Part 3 Past Papers

Summer 2016

QUESTION 1

Kathy is the US-based HR director for a large technology company, Global Tech Inc, which is a client of your firm. She has requested tax advice from your firm on the Irish tax considerations relating to the assignment of Steve, a senior executive to Ireland.

Steve has worked for the US parent company, Global Tech Inc, for over 20 years. Global Tech Inc are looking to expand their operations in Ireland and, as part of this, Steve will move to Ireland on 1 May 2015 to take up a temporary secondment for two years with their Irish subsidiary, Irish Tech Ltd. Steve will carry out all duties during the assignment in Ireland. Steve has always lived and worked in the US and Steve will remain a US citizen/US tax resident throughout his Irish secondment.

Steve’s wife, Anna, and their two children; Megan (12 years) and Lauren (three years) will accompany him to Ireland for the duration of his secondment.

Global Tech Inc will continue to pay Steve’s salary and benefits for the period of his Irish secondment. Steve’s salary will be €350,000 per annum and he will be provided with the following annual cash allowances:

housing allowance of €60,000, and

school fees of €6,000.

In addition, Steve is due to receive an amount of USD$59,460 in respect of a Restricted Stock Unit (RSU) vesting in April 2015. Steve does not have any other income sources.

Steve will be tax equalised for the duration of his secondment to Ireland such that he will be ‘no better/no worse off’, from a tax cost perspective, as a result of his Irish secondment.

Your firm has been engaged to complete Steve’s annual Irish tax returns over the period of his Irish secondment.

REQUIREMENTS

(i) On the basis that Steve will be tax resident in both Ireland and in the US in each year of his secondment, explain how Steve’s treaty residence position will be established.

(2 marks)

(ii) Outline the obligation(s) for Global Tech Inc/Irish Tech Ltd, if any, to operate PAYE/USC on Steve’s employment income for 2015. No calculations are required.

(4 marks)

(iii) Advise if Irish tax relief would be available under the Special Assignee Relief Programme (SARP) and outline the required conditions. Your answer should outline the relief that SARP could give and any actions that should be taken by Global Tech Inc/Irish Tech Ltd for application of the relief through payroll. No calculations are required.

(10 marks)

(iv) Explain the Irish social security treatment in Steve’s case.

(2 marks)

(v) Will the vesting of the RSU be taxable in Ireland? Explain your answer.

(2 marks)

(vi) Outline the Irish tax treatment of the cash allowances being provided to Steve and advise on a more tax efficient alternative, where applicable.

(5 marks)

Marks will be awarded for referencing relevant legislative provisions and Revenue practice.

Total 25 Marks

QUESTION 2

Smart Tech Inc is a US tax resident company listed on the US stock exchange and its business consists of the supply of business application software for use on mobile devices.

It has a wholly-owned subsidiary, Smart Tech (International) Holdings Ltd (“STHL”) which was incorporated in Ireland in 2007. Quarterly board meetings of STHL have taken place in the Cayman Islands since its incorporation, with four US tax resident directors attending each board meeting in person. STHL would not be considered tax resident in the US. STHL does not have any employees or any operations in Ireland. STHL employs a local firm in the Cayman Islands to undertake accounting and administrative services for it. STHL owns all intellectual property required to generate sales outside of the US.

Clever Tech (Ireland) Ltd (“CTIL”) was incorporated in Ireland in 2008 and has held its quarterly board meetings in Ireland, with a majority of Irish tax resident directors present, since its incorporation. CTIL is a wholly-owned subsidiary of STHL. CTIL undertakes production, sales and marketing and support operations worldwide (outside the US), employing 550 people in Ireland.

STHL grants CTIL a non-exclusive license to use the intellectual property owned by STHL with CTIL paying an arm’s length royalty to STHL for the right to use this intellectual property in its business. The royalty is computed under OECD transfer pricing principles and an appropriate taxable margin is retained in Ireland. The intellectual property in question consists of patented technology. The patents have been developed and registered in the US. The licence agreement between CTIL and STHL has been executed in the US and is subject to US law. STHL is the beneficial owner of the royalty income it receives from CTIL.

The corporate structure is summarised in the diagram below.

REQUIREMENTS

(i) Advise on whether STHL would be considered to be tax resident in Ireland. (No analysis of case law is required).

(6 marks)

(ii) Outline how the tax residence position of STHL will change in the future as a result of Finance Act 2014 changes to Irish domestic law.

(4 marks)

(iii) Outline the Irish tax implications for STHL and CTIL on the payment of the royalty. You should make reference to relevant Revenue guidance in respect of this.

(12 marks)

(iv) Briefly outline how any future change in the tax residency of STHL will impact on the Irish tax implications noted above, assuming no future change in Irish tax law or to the facts provided.

(3 marks)

Total 25 Marks

QUESTION 3

(a) James is a new client of your firm.

James and his wife, Anne, established an irrevocable trust in the Isle of Man in September 2007 for the benefit of their two sons Luke (age 23 in 2015) and Andrew (age 21 in 2015). All family members were resident, ordinary resident and domiciled in Ireland in September 2007.

The trustees are residents of the Isle of Man and neither James nor Anne retained any power to direct the trustees as to how to deal with the assets.

The following assets were settled on the trustees in September 2007:

UK commercial property (then valued at €550,000).

US residential investment property (then valued at €375,000).

US equities (then valued at €85,000).

These assets generated income in the calendar years 2012 to 2015 of €13,000, €52,000, €54,000 and €35,000 respectively. (There was no income generated in the calendar years 2007 to 2011).

The UK commercial property and US equities were sold by the trustees in August 2015 realising gains of €130,000 and €19,000 respectively.

In September 2015, the trustees distributed €110,000 each to Luke and Andrew.

James, Anne, Luke and Andrew left Ireland in January 2008 to move to the US. They remained in the US until returning to Ireland permanently on 5 June 2015.

REQUIREMENT

Outline the Irish income tax and capital gains tax exposure for each of James, Anne, Luke and Andrew based on the above facts.

(8 marks)

(b) In April 2013, while in the US, James, your same client as at (a) above, sold all of his shares in a software design company that he had established in Ireland in 2004. He made a gain of €1.8million. James did not pay Irish capital gains tax on the disposal of his shares, in line with advice that he had obtained at the time.

Before leaving Ireland, James sold a commercial property to his brother-in-law for market value. This resulted in a loss of €200,000.

REQUIREMENTS

(i) Outline the Irish capital gains tax position on the disposal of the shares in 2013.

(3 marks)

(ii) Advise James if his return to Ireland on 5 June 2015 impacts on the original Irish capital gains tax treatment. Explain your answer.

(3 marks)

(iii) Outline how the loss arising on the sale of the commercial property can be utilised.

