Foreign Tax Credit Rules
Foreign Tax Credit Rules
While changes, such as the introduction of the foreign dividend participation exemption and the prospective introduction of a branch exemption, simplify the tax system for international companies in Ireland, for those that elect to not avail of these exemption or do not qualify remain reliant on the complex foreign tax credit rules in Schedule 24, TCA 1997. In your view, how can these rules be simplified?
Contributor: Angela Fleming, Partner & Head of Financial Services Tax, BDO
While the introduction of the participation exemption for foreign dividends was a very welcome development, and a future introduction of an exemption for foreign branch profits would also be welcome, it is important to recognise that foreign tax arises on other sources of income, such as interest and royalties, and these are outside of those exemption regimes.
The rules set out in Schedule 24 are notoriously complex, and needlessly so. Take, for example, the rules for pooling relief for different income sources. Pooling relief is where a company is allowed to offset the excess foreign tax suffered on one source of income against another (but within the same category of income). For interest, a company is allowed to pool excess tax credits on its trading interest income received from group companies’ resident in treaty jurisdictions. Pooling relief for royalties, however, is only available as a deduction, but extends to both treaty and non-treaty royalties.
This is just one example of where different rules apply depending on the type of income receipt. One way of simplifying Schedule 24 would be to look to determine a single set of rules that would apply to all income receipts. For example, align the foreign tax credit rules for all trading income, regardless of the nature of the income, and whether from treaty or non-treaty sources, including full pooling relief. Furthermore, to the extent that there are excess foreign tax credits, a company should have the option of carrying forward those tax credits or claiming a full deduction in the current year as a trading expense.
Content published in Finance Dublin Irish Tax Monitor.