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Advanced Business Taxes Lecture 3

Advanced Business Taxes Lecture 3. ABT – Lecture Plan. ABT – Lecture Goals. Understand basis of Irish charge Identify Irish tax issues on repatriation of profits from Ireland including migration

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Advanced Business Taxes Lecture 3

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  1. Advanced Business Taxes Lecture 3

  2. ABT – Lecture Plan

  3. ABT – Lecture Goals • Understand basis of Irish charge • Identify Irish tax issues on repatriation of profits from Ireland including migration • Understand and apply the Irish tax treatment on inbound interest/royalties, foreign branch profits and dividends from both Treaty and non-Treaty jurisdictions to include Irish taxation and credit for foreign taxes • Understand and apply Irish participation exemption regime for chargeable gains • Compare and contrast branches, subs and representative offices • Understand key relief available for intra-group financing including associated anti-avoidance provisions

  4. Recap on Last Week - Quiz • Name three scenarios where Irish legislation, EU Directives and Double Tax Treaties may interact • Give the specific legislative references • Why would you rather go for EU Directive Relief as apposed to domestic or treaty relief? • How do the conditions for domestic, treaty or EU directive relief vary? • Name 4 ways a company can avoid withholding tax on interest?

  5. Recap on Last Week - Quiz • What is meant by transfer pricing? • Name 5 methods for determining transfer price? • What is a correlative adjustment • Describe any transfer pricing provisions of a double tax treaty? • Give 5 examples of a branch and 3 examples of a non-branch activity • What is meant by “thin capitalisation” • Name three ways a double tax treaty can relief income from double tax?

  6. International Tax Chapter 8 Taxation Issues for companies setting up in Ireland (Inbound investment)

  7. Companies coming to Ireland • How is a company coming to Ireland taxed? • Is it opening a branch in Ireland, creating a new subsidiary in Ireland or migrating its residence to Ireland? • What type of income will it have? Trading, non trading (Noddy), receipt of interest, royalties, dividends, chargeable gains? • What is the taxation in Ireland but also what withholding tax will apply on the repatriation of this profit abroad? • In what way is the income relieved from DT?

  8. Repatriation of Profits from Ireland • Key tax issue prior to investment is tax efficiency of profit repatriation – what is the tax cost of bringing profits “home”? • Profit repatriation encompasses interest, royalties, dividends, capital distributions – can also include arm’s length recharging for services rendered • Marginal taxation can arise due to • Higher rates of tax in home jurisdiction and/or non-availability of credit for Irish tax (including underlying tax in case of dividends) • Un-creditable WHT suffered/ domestic exemption such that WHT final tax cost

  9. International TaxationRecap – Basis of Charge • S.26(1) – Irish Res Co chargeable to CT on worldwide profits - income and chargeable gains • S.25(2) – Non-resident Co with Irish branch/agency chargeable to CT in respect of • trading income from the branch/agency (non-trading branch income outside of scope of corporation tax) • income from property of the branch/agency • chargeable gains from disposal of branch/agency assets • Non Irish resident Co with no Irish branch/agency chargeable to Irish income tax on Irish source income and chargeable to CGT on disposal of specified assets (S.29)

  10. Ireland as jurisdiction to repatriate profits from • Consider a structure such that foreign company lends to Irish operation or licences IP to Irish operation • Interest or royalties paid to foreign company – repatriation of profits before corporation tax! • Is it caught by domestic Transfer Pricing rules – Sec 835C • Applies to trading transactions • Does not apply to “grandfathered transactions”

  11. Repatriating Profits Abroad - Cont’d • What about withholding tax? • General rule – Income Tax withheld 20% • Interest paid S246 • Royalties S238 • WHT due with Preliminary Tax

  12. Interest and Royalties - Withholding Tax exemptions • S.246(3)(h) - exemption from WHT on trading interest to Treaty residents • No exemption on payments to domestic non-banking Irish Co unless covered by 51% group exemption S410 • S.242A – FA10 amendment extends same treatment to patent royalties made to Treaty residents in the course of trade/business • Extensive exemptions from DWT per S.172D • In absence of domestic legislative exemption – DTA provides for lower/nil rate of WHT on dividends, interest and royalties • Interest and Royalties Directive • Legislative exemption preferred due to absence of Treaty clearance procedures – changes in this