(3 marks)

Marks will be awarded for referencing relevant legislative.

(c) Graham and his wife Rebecca lived in Ireland for 25 years before retiring to Spain in 2012 becoming non-resident in Ireland from 2013 onwards. Graham is US domiciled and Rebecca is Irish domiciled and, while they have no plans to return to Ireland, neither intends to acquire a domicile of choice in Spain.

In February 2013, Graham purchased a villa in Spain for €1.4million in his sole name for himself and Rebecca to live in. At that time, Graham updated his will to provide that, on his death, the property should pass equally to Rebecca and their youngest daughter, Louise.

Graham and Rebecca also have another daughter, Emma. Both Emma and Louise are non-Irish domiciled, having acquired Graham’s US domicile as their domicile of origin. Neither has obtained a domicile of choice in Ireland. Louise has been living and working in Australia since January 2011 and she currently has no plans to leave Australia. Emma has continued to live in Ireland (having been tax resident in Ireland since 1986).

Graham and Rebecca had occupied their family home for 12 years prior to leaving Ireland in 2012. Graham purchased the home in his sole name in 2000. This property is currently valued at €950,000 and has been occupied solely by Emma since 1 July 2012. Graham plans to transfer the property to Emma in January 2016.

Neither Emma nor Louise has previously received gifts from either of their parents.

REQUIREMENTS

(i) Outline the potential capital acquisitions tax implications for Rebecca and Louise on Graham’s death in relation to the inheritance of the Spanish property.

(4 marks)

(ii) Outline the potential capital acquisitions tax and capital gains tax implications for Emma and Graham on the proposed gift of the family home.

(4 marks)

No calculations are required and marks will be awarded for referencing relevant legislative.

Total 25 Marks

QUESTION 4

(a) Big Ltd is an Irish tax resident non-trading holding company. It is 75% owned by Big Swiss AG, a company resident for the purposes of tax in Switzerland and subject to tax in Switzerland. The remaining 25% is owned by an Irish-approved pension fund. Big Swiss AG is 100% owned by Mr Swiss, a Swiss tax resident individual. Big Swiss AG does not carry on a trade in Ireland through a branch or agency. Big Ltd has a 100% directly-owned US tax resident subsidiary, Big US Inc. Big US Inc does not carry on a trade. Big Ltd also has a 100% directly-owned Luxembourg tax resident company, Big Lux Sarl, which also does not carry on a trade. Small Lux Sarl, a 100% subsidiary of Big Lux Sarl, is also tax resident in Luxembourg and does not carry on a trade.

A summary of the structure is depicted below.

Big Ltd was repaid an interest-free loan of USD$12million owing from its 100% US tax resident subsidiary, Big US Inc on 24 February 2015. Big Ltd opened a US dollar denominated bank account on 24 February 2015 into which the USD$12million received was lodged. The Euro:US dollar exchange rate on this date was €1:USD$1.13. Other than the funds from the repayment of the interest-free loan of USD$12million, Big Ltd did not hold any other USD amounts in this bank account on 24 February 2015.

On 27 November 2015, Big Ltd withdrew USD$2million from the USD$12million balance to pay an interim dividend to its shareholdings, the Irish pension fund and Big Swiss AG. The Euro:US dollar exchange rate on this date was €1:USD$1.06.

On 12 December 2015, Big Lux Sarl paid a dividend of €1million to Big Ltd. This dividend was paid out of profits consisting of a dividend received by Big Lux Sarl from its direct subsidiary, Small Lux Sarl, of €1million.

Big Lux Sarl was not subject to Luxembourg corporate tax on receipt of the dividend from Small Lux Sarl. However, Small Lux Sarl paid corporation tax in Luxembourg of €162,791, an effective rate of 14%, on its profits before paying the dividend of €1million to Big Lux Sarl. The nominal rate of Luxembourg corporate tax is 29%. No withholding tax was suffered on payment of the dividend from Big Lux Sarl to Big Ltd.

REQUIREMENTS

(i) Outline the Irish tax implications for Big Ltd on the withdrawal of the USD$2million from the US dollar denominated bank account and quantify the tax exposure.

(5 marks)

(ii) Outline the Irish tax implications for Big Ltd and its shareholders on the payment of the dividend by Big Ltd.

(5 marks)

(iii) Calculate the Irish corporation tax liability for Big Ltd on receipt of the dividend from Big Lux Sarl. Marks will be specifically awarded for relevant legislative references and explanations to support your answer.

(7 marks)

(b) A client of your firm has recently mentioned that she has read an article in a newspaper about a recent Court of Justice of the European Union (CJEU) case that could have an impact on Irish corporation tax. She has asked for some information on the impact of previous CJEU decisions on Irish direct tax.

REQUIREMENT

Cite two cases where decisions of the CJEU have required a change to Irish tax legislation. Briefly summarise the CJEU findings and the Irish tax legislation that was introduced as a result.

The European Court of Justice (ECJ) is officially called the Court of Justice of the European Union (CJEU).

(8 marks)

Total 25 Marks

QUESTION 5

XYZ FinCo Ltd, an Irish tax resident company, provides intra-group funding, cash-pooling, hedging and other treasury related activities on behalf of the XYZ Group, a large multinational group. It employs 10 people in Ireland who are appropriately qualified in treasury and spend 100% of their time actively managing the treasury activities of the XYZ Group.

XYZ FinCo Ltd’s accounts for the year ended 31 December 2015 show the following results:

 

Gross interest income

25,000,000

Expenses

(13,500,000)

Profit

11,500,000

During 2015, included in the gross interest income it has received are the following amounts from 100% direct subsidiary companies:

Company

Gross interest income (before withholding tax)

Withholding tax

Brazil Co

€2,500,000

€375,000

Singapore Co

€6,000,000

€300,000

Australia Co

€9,000,000

€900,000

In respect of all withholding tax suffered, this corresponds to the corporation tax in the country of source and has not been repaid to XYZ FinCo Ltd.

REQUIREMENT

Calculate the Irish corporation tax liability of XYZ FinCo Ltd for the year ended 31 December 2015. Marks will be specifically awarded for relevant legislative references and explanations to support your answer.

Total 25 Marks

SOLUTION 1

(i) While Steve will be tax resident in both Ireland and the US for each year of his assignment (2015 to 2017) under each country’s respective domestic rules, he can only be resident in one country for the purposes of the DTA.

Applying the tie-breaker rule in Article 4(3) of the Ireland/US DTA should determine Steve’s treaty residence to be the US as, while Steve should have a permanent home (includes rental home) available to him in both countries, his centre of vital interests should be determined to be in the US. This is on the basis that, even though Steve’s family have accompanied him to Ireland for his temporary secondment, the fact that his place of work remains in the US and that he retains his home in the US where he has always lived and worked should demonstrate that he has retained his centre of vital interests in the US. However, if his centre of vital interests cannot be determined, his habitual abode (i.e. the next tie-breaker test) would be deemed to be in the US.

