Inversions and Ireland: An update on recent changes and future outlook
By Louise Kelly
Posted: 23rd September 2016 08:18
An inversion is where the parent company of a group becomes headquartered somewhere other than the U.S. Due to various anti-avoidance rules introduced in the U.S. over the years, it is generally carried out as part of an acquisition, where the target is resident outside the U.S. Due to a complex tax regime in the U.S., including their Controlled Foreign Company (CFC) rules, many previously U.S.-headquartered groups have inverted to countries such as Ireland, Switzerland and the UK, with a particular increase in recent years. Sometimes, there is a misunderstandings that an inversion means that the global profits become taxable at the Irish corporate tax rate of 12.5% (compared to the U.S. rate of 35%, before state taxes) when a company inverts to Ireland. That is not the case, as any profits of the U.S. companies will remain taxable in the U.S. and any subsidiaries of the U.S. would remain within the scope of the U.S. CFC regime. However, usually as part of the inversion structuring, additional debt is introduced into the U.S. group, which leads to a reduction in U.S. taxes and non-U.S. subsidiaries are often transferred from the U.S. group, so that they are no longer within the scope of the U.S. CFC regime.
Some companies, particularly in the life sciences sector, have been involved in a series of inversion transactions, with the company growing larger with each transaction. While there clearly need to be commercial benefits and synergies to be realised from the acquisition and therefore U.S. companies will seek targets that fit with their business agenda, additional value has been created where the merger/acquisition has an inversion element, given the reduced corporate taxes to be paid by the combined group following the inversion. Therefore, a target which provides an inversion opportunity can be more attractive to the U.S. – headquartered company than one without such opportunity.
Inversions by U.S. groups have been criticised by many U.S. politicians (including the two presidential candidates) with the introduction of various proposals to restrict the benefits of an inversion over the years. However, due to the inability of the U.S. Congress to pass major tax reform over the last number of years, no legislative changes have been introduced; instead the U.S. Treasury and the IRS have published regulations (which do not need Congressional approval). On 4 April 2016, the U.S. Treasury and the IRS published two sets of draft regulations; the first aimed at increasing the scope of various anti-avoidance provisions relating to inversions, particularly where the target has itself carried out an inversion transaction in the previous three years, and the second denying interest deductions for debt in certain situations. The regulations, particularly those relating to interest limitations, are far reaching (and not just confined to inverted groups, but also for companies in general). In addition, whether legislation will be introduced in the near future will largely depend on the outcome of the presidential and Senate/House elections in the U.S. in November 2016.
Ireland has been a favourable location for companies looking to invert out of the U.S. due to its favourable tax regime, as well as for a number of other factors, including:
- Its 12.5% corporate tax rate applicable to trading profits
- Dividends taxable at the 12.5% or 25% corporate tax rate, but due to a generous foreign tax credit regime (including pooling of credits), generally no incremental Irish tax arises on the receipt of foreign dividends
- The participation exemption for capital gains relating to qualifying shares
- Generous dividend-withholding tax exemptions, where the recipient provides the necessary declarations
- No CFC regime or thin capitalisation rules
- A comprehensive treaty network
- The Irish common law legal system, which is similar in many aspects to the U.S. legal system
- The ability to prepare the consolidated financial statements under U.S. GAAP in certain cases, rather than IFRS or Irish GAAP
- Ireland is an English-speaking member of the EU and
- Good access to the U.S., with an ever-increasing number of transatlantic flights.
In June 2016, the EU Anti-tax Avoidance Directive (ATAD) was agreed by all EU Member States. One of the provisions included in the ATAD is the requirement for all EU Member States to introduce CFC rules by 1 January 2019. As mentioned above, Ireland does not currently have CFC rules and therefore the introduction would be quite a change from an Irish perspective. It is expected that a public consultation in relation to the Irish implementation of the ATAD will be announced by the Irish Department of Finance next year. It is uncertain at this time, whether the introduction of CFC rules will be accompanied by a participation exemption for dividends, which would reduce the complex compliance relating to foreign tax credit calculations. Any company with an Irish holding company, including inverted companies, will need to consider the potential impact of the CFC rules on their structure and take action to restructure or ensure that there is sufficient substance in the various locations, where necessary.
While some groups have increased their substance/functions in Ireland following an inversion, many of the C-suite positions and operations remain in the U.S. Therefore, while the overall Irish tax regime is attractive, it is not particularly aimed to attract U.S. companies seeking an inversion and certainly Irish Government policy is not to attract inversions. Rather, it is the U.S. tax regime that drives groups to invert. Ireland’s GDP growth in 2015 was technically 26% and one of the reasons cited for this seeming aberration was the inclusion of global profits of inverted companies. Unfortunately, however, this notional increase in GDP is likely to lead to an increase in Ireland’s contribution to the EU.
In our view, U.S. companies will continue to seek inversion opportunities as part of their M&A strategy as long as there is no major tax reform of the U.S. tax regime. Due to April 2016 regulations, it may be more difficult to find a target with the right profile and size and therefore we may see a reduced number of inversion opportunities. However, Ireland will remain an attractive location for U.S. companies to invert to for the reasons discussed above, where the profile of the target is suitable.
Louise Kelly is an international tax partner with 15 years’ experience advising multinational companies and Irish plc’s on corporate and international tax matters.
She advises Irish and multinational companies, particularly those in the life sciences and technology industries in relation to appropriately tailored structures for both inbound and outbound transactions and has been involved in advising on cross-border group restructures and developing IP management and tax-aligned supply chain strategies for multinationals.
Louise is M&A Tax country leader for Deloitte Ireland and has advised corporates and Private Equity firms on multiple M&A transactions (both on the buy and the sell side).
Louise led Deloitte's Irish desk in New York for two years, and so brings a unique perspective in advising clients on setting up operations in Ireland/undertaking group reorganisations.
Louise holds a 1st Class Honours Bachelor of Science in Accounting (University College Cork). Louiseis an ACA and AITI and was placed in the top five for the ICAI exams and placed first in the final exams for ITI. She is a regular author for Bloomberg BNA publications and is a regular speaker on international tax matters in Ireland and abroad.
Louise can be contacted on +353 (1) 417 2407 or by email at email@example.com