  13. Withholding Tax exemptions (cont’d) • Form VC3 previously required certificate from the auditor of the non-resident company certifying that it is not controlled by Irish residents • Finance Act 2010 has removed this requirement and instead DWT exemptions now apply in accordance with a self-assessment system.  • The declaration will endure and cover future dividends for a period of up to six years after which a new declaration • Note WHT exemption in Interest and Royalties Directive

  14. Repatriation of Profits by way of dividend • No deduction for CT purposes in Ireland, hence interest and royalties more favourable • Dividends are extremely widely defined • DWT applies unless domestic exemptions, (see s172) EU Parent Sub or treaty exemption applies • Are dividends treated as trading or non trading income for recipient in home country? • Is credit given in home country for WHT applied in Ireland?

  15. Repatriation of Profits from Ireland • Repatriation also includes S.583 capital distribution – redemption, share buy-back, distribution in course of winding-up • Capital distribution different from an income distribution S.130(1) => DWT n/a • Capital distribution = a reduction in capital of the company – difficult from a legal perspective • Capital distribution = CGT event, are the shareholders subject to CGT? • Repatriation also achievable through migration of Irish sub out of charge to Irish tax – migration may be preferable in certain circumstances to distribution/liquidation

  16. S.627 – 629 CGT Exit Charges on Migration • S.627 CGT Exit Charge on Migration - Company ceases to be Irish resident – deemed sale & reacquisition of all assets subject to certain key exemptions • Allowable loss offset against allowable gains – net gain chargeable • Exit charge n/a to “Excluded Companies” – 90% controlled by company under control of EU/Treaty residents (not Ireland) • Exit charge n/a where assets continue to constitute Irish branch assets (“specified assets”) • See Task 8.2

  17. S.627 – 629 CGT Exit Charges on Migration • S.628 Election to postpone gain where Migrating Co 75% Sub of Irish resident Co – deferred gain crystallises to the Irish parentif within 10 years: • MigratingCo sells any of the assets with deferred gain • MigratingCo ceases to be a 75% sub of the Irish resident Parent or the Parent ceases to be Irish resident • S.627/628 Tax unpaid within 6 months recoverable from • Co which was 75% group member in 12 month period to migration, or • Controlling Director (S.432) • Tax recoverable within “specified period” – 3 years after end of relevant chargeable period

  18. S.627 – 629 CGT Exit Charges on Migration • Migration to non EU/EEA country will result in migrating company ceasing membership of Irish CGT group • S.623 clawback of CGT group relief where migrating Co leaves CGT group with asset within 10 years of relieved transfer • S.623 clawback should result in uplifted base-cost for purposes of S.627 charge • S.627 exclusions not available for S.623 charge • Migration should not affect association for stamp duty clawback purposes

  19. International Tax Chapter 9 Taxation Issues Companies expanding outside of Ireland (Outbound from Ireland)

  20. Company expanding from Ireland or using Ireland as HoldCo location • What type of income will they receive • Foreign trade Case III or Case I • Repatriating profits from foreign operations • How? - Interest, Royalties, Dividends, Capital Distributions • Irish Domestic exemptions from WHT not applicable • What are foreign domestic WHT rules • Does Tax Treaty or EU Directives offer any relief? • Does our domestic unilateral credit relief apply?

  21. Interest/Royalties • Interest/royalties taxable at 12.5% trading income, 25% passive • DTA usually provides that interest/royalties taxable in country of residence only unless connected with PE in other country • Royalty payments may not fall within narrow definition in some Treaties such that WHT applies • Where WHT correctly suffered under DTA credit relief available per Sch24 • Non-Treaty – unilateral relief for trading interest/royalties per Sch24 9D, 9DB

  22. Interest/Royalties – Credit Relief – trading income from DTA Country – Sch 24, para 4 • If royalty/interest arising from DTA country and is trading income use – P X I/R turnover basis applies per Sch24, para. 4 • See pg 147 manual • Gross foreign income adjusted using “Turnover basis” to calculate “Irish measure of foreign income” <referred to as “Relevant Income”>