As there is limited guidance within the OECD’s Commentary on the Model Treaty as to what constitutes an individual’s personal and economic relations, there is an argument that Steve’s centre of vital interests is in Ireland. If students were to take this contrary view (i.e. that Steven has his centre of vital interests in Ireland), and where this position is supported by a valid argument, then marks were also awarded.

(ii) Income attributable to the performance in Ireland of duties of a non-Irish employment is chargeable to income tax under Schedule E under Section 18(2) TCA 1997. In line with Section 984(1), such income is within the scope of the PAYE system, whereby the employer is obliged to deduct or account for PAYE on the relevant remuneration. Where PAYE is not correctly applied by the non-Irish resident employer, the local Irish company that the employee(s) works for can be held accountable for the PAYE under Section 985D(3).

The treaty provisions that can apply to exempt an assignee from the charge to Irish income tax do not apply to exempt the employer from the requirement to operate Irish payroll taxes on the employee’s income attributable to the performance in Ireland of duties of his/her foreign employment. However, consideration should be given to the Revenue concessions, outlined in Revenue’s Statement of Practice (SP – IT/3/07), to determine whether these concessions for short-term temporary assignees may be applicable to relieve the employer from the obligation to operate Irish PAYE/USC.

The PAYE/USC dispensation that may apply, subject to formal application and Revenue agreement, for short-term assignees who spend more than 60 working days in Ireland will not apply in Steve’s case. One of conditions for this dispensation is that the temporary assignee must not spend more than 183 days in Ireland in the relevant tax year. This condition will not be met in Steve’s case.

Accordingly, Global Tech Inc will be required to operate Irish PAYE/USC on Steve’s remuneration attributable to his Irish secondment. As Steve is remaining on the US actual payroll, Global Tech Inc will need to operate an Irish shadow payroll to account for the PAYE/USC due in respect of Steve. Global Tech Inc may register as an employer for PAYE/USC in respect of the taxes due under the shadow payroll. However, it may be preferable, e.g. less of an administrative burden, if the PAYE/USC due under the shadow payroll is included in the employer payroll tax returns (P30s/P35) for Irish Tech Ltd (under the employer registered number for Irish Tech Ltd). As Steve is tax equalised, such that the company will fund any additional Irish tax payable as a result of Steve’s Irish secondment, the Irish PAYE/USC due and payable by the company must be calculated on a grossed-up basis.

(iii) Application:

The tax relief available under the Special Assignee Relief Programme (“SARP”) will apply in Steve’s case for each year of his assignment (2015 to 2017) as the necessary conditions, set out in Section 825C TCA 1997 are met, as follows:

Steve will be tax resident in Ireland;

Steve will be performing the duties of his employment with his “relevant employer” (i.e. Global Tech Inc) in Ireland at the request of Global Tech Inc.;

Steve will have “relevant income” (i.e. remuneration excluding bonuses, benefit in kinds or share options) of at least €75,000;

Steve was a full time employee of Global Tech Inc, and exercised the duties of his employment with Global Tech Inc outside Ireland, for the whole of the six months immediately prior to his arrival in Ireland;

Steve will perform employment duties in Ireland for Global Tech Inc for a minimum period of 12 consecutive months; and

Steve was not tax resident in Ireland for the five tax years immediately preceding 2015.

Relief available:

The relief operates on the basis of providing a deduction (the “specified amount”) from remuneration based on a formula contained in Section 825C(2B) as follows:

(A – B) × 30%

Where:

A = Total remuneration of the employee (includes bonuses, BIK and share options but excludes expenses and is after deduction of employee pension contribution, where relevant)

B = €75,000

Where an employee arrives or leaves Ireland mid-year, “B” is reduced proportionately, for e.g. as Steve will arrive in Ireland in May 2015, B will be reduced to €43,750 (€75,000 x 7/12), assuming he arrives on 1 May.

The relief only applies to income tax, i.e. no relief is available from USC or PRSI under SARP. However, as before, Steve should not be subject to PRSI.

Finance Act 2016 extended the SARP relief under Section 825C TCA 1997 to employees arriving in Ireland up to the end of 2020.

Company Requirements:

Global Tech Inc must be a “relevant employer” meaning it must be a company that is incorporated and tax resident in a country or jurisdiction with which Ireland has a DTA or a tax information exchange agreement and clearly this condition is met.

Within 30 days of Steve’s arrival in Ireland, the company must certify to Revenue (on the prescribed Form SARP 1A) that certain conditions to qualify for SARP relief are met.

The company must provide (by 23 February following the tax year) an annual return providing certain personal details for qualifying employees such as Steve (his PPS number, nationality, prior country of residence, job title and role). In addition, the annual return must set out the amount of income relieved through payroll as a result of the application of SARP and the increase in number of employees employed or retained as a result of Steve (and any other qualifying employees’) working in Ireland.

As outlined in Section 825C(9), in order to avail of the relief via payroll, the company should apply (on Form SARP 1A or other prescribed form) for Revenue’s approval to grant relief for SARP via the payroll. Revenue should confirm in writing to the company if no deduction of tax need be made under the PAYE system on the specified amount that applies for Steve.

(iv) Where an individual performs duties of their foreign employment in Ireland, the starting position is that Irish PRSI is payable.

As Ireland has a bilateral social security agreement with the US, a Certificate of Coverage should be applied for by Global Tech Inc. and obtained from the US authorities in advance of Steve’s temporary secondment to Ireland. This will demonstrate to the Irish authorities that Steve is retained within the US social security system for the period of his Irish secondment.

Once a valid Certificate of Coverage is in place, the company will not be obliged to deduct Irish PRSI.

(v) There is no specific legislation within the Taxes Acts that covers the taxation of Restricted Stock Units (RSUs). The treatment is set out in Revenue guidance.

RSUs are chargeable to Irish income tax under Schedule E with PAYE/USC/employee PRSI (as applicable) to be deducted via payroll.

As outlined in Revenue guidance, an ‘all-in/all-out’ approach applies to the taxation of RSUs, whereby the RSUs will either:

(a) Be fully taxable in Ireland if they vest at a time when the holder is Irish resident; or

(b) Be fully non-taxable in Ireland if they vest at a time when the holder is not Irish resident

The above treatment applies regardless of the fact that the holder may have been resident in Ireland at the time of the grant and/or throughout the vesting period.

