Proposed interest tax reforms could hit competitiveness, accountants warn

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Proposed reforms to rules on interest tax risk undermining Irish competitiveness, Chartered Accountants Ireland (CAI) has warned the Department of Finance.

Proposals on the treatment of interest in the tax system would add “unnecessary complexity” should these be adopted, the accountancy body said in response to a consultation.

Minister for Finance Simon Harris published a call for feedback in November on a set of proposed “strawman” reforms on how the tax system operated around interest payments and the deductibility of such payments from tax obligations.

In its submission, CAI said it had “some fundamental concerns” with the proposal.

“Potentially the most significant among these is the proposal to introduce a single test – the so-called ‘profit motive test’ – to all interest expenses incurred by companies,” it said.

Under the proposal, firms would only be able to deduct interest if the borrowings were undertaken in the aim of realising profits or gains. CAI warned the measure will increase complexity for firms when applied across the board.

Rather than being a simplification for businesses, its adoption “may require a substantial review of existing arrangements” for businesses “given that the wording is fundamentally different”, the body said.

CAI also raised concerns on a proposal to shift from taxing and deducting interest on a paid basis to an accruals basis. Instead of obligations being due when interest is paid, it would instead be due when interest in earned.

The representative body said this should could have “potentially significant and negative consequences for Ireland’s start‑up ecosystem” as early-stage companies often used debt funding and negotiate interest‑free periods to support liquidity in the early critical years.

“Under an accruals model, companies could face annual withholding tax obligations on interest they have not paid – a direct cash‑flow hit. Investors, too, would be taxed on income not yet received and in the event of failure would need to navigate complex bad‑debt relief processes,” CAI told The Irish Times.

It also said that the change could reduce the attractiveness of debt funding.

CAI head of tax Gearóid O’Sullivan described the taxation of interest for companies as a “complex piece of Irish tax legislation” and stressed the importance of reducing complexity in the system – much of which was added as European Union legislation was added to the Irish tax system.

He said the proposals “risk undermining Ireland’s competitiveness”, saying that these “introduce new complexity rather than streamlining the existing regime”.

A further “unexpected” change in the proposal suggests the government could move towards activating legislation extending the transfer pricing rules to SMEs.

The change would be coming “at a time when SMEs are facing increased costs arising from an already increasing administrative burden – including a substantially more complex tax compliance environment”.

“The government should take appropriate steps to repeal the legislation which would extend transfer pricing commitments to SMEs and provide a clear signal of its support for that sector,” O’Sullivan said.

“Activating transfer pricing legislation for SMEs would also put us out of step with our nearest competitor, the UK.”