  23. Interest/Royalties – Credit Relief • Relevant income = P x I/R • P= the amount of net profits of the trade before any deduction for foreign taxes not allowed as a credit (i.e. net taxable Case I profits pre deduction for uncredited tax) • I = “that income” (the foreign income on which the foreign tax was suffered) before deducting any expenses (i.e. gross foreign income) • R= the total amount receivable by the company in the period in the carrying on of its trade (i.e. Case I Turnover)

  24. Interest/Royalties – Credit Relief • Practical approach to foreign tax credit relief calc:- • Gross up Net Foreign Income (Relevant Income Less Foreign Tax) at lower of Irish effective rates and Foreign effective rates <foreign effective rate = foreign tax/relevant income> • Credit = Grossed up NFI X Lower Effective Rates • Full Credit where FER < Irish effective rate (12.5%), • FER > Irish effective rate – tax deduction for uncredited tax

  25. Understanding Interest/Royalty Credit Relief Sch 24(4) • See example 9.1 • Say Royalty received = 40k • Say tax withheld on Royalty = 4k • Say total profits in IreCo = 100k • Say total Turnover in IreCo = 800k • Royalty is deemed to contribute 5k to profits of Irish Co. • Royalty forms part of trading income – trade expenses would have occurred, hence reduction to deemed Irish Measure Income! • Actual tax withheld was 4k. Effective tax rate 80%. Regross 1k at lower of Irish and Foreign ETR = 1.143k. • Credit is given for 1.143k, Deduction for 3,857k

  26. Interest – Credit Relief – trading interest from Non DTA Country – Sch 24, para 9D • Calculate A – use normal method (sch 24 para 4) • Calculation B - Foreign Tax x 87.5% • Credit relief based on lower of A&B

  27. Interest/Royalties – Credit Relief • Onshore “pooling” for trading interest only per Sch24,9F subject to 25% relationship – no pooling for royalties • Uncredited foreign tax on interest offset against Irish CT on similar Case I trading interest – no provision for carry forward (as distinct from pooled dividends) • Part of Excess Credit relieved by deduction • Excess credit for pooling = (100% – 12.5%) X Excess Credit (Sch 24, Paragraph 9 (3)(b)) • Example 9.2

  28. Interest/Royalties – Credit Relief • Non-trading interest/royalties • Treaty relief only – no unilateral relief • Irish measure foreign income is the foreign interest/royalty – no adjustment required – its not Case 1 income! • No pooling for un-credited foreign tax

  29. Foreign Branch Profits • Credit in Ireland for foreign branch profits under DTA per Sch24 • Sch 24, 9DA – unilateral credit relief to IrishCo for foreign tax on foreign branch profits • Sch24, 9FA - pooling of unrelieved foreign branch tax against other foreign branch income – FA10 amendment provides for carry forward unrelieved tax • Irish Measure Foreign Income (IMI) – Irish taxable profits on basis profits were calculated under Irish tax principles => Sch24, 4.(2A) [P X I/R] Turnover Basis not used • Use of Irish basis generally results in different FER to actual rate of foreign tax=> FER = foreign tax/IMI • See examples Pg. 166

  30. Inbound Dividends – Domestic Taxation • Prior to FA08 inbound dividends taxable under Case III @ 25% • FA08 introduced S.21B arising from UK FII GLO case => aim to ensure that EU source dividends not subject to higher rate of taxation than domestic dividends contrary to Freedom of Establishment principle • Domestic effective rate may be lower than 12.5% on underlying profits – EU source dividends now at effective 12.5% => still contrary to EU law??? • Election to tax inbound dividends from EU/DTA resident sub paid out of “trading profits” as defined • NEW FA2010 extended 12.5% CT to dividends paid from trading profits of non DTA public co’s

  31. Inbound Dividends – Domestic Taxation • Trading Profits • profits from carrying on a trade (exclude “excepted trade”) • dividends received out of trading profits (traced through EU/DTA) • Mixture – pro-rating required subject to 75% test • Dividends flowing through non-EU/DTA lose their trading character • Dividend from <5% shareholding deemed paid out of trading profits – 12.5% where Case III, exempt where trading Case I

  32. Inbound Dividends – Domestic Taxation • All dividend deemed to be paid out of trading profits where • 75%+ sub profits are trading profits, and • 75%+ assets of group are trading assets • Relevant trade charges offsettable against S.21B 12.5% dividends – S.243A(3)(c) • Relevant trading losses offsettable against S.21B 12.5% dividends – S.396A(3)(c) • Group relief relevant trading losses and excess relevant trade charges against S.21B 12.5% dividends – S.420A(3)(a)(iii)