Applying this treatment to Steve’s case means that his RSU vest in April 2015 will not be taxable in Ireland. While Steve will be Irish tax resident in 2015, split year treatment (Section 822 TCA 1997) applies to the taxation of his employment income, including his RSU vests. Under split year treatment, Steve will effectively be treated as Irish tax resident from the date of his arrival, i.e. May 2015 as opposed to from 1 January 2015.

(vi) The cash allowances are fully taxable under Section 112 TCA 1997 and subject to deduction of PAYE and USC through payroll (no PRSI in Steve’s case, as above). As outlined above, SARP relief should be available in respect of these allowances to reduce the PAYE payable.

Both items could be delivered in a more tax efficient manner, as follows (without disturbing Steve’s entitlement to claim SARP relief):

Housing

In line with Revenue guidance (contained in SP – IT/2/07), on the basis that Steve’s assignment will not exceed 24 months and subject to other conditions set out in the Revenue guidance, the vouched cost of reasonable accommodation may be paid by the company or reimbursed by the company to Steve on a tax-free basis for a 12-month period (and not the full duration of his secondment). Reasonable accommodation will take into account that Steve’s family are with him.

Reimbursement of housing expenses could also be done on a flat rate in accordance with the Civil Service schedule of rates contained in Revenue guidance. However, this is likely to be less favourable for Steve than claiming on a vouched basis.

School fees

For each tax year that Steve qualifies for SARP, the payment or reimbursement by the company of school fees, not exceeding €5,000 per annum per child, may be made without deduction of PAYE/USC under Section 825C(6).

The school fees must be to an approved school that is established for the purposes of providing primary or post-primary education to students. In Steve’s case, the qualifying amount of school fees will be €5,000 in respect of Megan and so the company may wish to pay the remaining €1,000 as a cash allowance or consider if the €1,000 could be provided in a more tax efficient way.

SOLUTION 2

(i) The rules relating to company residency are outlined in Section 23A TCA 1997.

Although STHL is an Irish incorporated company, it has been incorporated in Ireland before 1 January 2015 and therefore the new company residency rules introduced in Finance Act 2014 will not apply until 1 January 2021.

For companies incorporated before 1 January 2015, they will be automatically considered to be tax resident in Ireland if incorporated in Ireland, unless they meet either of two exemptions, namely the trading exemption or treaty exemption.

Under the trading exemption, STHL would not be considered to be tax resident in Ireland if

it is a “relevant company”; and

it carries on a trade in Ireland or is related to a company which carries on a trade in Ireland – Section 23A(3) of pre 1 January 2015 legislation refers.

A “relevant company” is a company which is under the control of a person or persons tax resident in a state with which Ireland has a tax treaty and is not ultimately under the control of persons tax resident in Ireland or is a company or related to a company which is quoted on a recognised stock exchange. As STHL is wholly owned by Smart Tech Inc, a US tax resident entity as well as being related to a quoted company (Smart Tech Inc), it should be considered to be a “relevant company”.

As STHL does not employ any people nor have any activities in Ireland, it would not be likely to be considered trading. However, CTIL would be likely to be considered to be trading for Irish tax purposes based on the principles set down in case law and Revenue practice, given its relatively substantial activity in Ireland. CTIL would be related to STHL by virtue of it being a wholly owned subsidiary and therefore the second condition for the trading exemption would have been met.

The “stateless company” provisions contained in section 23A(5) (which disapply the trading exemption) will not apply here as STHL is not managed and controlled in the US (i.e. a “relevant territory”) and would likely be considered to be tax resident in the Cayman Islands.

In summary, STHL should not be considered to be tax resident in Ireland for Irish tax purposes as the trading exemption is met.

(ii) Finance Act 2014 amended the domestic law provisions contained in Section 23A dealing with tax residency, effectively deleting the trading exemption that has previously existed.

Under the new tax residency rules, an Irish incorporated company will automatically be considered tax resident in Ireland unless it is tax resident in another jurisdiction by virtue of the tie-breaker clause in a double tax treaty with that jurisdiction – Section 23A(2) TCA 1997 refers.

However, these changes to the Irish domestic law residency rules contain a grandfathering period in respect of companies which were incorporated before 1 January 2015 such that those companies will only be subject to the new rules introduced in Finance Act 2014 from 1 January 2021.

In respect of STHL, as it was incorporated before 1 January 2015, it should come within the grandfathering provisions such that the new residency rules should only apply from 1 January 2021. However, from 1 January 2021, STHL would be considered to be tax resident in Ireland under Irish domestic law because it is an Irish incorporated company Ireland and does not have a tax treaty with the Cayman Islands to allow a tie-breaker provision to apply.

(iii) Although the payment of the royalty by CTIL to STHL was incurred wholly and exclusively for the purposes of the trade of CTIL, a corporation tax deduction will not be deductible for CTIL under general trading principles as a deduction for patent royalties is specifically disallowed under Section 81 (2) (m) TCA 1997.

On the basis that the patent royalty payment should be considered a “relevant trading charge on income” relief should be available under Section 243A (3) TCA 1997 against trading income or Section 243B TCA 1997 against other taxable profits on a value basis. Relief under Section 243B is given after Section 243A relief (Section 243B (2) refers). Relief for relevant trade charges is only available on a paid basis (i.e. not an accruals basis).

Section 238(2) imposes an obligation on CTIL to withhold tax at 20% on the payment of the royalty to STHL. As the payment is being made to STHL, which is not tax resident in either the EU or a country with which Ireland has a double tax treaty, no relief to reduce or eliminate this withholding tax is available under the EU Interest and Royalties Directive under Part 8, Chapter 6 TCA 1997, the general domestic exemption provided for under Section 242A TCA 1997 or the terms of any double tax treaty.

However, relief should be available for CTIL having to apply withholding tax under Revenue’s Statement of Practice (CT 01/2010) on the basis that:

1. The payee (i.e. STHL) is not tax resident in Ireland and does not carry on a trade in Ireland through a branch or agency and is the beneficial owner of the royalty income;

2. The royalty is payable in respect of a foreign patent (i.e. it has been registered in the US) and the license agreement between STHL and CTIL has be executed outside Ireland;

3. The payment was incurred by STHL for its trade; and

4. It is not part of a conduit arrangement whereby all or substantially all of CTIL’s income is paid out to STHL.

Advanced clearance is required to be obtained by STHL (as payee) before any royalty payment can be made by CTIL free of withholding tax.

As STHL is not an Irish tax resident company and does not carry on a trade in Ireland, it will only be subject to income tax at 20% on any Irish source income under section 18 TCA 1997. However, where the conditions of Revenue’s Statement of Practice for patent royalties mentioned above are met, then no income tax charge should arise for STHL on receipt of the royalties (assuming again that advanced clearance has been obtained from Irish Revenue before payment by CTIL).

