On December 22, 2021, the Irish Department of Finance opened a public consultation regarding a potential move from its current credit method of double taxation relief (a worldwide system of taxation) to an exemption method (a territorial system of taxation). The consultation period will run until March 7, 2022.
A worldwide regime considers all profits, both domestic and foreign source, of a resident entity to be within scope of taxation. Whereas fully territorial regimes focus on the taxation of income and gains earned in the territory and exempt foreign-source profits of resident entities.
According to the Irish Department of Finance, with the recent OECD Inclusive Framework Agreement on addressing the tax challenges arising from digitalisation being the most significant global corporate tax development in a century, it is an opportune time to reflect on the potential merits of moving to the exemption method of relief from double taxation, as well as considering alternative reforms to the Irish current system of double taxation relief.
As an initial step, the Irish Department of Finance is inviting broad views on a potential move from its current credit method of double taxation relief to an exemption method. Contributions are being sought to identify, and inform policy discussion on, the potential impacts of a transition to a territorial system. It is envisaged that, as the review process progresses, further input may be sought on the detail of the key issues identified.
At present, a company resident in Ireland is subject to Irish tax on its worldwide income. In order to prevent double taxation of foreign income that is also subject to tax in a foreign jurisdiction, foreign tax paid on that income can be offset against Irish tax payable on the same income. (Worldwide system of taxation)
In practice, this often results in limited amounts of incremental tax becoming payable in Ireland on foreign earnings. However, the double tax relief provisions set out in Schedule 24 of the Taxes Consolidation Act 1997 (TCA 1997) are complex, having evolved over many years in response to changes in policy and to accommodate principles established in European case law.
In essence, a participation exemption, or branch exemption, system would deliver double taxation relief in respect of the relevant foreign income, as the words suggest, by exempting the income concerned from residence state taxation. (Territorial system of taxation)
In its consultation the Irish Department of Finance raises 25 questions which relate to 10 subjects.
Policy Benefits of Participation Exemption and/or Branch Exemption Regimes
Q1. What is your opinion of Ireland’s corporate tax potentially moving from the current worldwide system with credit relief for foreign tax to a territorial system of double taxation relief, including participation exemption and/or branch exemption provisions?
Q2. What would the broad benefits be for multi-national enterprises if Ireland were to move to such a system?
Q3. Are there any particular drawbacks or concerns for multi-national enterprises which should be considered if Ireland were to move to such a territorial system of double tax relief, including any indirect consequences or risks?
Q4. Are there particular examples of best practice associated with a change to territoriality in other jurisdictions which could be considered, with a view to reducing compliance burdens without increasing avoidance risks?
Scope of Exemption Regimes
Q5. Taking account of the above, what in your view would be the potential impacts of moving to a participation exemption regime as set out in the Coffey Report?
Q6. Are there particular considerations or design features that should be considered in reviewing the basis of the Irish corporation tax system?
Q7. Taking account of, but not limited to, the design elements above, what in your view would be the best regime for Ireland to transition to, should a change take place?
Please elaborate with consideration of the impacts, benefits and potential drawbacks both of (a) your preferred approach and (b) any approaches which you do not think would be beneficia
Interaction with CFC Rules
Q8. Please outline your view of whether Ireland’s CFC rules would be adequately aligned with participation exemption and/or branch exemption regimes should these be introduced. What synergies or risks, if any, do you foresee arising?
Q9. Please identify any particular design features of these exemption regimes that could have positive or negative impacts in this context? Please elaborate.
Q10. Please identify any adaptations to Ireland’s CFC rules that should be considered in conjunction with the introduction of such exemption regimes.
Interest Charges associated with Exempt Income
Q11. In your view, should tax relief for funding costs of investments be reviewed, with a view to restrictions, if foreign income from such investments were to be exempted? What EU law or tax treaty constraints, if any, might impede such restrictions?
Exit Tax
Q12. Please outline what in your view the impacts, if any, of participation exemption and/or branch exemption regimes might be on Ireland’s Exit Tax rules. Do you foresee any synergies or risks in this space?
Q13. Please identify how particular design features of the exemption regimes could have positive or negative impacts in this context.
Schedule 24 TCA 1997
Q14. Do you believe that a review and simplification of Schedule 24 could be feasible and sufficient, instead of changing to participation exemption and/or branch exemption regimes? How might this simplification be achieved?
Q15. What in your view are the relevant considerations in terms of any simplification of Schedule 24?
Q16. In the event of Ireland moving to participation exemption and/or branch exemption regimes, what simplifications, if any, could be considered for the remaining credit system of double taxation relief - including in respect of foreign-source interest and royalty income and out-of-scope dividend, branch income and capital gains?
Interaction with Anti-Hybrid rules
Q17. Please outline how territorial participation exemption and/or branch exemption regimes could impact on Ireland’s Anti-Hybrid rules. Do you foresee any synergies or risks arising from the change?
Q18. Please identify any specific design features of exemption regimes that could have positive or negative impacts in this context? Please elaborate.
Q19. Please identify any adaptations to Ireland’s Anti-Hybrid rules that should be considered in conjunction with a transition to such exemption regimes.
Interaction with the Two-Pillar Solution
Q20. Do you foresee potential impacts, arising from moving to participation exemption and/or branch exemption regimes, for the way in which the two pillar solution is implemented in Irish tax law? Are there any potential synergies or risks with the implementation of the two-pillar solution and such exemption regimes?
Ireland’s Double Taxation Treaty Network
Q21. Do you foresee potential impacts, arising from moving to participation exemption and/or branch exemption regimes, for Ireland’s tax treaties?
Q22. Should the renegotiation of Ireland’s tax treaties, as respects the Elimination of Double Taxation article, be considered in the event of the enactment of participation exemption and/or branch exemption regimes? Would this be necessary? If so, how might it be feasible to accomplish this in a targeted and efficient manner?
Q23. Would any amendment of Ireland’s worldwide tax system to allow for exemption of foreign dividends, gains or branch income necessitate a review of specific tax treaties in Ireland’s network, where previously Ireland’s worldwide charge would have ensured taxation of such dividends, gains or branch income? Alternatively, could such taxation be ensured by limiting the scope of any exemptions enacted in domestic law?
Transitional Arrangements
Q24. Do you foresee impacts in relation to the matters identified above or any other matters related to transitional arrangements?
Other Issues
Q25. In your view, what other relevant considerations should be taken into account? You may wish to consider this question in the context of the recent OECD Inclusive Framework Two-Pillar agreement.
Click here too download the consultation document, in which you can also find all the necessary information on how to respond, from the website of the Irish Department of Finance.
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