Possible Areas of Reform of the Double Tax Relief Rules

In the December 2022 issue of the Irish Tax Monitor Roundtable a contributor wrote ‘In addition to the benefits associated with such a territorial tax system, further consideration should be given to engaging in a broad simplification of existing double tax relief mechanisms to bring greater clarity for companies operating internationally.’

In your opinion what would be the most beneficial double tax areas, outside of an elective foreign branch profit and dividend exemption that a territorial tax system could accommodate, that could be revised to improve the system for companies that operate internationally?

Angela Fleming, Partner & Head of Financial Services Tax: There are few tax advisors who would argue against the simplification of Schedule 24. The existing credit provisions, while they may ultimately result in an effective exemption position, are so overly complex, they have the effect of diminishing their benefit purely based on the time it takes to try to explain them to clients. And, of course, it is not always the case that an effective exemption is achieved. There are many instances, particularly when dealing with start-up and/or loss making companies, that little to no benefit is obtained.

Currently, the provisions relating to credit relief for trading income are a patchwork of provisions, with an almost entirely different set of rules attaching to different types of income.  For example, while credit pooling relief is available for interest, this is not the case for royalties (which instead have a form of pooling relief, but for deductions only). One way of simplifying Schedule 24 would be to provide the same set of rules for all forms of trading receipts, regardless of their nature. This would include interest and royalties, but should also extend to service fees and leasing income.

Constraints on the ability to utilise unrelieved foreign tax suffered by way of deduction have been introduced into legislation in recent years. In my opinion, it is important to recognise withholding taxes as the business expense that they are. And thus, any simplification of the double tax rules presents an opportunity to clarify that where relief is not available under the credit provisions, that a deduction should be available under the general principals of section 81 as expenditure wholly and exclusively laid out for the purposes of the company’s trade.

While I welcome the recent commitment by the Government to consider options for a move towards a territorial corporation tax system, I fear that the complexity involved in introducing such a regime, alongside the introduction of Pillar Two provisions, will sideline any overhaul of double tax relief rules generally. However, it is important that we capitalise on this opportunity to consider all of these rules holistically to produce a new set of rules that are effective, as well as easy to administer.

Content adapted from Finance Dublin’s Irish Tax Monitor.

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