(iv) When STHL becomes Irish tax resident from 1 January 2021 on expiration of the grandfathering rules, it will be subject to Irish corporation tax on its worldwide profits. As it will not be considered to be a trading company for Irish tax purposes, any income or profits arising will be taxable at 25%.

Relief for the payment of the royalty by CTIL to STHL should still be available under either Section 243A or Section 243B. As the payment of the royalty is now being made by a 51% subsidiary to its 51% parent, a payments group should exist under Section 410 such that no withholding tax should be required to be applied under Section 410 (4).

SOLUTION 3

(a) James and Anne

James and Anne retain no power to enjoy the income of the trust. Therefore, Section 806 TCA 1997 does not apply to deem the income of the non-resident trust to be income of either James or Anne (the transferors).

Similarly, chargeable gains will not be attributed to James or Anne as Section 579A applies to attribute gains to the beneficiaries as the trustees were at no time resident or ordinarily resident in Ireland and neither James nor Anne have an interest in the trust settlement [Section 579A(2)(a)].

Luke and Andrew

While Luke and Andrew are neither resident nor ordinary resident in Ireland, an income tax charge does not arise under Section 807A. However, as Luke and Andrew (non-transferors) are both resident in Ireland in 2015 (each will spend at least 183 days in Ireland in 2015), both have received a benefit from a transfer of assets abroad and that transfer of assets abroad resulted in income becoming payable to a non-resident trust, Section 807A TCA 1997 will apply to give rise to an income tax charge for both Luke and Andrew. The charge arises when the income is distributed by the trustees to Luke and Andrew.

Luke and Andrew will be deemed to receive income under Section 807A TCA 1997 of €77,000 each (being their respective portions of the cumulative income generated since 2012 i.e. €154,000/2).

Section 579A TCA 1997 applies to capital payments which are defined in Section 579A(1) as payments which are not liable to income tax or, in the case of a recipient who is neither resident nor ordinary resident in Ireland, any payments received otherwise than as income.

The remaining amount of the distribution that Luke and Andrew received will be treated as a capital payment received by them, i.e. €110,000 - €77,000 = €33,000 each.

Finance Act 2016 amended Section 579A TCA 1997 to state that the provisions of the section do not apply if the settlement was established for bona fide commercial reasons and not part of a tax avoidance scheme.

Finance Act 2017 made amendments to Section 806 to provide that the provisions of the section do not apply where genuine economic activities are undertaken by the non-resident person in the relevant Member State.

(b)

(i) Section 29 TCA 1997 identifies the persons chargeable to Irish CGT. Section 29(2) sets out that an individual will be chargeable to Irish CGT in respect of chargeable gains that accrue to them in a tax year for which that individual is either resident or ordinary resident in Ireland. Where an individual is neither resident nor ordinary resident in Ireland in a tax year, their charge to Irish CGT will be limited to gains accruing from the disposal of any of the assets specified in Section 29(3), known as “specified assets”.

At the time of the disposal of his shares in April 2013, James would have been non-resident and non-ordinary resident in Ireland. James would have lost his ordinary residence status in 2012 after three years of non-residence (i.e. 2009, 2010 and 2011) and he would continue to be non-ordinary resident until such time that he had been tax resident in Ireland for three consecutive tax years (i.e. the earliest time he would become ordinary resident would be 2018, if he was resident in 2015, 2016 and 2017).

Furthermore, the disposal of James’ (software design) company shares would not constitute the disposal of a “specified asset” within Section 29(3).

Therefore, as James was neither resident nor ordinarily resident in Ireland in 2013 when he realised a gain on the sale of the shares and since he was not disposing of a “specified asset”, James would not have been within the charge to Irish CGT under Section 29(2) or 29(3) respectively.

(ii) The relevant anti-avoidance legislation, which can result in a CGT charge for an Irish domiciled individual who disposes of an asset (other than a “specified asset”) during a period of temporary non-residence, is contained in Section 29A TCA 1997.

As there were more than five tax years falling between the year of James’ departure (2008) and the year of his return to Ireland (2015), Section 29A does not apply to bring James’ gain on the disposal of the shares within the charge to Irish CGT.

(iii) James would be regarded as “connected” with his brother-in-law under Section 10 TCA 1997 (under Section 10(3) a connected person includes a relative of the James’ wife (Anne) and “relative” includes brother under Section 10(1)). Therefore, James and his brother-in-law, Michael, are connected persons.

Section 549 TCA 1997 deals with transactions between “connected persons” as regards the computation of chargeable gains and allowable losses in Chapter 2 TCA 1997.

Section 549(3) provides that where a disposal between connected person gives rise to a loss, no relief is available for that loss except against a chargeable gain arising on another disposal by that person to the same connected person. Therefore, James can only avail of loss relief, in respect of the loss that arose from the disposal to Michael, on a chargeable gain that arises from a future disposal by James to Michael.

(c)

(i) Graham (the disponer) is non-resident for Capital Acquisitions Tax (CAT) purposes under Section 11(4) CATCA 2003. Section 11(4) provides that a foreign domiciled person, such as Graham, will be deemed non-resident and non-ordinarily resident in Ireland for CAT purposes unless he was resident in Ireland for each of the five consecutive tax years immediately preceding the date of the benefit and on the date of the benefit is either resident or ordinarily resident in Ireland.

As a result of the above and of the property being non-Irish situate, the CAT implications will be dependent on the status of the beneficiaries.

Rebecca

Rebecca is still ordinarily resident in Ireland. She will continue to be ordinarily resident until she has been non-resident in Ireland for three consecutive years, i.e. the first year of non ordinary residence would be 2016. While Rebecca remains ordinarily resident in Ireland, she will be within the charge to Capital Acquisitions Tax (CAT). The provisions of s11(4) CATCA 2003 do not apply to her as she is Irish domiciled. However, on the inheritance of the property from Graham, if this were to occur while Rebecca was still ordinarily resident in Ireland, she could avail of the spousal exemption under Section 71 CATCA 2003 on the inheritance so that no CAT would arise.

Louise

Louise is currently non-resident and non-ordinarily resident in Ireland and therefore she is not currently within the charge to CAT. If Louise were to return to Ireland and if she were to take her inheritance from Graham sometime after she had resumed Irish tax residence, she would be within the charge to Irish CAT if she had been resident for each of the five consecutive tax years immediately preceding the date of the inheritance and if, on the date of the inheritance, she was either resident or ordinarily resident in Ireland.

If Louise were within the charge to Irish CAT, her tax-free threshold for gifts/inheritances from a parent should be fully intact to reduce the value of the Spanish property subject to CAT. In addition, a credit may be available against the Irish CAT payable where Spanish tax arises on her father’s death.

