Tax Rule (STTR)
The STTR is a bilateral tax treaty rule which operates separately to the GloBE rules outlined above.
The STTR is not finalized but is intended to apply to cross-border payments such as interest and royalties where the payment is subject to an ETR below the STTR 9% minimum rate.
If tax on a payment is below the STTR 9% minimum rate, the source jurisdiction is granted additional taxing rights to bring the tax borne up to the difference between 9% and the tax applied to the payment in the source and residence jurisdictions.
A multilateral instrument is anticipated to assist countries in adopting the STTR where required to do so.
The consultation can be accessed here.
The consultation does not extend to the design of Pillar Two itself.
The consultation questions are set out below. The consultation contains detailed footnotes cross refencing to the Model Rules and draft Directive.
- Are there any specific features of the Rules that warrant particular attention with regard to their implications for Ireland's tax code and tax policy?
- When implementing the Rules, are there any specific issues which should be considered with respect to implications for the Irish tax code arising from United States (US) corporate tax reform proposals, with particular reference to the significance of US multinational enterprises (MNEs) operating in Ireland?
- Are there other considerations of significance that should be taken into account when implementing the Rules in domestic legislation?
- Are there any amendments needed to Ireland's existing tax code to ensure that existing legislation does not result in any unintended outcomes under the Rules when they are implemented in domestic legislation?
Are there any aspects concerning the scope of the Rules, for example the definitions of a Group, a Constituent Entity or an Excluded Entity, that require further clarification in domestic legislation?
- Do you have any views on how (i) the Income Inclusion Rule (IIR) and (ii) the Undertaxed Profits Rule (UTPR) provisions should be reflected in domestic legislation?
- In relation to the UTPR, should this take the form of either (i) a top-up tax or (ii) a denial of deduction against taxable income resulting in an amount of tax liability necessary to collect Ireland's portion of the UTPR top-up tax amount?
Computation of GloBE Income or Loss
- Do you have any comments on the Computation of GloBE Income or Loss provisions contained within the Rules and how these could be implemented in domestic legislation? In particular, do you have any comments on:
- the determination of the Financial Accounting Net Income or Loss, and
- the adjustments to determine the GloBE Income or Loss?
- Are there any aspects of the Computation of GloBE Income or Loss provisions that require further clarification in domestic legislation?
- Do you have any views on the rules regarding the allocation of Income or Loss to entities/jurisdictions as they could apply to domestic legislation?
Computation of Adjusted Covered Taxes
- Do you have any comments on the Computation of Adjusted Covered Taxes provisions and how these could be implemented in domestic legislation?
- Are there any aspects of the Computation of Adjusted Covered Taxes provisions that require further clarification in domestic legislation?
- Do you have any views on the rules on (i) the allocation of covered taxed between entities, (ii) the mechanism to address temporary differences, and (iii) post-filing adjustments as they could apply to domestic legislation?
Qualified Refundable Tax Credits
- Do you have any comments on the potential interaction of tax credit provisions, as currently set out in the corporation tax code, with the definition of "Qualified Refundable Tax Credit"?
Computation of ETR and Top-up Tax
- Do you have any views on the Computation of Effective Tax Rate (ETR) and Top-up Tax provisions? In particular, do you have any views on the process to calculate ETR and Top-up Tax and how these could be implemented in domestic legislation?
- Are there any aspects of the calculation of the ETR and Top-up Tax of investment entities, joint ventures or minority-owned constituent entities that require further clarification in domestic legislation?
Qualified Domestic Top-up Tax (QDTUT)
- In your view, should a QDTUT be implemented by Ireland? If so, what should be the features of such a QDTUT and how should it operate? In particular, please provide your view on the charging and administrative rules that should apply.
For example, could a QDTUT form part of the corporation tax liability of a company and be returned as part of the corporation tax return? How should the jurisdictional calculation of the QDTUT be addressed in return filings, particularly where entities in an MNE group in scope in Ireland might have different intermediate parents?
Administration – Payment and Filing
- Do you have any views on how the reporting obligations of entities that are in scope of the Rules, should be satisfied?
- How should liabilities arising under the IIR or UTPR be reported and paid/collected? Do you have any views on the frequency of such payments and the deadlines that should apply?
- Do you have any views on whether Irish constituent entities should be made joint and severally liable for any Irish GloBE liabilities of the Irish constituent entities of the same MNE Group? In this regard, would you differentiate between IIR liabilities and UTPR liabilities?
- Do you have any views on whether Irish constituent entities should be made joint and severally liable for the QDTUT (if Ireland were to adopt such a provision) of the Irish constituent entities of the same MNE Group?
- What group entity should be made initially liable for paying UTPR tax? Is your answer dependent on whether UTPR tax is collected by way of denial of deduction or direct charge?
- Are there any aspects of the Transition Rules that require further clarification in domestic legislation?
Subject to Tax Rule (STTR)
- Should amendments to any domestic legislation be considered to address potential application of, or interactions with, the STTR?
Large Scale Domestic Groups
- The proposed Directive on Pillar Two will also apply to large-scale domestic groups. Are there any aspects of the application of the Rules to large-scale domestic groups that require further clarification in domestic legislation?
The consultation period will run until 22 July 2022.
It is noted that Ireland's Department of Finance may invite stakeholders to meet with them as part of the consultation process.
EY Ireland will participate with clients, the Department of Finance and other stakeholders on this process.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Ireland), Dublin
Ernst & Young (Ireland), Financial Services, Dublin
Ernst & Young (Ireland), Cork
Ernst & Young (Ireland), Limerick
Ernst & Young (Ireland), Waterford
Ernst & Young (Ireland), Galway
Ernst & Young LLP (United States), Irish Tax Desk, New York
Ernst & Young LLP (United States), Irish Tax Desk, San Jose
Ernst & Young LLP (United States), FSO Irish Tax Desk, New York