  33. Inbound Dividends – Credit Relief under DTA • Dividends potentially suffer two layers of taxation • Underlying tax – tax on the profits out of which dividend paid • Dividend Withholding tax • DTA usually limits level of DWT depending on % shareholding, e.g. UK DTA – max 15% WHT, reduced to 5% with 10% • DTA imposes minimum shareholder requirement to avail of credit relief for underlying tax, e.g. Art.21(b) UK DTA imposes min. 10% voting power

  34. Inbound Dividends – Credit Relief under DTA • Limited no. of DTAs allow relief for underlying tax to “portfolio” investors (<10% issued share capital) • Belgium, France, Germany, Italy, Japan, Lux, => Revenue provide sample effective tax rates for these jurisdictions (incl. WHT & underlying tax)– open to taxpayer to calculate actual instead (See TB67) • Cyprus, Pakistan, Russia & Zambia – taxpayer must calculate actual effective tax rate

  35. Inbound Dividends – Credit Relief • Bowater principle => Irish measure of foreign income (IMI) (aka “relevant income”) in case of dividends is accounting profits before tax (not tax adjusted profits) • Foreign Effective Rate = Actual ForeignTax (i.e. DWT + % Underlying Tax) % Accounting Profits before tax • Need to pro-rate accordingly where not all profits distributed and/or not 100% shareholding • See Task 11.4 (change to eg 9.6)

  36. Inbound Dividends – Unilateral Credit • Sch24, 9A – unilateral credit relief for WHT and underlying taxes on dividend income from 5% Sub – also applies to EU Co with Irish branch receiving dividend • Unilateral relief applies where no DTA or requirements for credit relief under DTA not met (e.g. % shareholding) • Sch 24, 9B – same relief as 9A for underlying tax borne by lower tier companies • Relief is granted in same manner as per Treaty – Sch. 24 provisions apply

  37. Inbound Dividends – Onshore Pooling Sch24, 9E • Relief for un-credited foreign tax on inbound dividends – available for offset against Irish tax arising on other inbound dividends - see example 9.7 • Excess credits available for offset against other foreign dividends in AP, unutilised c/f for offset in future AP • Part of Excess Credit relieved by deduction => Excess credit for pooling = (100% – Tax Rate%) X Excess Credit (Sch 24, Paragraph 9 (3)(b)) • Restrict tax credit to 75% or 87.5% as appropriate

  38. Inbound Dividends – Onshore Pooling Sch24, 9E • Excess tax credit arising on 25% dividend received from 5% Sub (direct or indirect) may be claimed against CT arising on any other such inbound dividend (either 25% or 12.5%) See example 9.8 • Excess tax credit arising on S.21B 12.5% “relevant dividend” offsettable only against CT arising on 12.5% “relevant dividend” • Consider mix of foreign dividends before 12.5% election => may be preferable not to elect – see 9.3.4 pg 166 • Unused credits available for carry forward indefinitely – 12.5% excess credits ring-fenced

  39. Participation Exemption – S.626B • “Participation Exemption” • An exemption from CGT on disposal of shares in Qualifying Subs • ParentCo - Min 5% of OSC, Profits & Assets for continuous 12 month period at any time during 2 years period up to date of disposal => no requirement for 5% at date of disposal • SubCo – EU/DTA Resident, and • business of SubCo consists wholly or mainly of the carrying on of one or more trades, or • taken together, the businesses of HoldCo and all SubCos which meet resident/holding period test consist wholly or mainly of the carrying on of one or more trades.