(ii) As outlined above, Graham (the disponer) is non-resident for Capital Acquisitions Tax (CAT) purposes under Section 11(4) CATCA 2003. Therefore, the CAT implications are dependent on the residence status of the beneficiary and/or the situs of the assets.

Emma’s CAT Position

Emma is within the charge to Irish CAT based on her residence position. In any event, the gift of the property would be taxable as it is an Irish asset. As Emma will have continuously occupied the property as her main residence for three years, which does not include periods of occupation by Graham of the property as his main residence, Emma should meet the requirements to avail of dwelling house relief, under Section 86 CATCA 2003, such that the gift of the property would be exempt from CAT. The exemption would cease to apply if Emma sold or otherwise disposed of the property within six years of the gift and did not reinvest the proceeds in another dwelling house.

Finance Act 2016 significantly amended Section 86 CATCA 2003 (dwelling house exemption). With effect from 25 December 2016, the dwelling house exemption will only be available in respect of:

Inheritances of dwelling houses

Gifts of dwelling houses to dependent relatives

Certain conditions must be satisfied in order for the exemption to apply

Finance Act 2017 clarified that, for the purposes of dwelling house relief under Section 86 CATCA 2003, the property does not need to be occupied by the disponer prior to the gift in the case of a gift to a dependent relative.

Graham’s CGT Position

As Graham is neither resident nor ordinarily resident in Ireland at the time of the disposal of the property, he is not within the charge to Irish Capital Gains Tax (CGT) under Section 29(2). However, as the property is a specified asset under Section 29(3), the disposal of the property is within the charge to Irish CGT.

Principle private residence relief (under Section 604 TCA 1997) should be available in respect of the period of Graham’s ownership of the property during which Graham occupied the property as his only or main residence, including the last 12 months of his ownership, to exempt that portion of the gain from Irish CGT.

In addition, Graham’s chargeable gain will be reduced by the annual exemption of €1,270 before calculating the CGT payable at 33%.

Under the Double Taxation Agreement between Ireland and Spain, a credit should be available against any Spanish taxes payable for the Irish CGT paid (on the basis of the model convention provided in the exams).

SOLUTION 4

(a) (i)

Generally foreign currency is an asset for capital gains tax purposes (Section 532(b) TCA 1997 refers) such that a withdrawal of such currency is a disposal for CGT purposes. Although the CGT treatment for foreign currency withdrawals will not apply to any gains or losses arising on money held for trading purposes (with such gains or losses instead being within the charge to corporation tax) as per Section 79(3), the CGT treatment will apply in the case of Big Ltd as it is not a trading company.

Section 541(1) provides an exemption from CGT on the disposal of a debt where the gain accrues to the original creditor of a debt. Where there are funds held in a bank account (whether in euro or a non-euro currency), the bank will owe the account holder such that on a withdrawal from the account, the account holder is making a disposal of a debt. However, the general exemption provided for in Section 541(1) specifically does not apply to a non-euro currency held in a bank account (Section 541(6) refers).

Based on the principles set out in the case of Bentley vs Pike, any capital gain or loss arising is computed by reference to the difference between the euro value of the currency asset at acquisition and its euro value at the date of disposal. It is not allowed to calculate the gain or loss in the foreign currency and then convert that gain or loss into euro.

Based on the information provided a CGT liability will be computed as follows:

Proceeds

USD$2,000,000/1.06

€1,886,792

Cost

USD$2,000,000/1.13

(€1,769,912)

 

 

 

Gain

€116,880

 

 

 

Corporation tax on the chargeable gain at effective rate of 33%

 

€38,570

The liability of €38,570 will be due as part of the overall preliminary tax and final corporation tax payments due by Big Ltd.

(ii) No Irish corporation tax deduction will be available for Big Ltd on the payment of the dividend under Section 76(5)(a) TCA 1997.

Generally the payment of a dividend by an Irish tax resident company will require dividend withholding tax at 20% to be applied to such a payment under Section 172B(1) TCA 1997.

Big Ltd will be paying a dividend of USD $1.5 million to Big Swiss AG. No DWT should apply by virtue of the extension of the Parent-Subsidiary Directive to Switzerland, as outlined in Section 831A TCA 1997, as Big Swiss AG directly holds at least 25% of the voting power in Big Ltd and is subject to tax in Switzerland on receipt of the dividend. Unlike the general domestic exemption from DWT under Section 172D(3) (which could apply in this case as Big Swiss AG is not Irish tax resident and not ultimately under the control of an Irish tax resident individual), no certificate is required to be provided by the payee (Big Swiss AG) to the payor (Big Ltd) before payment of the dividend. Although no DWT will apply, Big Ltd will still have an obligation to file a nil DWT return in respect of the payment of the divided online through ROS by 14 December 2015 – Section 831A(2) refers. Details of the dividend would also be required to be disclosed on the annual corporation tax return (Form CT 1) of Big Ltd.

As Big Swiss AG should be considered to be a “qualifying non-resident person” as defined Section 153(1)(b)(i) as it is a company not tax resident in Ireland and under the control of Irish tax residents, no charge to Irish income tax should arise on the receipt of the dividend under Section 153(4).

No DWT should apply to the payment of the dividend of USD $500,000 to the Irish pension fund under Section 172C(2)(b) TCA 1997, as long as the pension fund has provided Big Ltd with the appropriate certification required under Schedule 2A before payment of any dividend. Again, although no DWT is due, details of the dividend paid to the pension fund would be required to be disclosed on the nil DWT return due for filing by 14 December 2015 as well as on the annual corporation tax return of Big Ltd.

No income tax liability should arise for the pension fund on receipt of the dividend income on the basis that it is an approved pension and a claim is made to Revenue for such exemption – Section 774(3) refers.

(iii) As the dividend received from Big Lux Sarl is not being paid from trading profits, an election under Section 21B TCA 1997 to tax the dividends at 12.5% cannot be made. Therefore the dividends received will be taxed in Ireland at 25%.

A credit should be available for the underlying Luxembourg tax suffered on the dividends received based on the lower of the Irish and Luxembourg effective rates of corporation tax, per Paragraph 4 of Schedule 24, TCA 1997.

As the dividend has been received from a company tax resident in the EU, the additional foreign tax credit provided for in Paragraph 9I of Schedule 24, TCA 1997 may be available. This additional credit is given on top of the relief for any underlying tax suffered by reference to the nominal rate per cent of tax on a dividend received from an EU member state.

The additional credit available is computed by reference to the formula (A*B)-C outlined in Paragraph 9I(4) of Schedule 24, TCA 1997.

The additional tax credit is not available in the case of an “excluded dividend”, as defined in Paragraph 9I(1) of Schedule 24. However, the dividend received from Big Lux Sarl should not be an “excluded dividend” as it has been subject to tax in Luxembourg (at the level of Small Lux Sarl).

