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Deloitte submission on the territorial system of taxation

Background

On 22 December 2021 Department of Finance launched its public consultation seeking stakeholder views on a possible move to a limited territorial system of taxation in respect of the income of foreign branches of Irish resident companies and in respect of the payment of foreign source dividends.

This consultation builds on the recommendations contained in the Coffey Report and delivers on one of the commitments under the Update to Irelands Corporation Tax Roadmap, published in January 2021, to update and enhance Ireland’s corporation tax rules. In particular, the Coffey Report noted that in deciding whether to move to a territorial corporation tax base, a balance must be struck between the prospective reduction in compliance burdens for Irish resident outbound investors and a prospective increase in compliance burden necessitated by the introduction of any additional anti avoidance measures required. An alternative to a territorial corporation tax base, as recommended by the Coffey Report, would be a review to existing provisions in Irish law with a view to simplifying the current double tax relief rules and mechanisms.

A key purpose of the consultation was to gather stakeholder views on the potential impact of a move to a limited territorial system of taxation as well as the potential simplification of existing double tax relief rules. Stakeholders were also invited to provide their views on how measures such as the transposition of the Anti-Tax Avoidance Directive and the recent OECD Inclusive Framework agreement to address the tax challenges arising from digitalisation of the economy could interact with a move to a territorial system of taxation.

See the summary of our discussions on key focus areas below and read our full submission here.

Summary of observations and recommendations on focus area

Ireland’s current double tax regime is complex and has experienced significant change over the years to address EU law concerns. This has resulted in a double tax regime which does not lend itself either to taxpayer certainty or user-friendly compliance obligations.

Accordingly, Deloitte have made the following key observations and recommendations in our response to the Department of Finance:

  • Ireland should consider moving to a limited territorial system by introducing a foreign branch profit exemption and a participation exemption (in line with many other EU Member States) on an elective basis. Detailed double tax relief provisions, while providing for a de facto participation exemption, require a series of complex steps to be undertaken as part of the tax compliance process. Accordingly, an elective exemption for foreign branch income and/or foreign dividend income would be welcome.
  • The broad benefits associated with an elective foreign branch profit and dividend exemption would be a reduction in compliance workload and complexity with respect to the tax treatment of such income streams.
  • Ireland should also attempt to simplify the existing double tax relief rules in Irish tax law. A broad simplification of existing double tax relief mechanisms would bring greater clarity for companies operating internationally (“MNEs”). In the context of multinationals (both inward investment and indigenous companies expanding internationally), simplification of the existing double tax relief rules for royalties would bring significant benefits in a variety of industries. Consideration should be given to a number of key measures including broadening the categories of income on which relief may be obtained and simplification measures for the pooling and carry forward of unrelieved foreign tax.
  • In the event of Ireland moving to a participation exemption and/or branch exemption, provision would need to be made to allow for the timely use of unrelieved foreign tax carried forward from prior years whether in respect of dividends or foreign branches.
  • Based on the current Pillar Two model rules and the existing draft Directive on same, we would expect that the treatment of foreign branch income and/or foreign dividends should not be altered by the introduction of a limited territorial system of taxation.
  • The calculation of GloBE Income and Loss and Adjusted covered taxes for Pillar Two purposes require (in general) adjustments should be made to remove dividend income and tax expenses associated with such income. Such an outcome would likely arise irrespective of whether Ireland adopts a participation exemption for dividends or maintains the current worldwide regime in force. Accordingly, we would not be of the view that a dividend participation exemption would overly interact with the GloBE rules currently contained within either the Pillar Two model rules or the related draft EU Directive.
  • The proposed EU Directive on Pillar Two would indicate that a “constituent entity” for the purpose of the Global anti- Base Erosion (GloBE) rule refers to an entity or permanent establishment that is a part of an MNE group or a large-scale domestic group. Accordingly, top up tax levied with respect to a foreign PE would likely be collected in that other Member State, with foreign PEs being treated as constituent entities for the purpose of the Pillar Two rules. Such an outcome is likely to be irrespective of whether Ireland adopts a foreign branch exemption or retains a purely worldwide regime.
  • The interaction between the STTR and any potential exemption for foreign branch profit could in theory result in the levying of source taxation by virtue of such an exemption, irrespective of the tax actually levied in the country in which the branch carries on its activities. While not addressed in the current Pillar Two model rules or the draft EU Directive, model treaty provisions dealing with the STTR are expected to be issued in 2022; further work may be required to fully understand the interaction between such rules and a potential limited territorial system of taxation prior to any legislative change.


Read our full submission here.

Next steps

Following the public consultation, the Department may publish the responses and may also invite stakeholders to meet with them, including representative bodies, tax professionals and other interested groups or individuals. Deloitte will continue to monitor this and other key tax developments as they arise. Should you have any query on the potential impact of the proposed changes to you or your business, please do not hesitate to reach out to your Deloitte contact for further information.

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