  40. Participation Exemption – S.626B • “Wholly or mainly” – no guidance, >50% total profits, assets or turnover • S.626B(3) – exemption N/A to • disposals of shares deriving greater part of value from land/minerals in State, • ng/nl transactions per S.617 • Deemed disposals on migration per S.627 • S.626C – extends S.626B to assets related to shares, e.g. options & other rights to acquire shares • No loss relief where S.626B applies • Dividends from SubCo not treated as investment income for CCS purposes where S.626B applies – excl FII

  41. Chargeable Gains – Sch24, 9FB • Many DTAs provide that disposal of shares taxable in country of residence only except where greater part of value derive from land/buildings in other jurisdiction • Gain chargeable in both countries • Credit relief under DTA – use Irish measure of gain to calculate FER • Unilateral relief where CGT suffered in jurisdictions covered by DTAs which exclude CGT (pre 74 Treaties), e.g. France, Germany, Netherlands

  42. Branch, Sub or Rep Office? • Company and branch treated as same legal entity for Irish tax purposes (Irish co with foreign branch or foreign co with Irish branch) • Other jurisdictions may treat Company and branch as separate entities for tax purposes, e.g. Luxembourg • Irish branch of foreign co does not prepare own financial statements – Foreign Co required to file Form F7, P&L, BS, Directors and Audit report including consolidated accounts with CRO • Foreign branch of IrishCo – financial statements include branch profits => full profits taxable in Ireland with credit for foreign tax. Domestic provisions of foreign jurisdiction may require separate branch accounts

  43. Branch, Sub or Rep Office? • Branch • IrishCo liable to branch profits as earned – credit relief (DTA, unilateral relief) for foreign tax suffered • Transactions between branch and IrishCo ignored (includes for TP purposes) – Treaty imposes arm’s length pricing • Branch losses form part of IrishCo profits – immediate relief • Foreign tax base and Irish tax base may differ – consider in context of FER

  44. Branch, Sub or Rep Office? • Subsidiary • Ensure foreign tax residence • Irish Parent liable to tax on sub profits when repatriated– credit for WHT and underlying tax (DTA, unilateral relief) • No loss relief in Irish Parent for foreign sub unless S.420C applies • Entitlement to S.626B relief on future sale • Irish sub of foreign parent – consider foreign CFC rules

  45. Branch, Sub or Rep Office? • Representative office is merely an office in foreign jurisdiction with no authority to bind the company – should not constitute a PE (branch or agency) • No taxable presence in local jurisdiction – may be requirement to apply PAYE where employees are carrying out duties in domestic jurisdiction • Nature of representative office is that no profit attributable to it (even where foreign Revenue authority argues that it is a PE under

  46. Relief on Intra-group Financing • Qualifying interest per S.247 deductible as a charge on income per S.243(8) • S.247 used to finance acquisitions, fund subsidiaries, restructure groups by way of debt/equity – including non Irish resident subs • Detailed conditions to be met • Detailed anti-avoidance provisions re interest on intra-group loans (not equity) • Comprehensive recovery of capital rules – S.249 • Remember general rules re interest deductibility on trading account, rental account

  47. Relief on Intra-group Financing S.247(2) Interest on a loan used to:- • Acquire shares in a Trading/Rental Co or a HoldCo of a Trading/Rental Co • Lend to Trading/Rental Co or a HoldCo of a Trading/Rental Co where proceeds used wholly & exclusively for purposes of their trade/ trade of ConnectedCo • Repay loan which was applied for either of these purposes • Note: S.248 for individuals – no relief for interest on loan to RentalCo

  48. Relief on Intra-group Financing – S.247(3) Conditions • Investing Co must have Material Interest (>5% OSC) in Investee Co or a ConnectedCo • Common Director throughout period from loan application to interest payment • No recovery of capital in period – interest relief restricted pro-rata per S.249 • Interest relief allowed on a paid basis • Loan proceeds cannot have been applied for some other purpose prior to being used as per S.247(2)

  49. Relief on Intra-group Financing – S.249 Recovery of Capital • Interest deduction restricted pro-rata where Investing Co (borrower) recovered or deemed to have recovered capital from Investee Co or ConnectedCo • Applies to capital recovered during the period from the application of the proceeds of the loan until interest paid or within the period beginning 2 years before the loan proceeds were invested, unless capital recovered used to • acquire shares/lend money qualifying for relief per S.247(2), or • repay another loan qualifying for S.247 relief

  50. Relief on Intra-group Financing – S.249 Recovery of Capital Deemed recovery of capital per S.249(2) • InvestorCo receives consideration for the sale/repayment of OSC of InvesteeCo or company connected with InvesteeCo • Investee Co or ConnectedCo repays any loan from the InvestorCo • InvestorCo receives consideration for the assumption of a debt due from InvesteeCo or a ConnectedCo

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