Corporation Tax computation for Big Ltd in respect of receipt of dividend from Big Lux Sarl

Grossed up dividend received (Note 1)

1,162,790

Corporation tax @ 25%

 

290,698

 

 

 

Credit for underlying tax (Note 1)

162,791

 

Additional credit (Note 2)

127,907

290,698

 

 

 

Corporation tax payable

 

Nil

Note 1 – Maximum credit for underlying tax

Irish effective rate

25%

 

Luxembourg effective rate

14%

 

 

 

 

Dividend received regrossed at lower of Irish and Lux effective rates

€1,000,000/(1–0.14)

€1,162,791

Maximum credit available is Luxembourg corporate tax suffered

€1,162,790×14%

€162,791

Note 2 – Additional credit available under Paragraph 9I, Schedule 24

Additional credit computed by reference to formula in Paragraph 9I(4)(b) in the case of dividends taxed at 25%, by reference to the formula (A×B) − C

A =

€1,162,791

“relevant dividend” (i.e. dividend within the charge to Irish corporation tax)

B =

25%

Lower of Irish and Luxembourg nominal rates

C =

€162,791

Credit for Luxembourg tax already given

 

 

 

(€1,162,791×25%) – €162,791 = €127,906

 

 

(b) Below are some recent examples of CJEU cases that students may refer to in their answers (marks to be awarded for any other relevant examples)

I. Marks and Spencer C466/03

This case dealt with the availability of group relief for losses between EU group companies. The UK did not allow loss relief incurred by a non-resident company. The CJEU held that the restriction of loss relief should not apply if the non-resident company has exhausted all possibilities available in the State of residence for using the losses and there is no possibility of the losses being utilised in that country in the future.

Section 420C was introduced as a result of this case to allow for group relief for losses if the loss is an amount of a kind that would generally be available for offset under Irish tax rules, is calculated under the rules of the Member State of the surrendering company, is a trapped loss and cannot be used in the Member State.

II. FII GLO C466/04

This case dealt with the receipt of foreign dividends. Under UK domestic law, dividends from UK subsidiaries were exempt whereas dividends from EU subsidiaries were taxable. The CJEU held that there was nothing to prevent Member States from using an exemption system for nationally sources dividends whilst using a credit system for foreign sourced dividends as both methods should ensure that the dividends are not liable to a series of tax charges. Nationally sourced dividends are taxed at a subsidiary level but not in the hands of the parent and foreign sourced dividends are taxed in the hands of the parent but with credit for any withholding tax and underlying tax suffered. The CJEU held that the credit system was only acceptable where the rate of tax suffered on the foreign sourced dividends is equal to the rate of tax on the nationally sourced dividends.

Section 21B was introduced on foot of this case to allow for a 12.5% rate on dividends received from EU subsidiaries where certain conditions are met. Prior to the introduction of Section 21B, foreign dividends would have been taxed at 25% at the level of the parent. whereas Irish source dividends would have been taxed at 12.5% at the level of the subsidiary.

III. FII GLO C35/11

This case was a follow on from the initial FII GLO case which resulted in the introduction of section 21B. In this second case dealing with the taxation of foreign dividends, the CJEU held that the application of an exemption system for domestic dividend and a credit system for foreign dividends was contrary to EU law. The CJEU noted that Member States are precluded from applying an exemption method to domestic dividends and a credit system for foreign sourced dividends if its established that the tax credit entitlement is based on the amount of the foreign tax actually paid on underlying profits and the effective level of company profits in the Members States is generally lower than the prescribed nominal rate of tax. One solution to deal with this proposed by the CJEU was for Member States to grant an additional credit for overseas tax at the foreign nominal rate rather than the effective rate.

Schedule 24, Paragraph 9I was introduced as a result of this ruling to allow for an additional foreign tax credit on dividends received from EU or EEA countries with which Ireland has a double tax treaty based on the nominal, rather than effective tax rate.

IV. National Grid Indus C371/10

This case dealt with the imposition of an exit tax under Dutch domestic law on the migration of tax residency of a company from the Netherlands to the UK. Similar to Irish law, on migration of tax residence from the Netherlands, a tax charge arose in respect of a deemed disposal of certain assets held by the company at the date of migration (in this case a receivable owing to a UK related company). The taxpayer argued that the imposition of this exit tax represented a restriction on freedom of establishment. In its ruling, the CJEU held that exit taxes were justified in order to preserve the allocation of tax rights between Member States. However, the collection of any tax due immediately on migration was not proportionate as it put the taxpayer at a disadvantage compared with taxpayers who may move operations within a Member State. Two solutions were proposed by the CJEU – payment of the exit tax upfront with the cash disadvantage or deferral of the payment of the exit tax.

Section 628A was introduced as a result of this case. This section provides that where a company migrates its tax residency from Ireland to another EU Member State, Norway or Iceland or Liechtenstein, the company can elect to defer the payment of the exit tax either in six instalments or not later than 60 days after the actual disposal of the asset subject to a maximum deferral of 10 years. The deferral of the exit tax will also result in interest being imposed on the tax due.

V. European Commission v United Kingdom

This case dealt with the UK equivalent of our Section 590. Section 590 applies such that if a non-resident close company crystallises a chargeable gain, the Irish Exchequer will reach out to that company and pull that gain back to Ireland and subject it to Irish capital gains tax in the hands of the Irish-resident/ordinarily resident and domiciled taxpayers, even though those Irish participators would not have received any actual funds or other benefit from holding an interest in that company. In this case, the CJEU held that the UK equivalent was against the free movement of capital in that it targeted not only wholly artificial arrangements but also imposed a tax charge on arrangements which were carried out for a bona-fide genuine commercial purposes.

Before this judgement was released the UK had already amended its version of Section 590 conceding that the previous version of their legislation was against EU law and the action taken by the European Commission was therefore justified.

Finance Act 2015 amended Section 590 in light of this ruling such the provisions of Section 590 will now only apply in the case of a transaction which is not carried out for bona-fide commercial reasons and is part of an arrangement of which the purpose or one of the main purposes is the avoidance of Irish tax.

[NOTE – Finance Act 2015 is not within scope of the 2015/2016 syllabus but reference to the change has been included here as a learning point.]

Finance Act 2017 amended Section 590 to provide for an exclusion for a chargeable gain that arises on the disposal of assets by a company where genuine economic activities are being undertaken by that company in that Member State at the time of disposal.

SOLUTION 5

Based on the information provided, XYZ FinCo Ltd should be considered trading as it is actively carrying on a treasury business, rather than merely passively holding loan assets. As such, any income it derives from this activity should be taxable at 12.5% under Section 21(1) TCA 1997.

