Real-time foreign tax relief
Revenue introduce measures to allow real-time foreign tax relief through the Pay As You Earn (PAYE) system
Revenue have recently issued an eBrief (119/15), which sets out the criteria and procedures in order to obtain real-time foreign tax relief through the Pay As You Earn (PAYE) system.
This comes about after representations were made to Revenue in this area by the Irish Tax Institute, which Deloitte took part in. This will alleviate the cash-flow burden experienced where an employee who performs some of the duties of the employment abroad also triggers a simultaneous foreign tax withholding in that foreign jurisdiction.
The provisions will only apply to individuals who are:
- Tax resident in Ireland and
- Employed by an Irish employer and
- Employed under an Irish contract of employment and
- Who exercise some of the duties of the employment abroad and
- Who are subject to a simultaneous deduction of both Irish and foreign tax.
In addition, the foreign tax suffered must be non-refundable.
Where these criteria are met, Revenue will, on a case-by-case basis, consider an application for provisional tax relief in respect of the foreign tax through the PAYE system. Prior to the introduction of these measures, relief for foreign tax paid was only allowed by way of a claim at year-end.
The method of granting the foreign tax relief will depend on whether the foreign tax is paid in a country where there is a Double Taxation Agreement (DTA) in place.
For DTA countries, an application for the relief may be made by the employee on Form DD1. Revenue will prepare an estimate of the real-time foreign tax relief and a credit for this will be given through the PAYE system. Any credit for foreign tax paid should not exceed the Irish tax payable on the same income and the eBrief sets out how the credit will be calculated. All credits granted in this manner will be subject to an end-of-year review when the employee files their annual tax return with Revenue, and Revenue will require proof of the final tax liability in the other jurisdiction.
For non-DTA countries, there is no double tax credit relief. However, unilateral relief can be granted by giving a deduction in respect of the non-refundable foreign tax. This deduction will be expressed as a tax credit through the PAYE system, but the Revenue must be provided with evidence of the amount of the foreign tax and that such foreign tax is non-refundable.
In many cases, where an employer sends an employee to work abroad, a shadow payroll will be operated in the foreign location to meet the withholding tax obligations in that country. The employer will generally fund the taxes due in the host location and in some circumstances recover that tax paid from the employee when a foreign tax credit claim is made at the end of the year.
In eBrief 119/15, Revenue has indicated that potential issues could arise with this arrangement including whether a loan was made to the employee, the employee was in receipt of a benefit or if the employee is entitled to a foreign tax credit where the foreign tax was not actually deducted from the employee’s pay.
Notwithstanding these issues, Revenue has confirmed that for the years up to the 2015 tax year only, no charge to tax will arise on the payment of the foreign tax by the employer provided that: evidence is supplied of the final tax liability paid in the foreign jurisdiction; and, within one month of the granting of the foreign tax credit relief, evidence is supplied by the employee that he/she has reimbursed the employer the full amount of the final liability foreign tax credit granted to them.
Revenue’s eBrief does not directly address the situation where an employer tax equalises an employee so that the employee’s net pay is not affected by the foreign taxes arising, but instead assumes that the employee bears the cost of any foreign taxes.
The eBrief has raised some concerns about what Revenue’s approach to the operation of shadow payrolls will be in this regard and we await further clarification from Revenue on this for 2016 and subsequent years.
While we await clarification on the position for 2016 and subsequent years in respect of shadow payroll/tax equalised individuals, claims for real-time foreign tax credits can be made to Revenue using Form DD1. The application must be made by the employee to his/her own local tax district rather than the employer’s district.
There is also an opportunity to review the tax position of any employees where a shadow payroll was operated for the four years up to and including 2015 to ensure any foreign tax credits due are claimed.