Relief for the foreign withholding tax suffered on the Singapore and Australian interest income should be available by way of double tax relief as Ireland has a double tax treaty in force with both of those countries – Schedule 24, Paragraph 2(1) TCA 1997 refers.

The maximum credit allowed in restricted to the Irish corporation tax attributed to that income, computed by reference to the formula P*(I/R) as outlined in Schedule 24, Paragraph 4 TCA 1997. Based on the information provided, P will be €11.5million, I will be the Singapore and Australian interest income (i.e. €6million and €9million respectively) and R will be €25million. See Note 1 below for a computation of this credit.

Note 1 – Computation of credit for double tax relief

Credit for the Singapore and Australian withholding tax suffered will be computed as follows:

 

Singapore Co (€)

Australia Co (€)

 

 

 

Irish Measure of Income (IMI) (P×I/R)

2,760,000

4,140,000

Foreign withholding tax (FT)

(300,000)

(900,000)

Net Foreign Income (NFI)

2,460,000

3,240,000

 

 

 

Foreign Effective Rate (FT/IMI)

10.87%

21.74%

 

 

 

Irish Rate

12.5%

12.5%

 

 

 

Maximum credit computed by re-grossing NFI by lower of Irish and Foreign Effective Rate

 

 

Regrossed NFI

2,760,013 (2,460,000/(1−0.1087)

3,702,857 (3,240,000/(1−0.125)

Maximum Credit computed by reference to lower of either actual foreign tax or Irish tax on grossed-up NFI

300,000 (i.e. actual FT suffered)

462,857

Any amount that cannot be relieved by way of credit should be available to be relieved by way of deduction under Schedule 24, Paragraph 7(3)(c). See Note 2 below for a computation of the deduction allowable.

An additional credit for any unrelieved tax is available under the pooling provisions contained in Schedule 24, Paragraph 9F in respect of the unrelieved Australian withholding tax suffered on the basis that:

The Australian interest income is taken into account in computing the trading income of XYZ FinCo Ltd;

Arises from a source within a country with which Ireland has a double tax treaty (i.e. Australia); and

Has been received from a 25% group company (i.e. Australia Co is a 100% direct subsidiary of XYZ FinCo Ltd)

Note 2 – computation of deduction available for double tax relief and pooling relief

 

Singapore Co (€)

Australia Co (€)

Foreign Withholding Tax

300,000

900,000

Maximum credit (see Note 1 above)

(300,000)

(462,857)

Amount available for relief as deduction

Nil

437,143

 

 

 

Tax effect of relief given by way of deduction

 

(54,643) [437,143×.125]

 

 

 

Amount available for pooling

 

382,500

 

 

 

Taxable income (see regrossed NFI see Note 1)

2,760,013

3,702,857

Irish tax @ 12.5%

345,002

462,857

Credit

(300,000)

(462,857)

 

 

 

Incremental Irish tax

45,002

Nil

 

 

 

Relief by way of pooling

(45,002)

 

 

 

 

Net Irish tax

Nil

 

The remaining unrelieved Australian withholding tax after pooling of €337,498 (i.e. €382,500 – 45,002 used against Singapore Co Irish tax) will be lost as it cannot offset against non-treaty source interest income (e.g. Brazil) and cannot be carried forward to use in a future taxable period.

As Ireland does not have a double tax treaty with Brazil, relief for the withholding tax will not be available under the usual provisions contained in Schedule 24, Paragraph 4 as would apply for the Singapore and Australian withholding tax. However, credit should be available for the Brazilian withholding tax under the unilateral relief provisions in Schedule 24, Paragraph 9D as the Brazilian withholding tax should be considered to be “relevant foreign tax” as defined in Schedule 24, Paragraph 9D(1)(a), being:

Tax which has been deducted under Brazilian domestic law;

Which corresponds to income tax or corporation tax;

Which has not been repaid to the XYZ FinCo Ltd;

For which credit is not available under any double tax treaty; and

Which, apart from the unilateral relief provisions, is not treated as reducing the taxable income of XYZ FinCo Ltd.

The method of computing the maximum credit available under unilateral relief is different compared with how it would be computed if normal double tax relief were to apply. Under Schedule 24, Paragraph 9D(2), the maximum credit allowed is the lower of:

1. The foreign tax suffered @ 87.5% or;

2. Net foreign income (computed in the same was as under double tax relief) @12.5%

In respect of the Brazilian withholding tax suffered, the maximum credit allowed is therefore computed as follows:

Note 3 – computation of unilateral relief for Brazilian withholding tax

1. Foreign Tax Suffered

 

€375,000

 

 

@87.5%

 

 

€328,125 (A)

2. Net Foreign Income

 

 

 

 

 

Irish measure of income (IMI)

€1,150,000 (€2,500,000×(€11,500,000/€25,000,000))

 

Brazilian Withholding Tax

(€375,000)

 

Net Foreign Income

€775,000

 

 

@12.5%

€96,875 (B)

 

 

 

Maximum credit available

Lower of A and B

€96,875

A deduction will also be given for the total Brazilian withholding tax suffered under Section 77(6A) TCA 1997. The amount of the deduction is restricted to the Irish measure of income so that the deduction cannot effectively create a loss. However, as the Irish measure of income (i.e. €1,150,000) exceeds the Brazilian withholding tax suffered, this restriction should not apply.

Corporation Tax Computation for XYZ FinCo Ltd – Year ended 31 December 2015

 

Profit

 

11,500,000

Less deduction for foreign tax:

 

 

Australia WHT (Note 2)

437,143

 

Brazil WHT (S77(6A))

375,000

(812,143)

 

 

 

Taxable profits

 

10,687,857

 

 

 

Corporation Tax @12.5%

 

1,335,982

 

 

 

Credit for WHT:

 

 

Singapore (Note 1)

300,000

 

Australia (Note 1)

462,857

 

Pooling (Note 2)

45,002

 

Brazil (Note 3)

96,875

(904,734)

 

 

 

Net Corporation Tax Payable

 

431,248

Examiner’s Report

The purpose of this document is to highlight areas of the Summer 2016 examination where students answered well, together with those areas where students did not. It is hoped this document will act as a study aid for future students when preparing for their examinations in this module.

Some general comments on the paper as a whole are set out below, followed by specific comments on each question.

Overall comments

Overall, the standard of answers by candidates on this paper was mixed.

Some key areas to be aware of for future students:

Most recent Finance Act changes – as these are new and have not been examined before, students should have a clear understanding of these as it is possible that an examiner will work these into a question, especially if there has been a big change/addition to an area of Irish tax law. This comment applies equally across all modules at all levels, not just this particular exam.

Topical areas – students should have a broad understanding of any particular areas on the courses that have been topical recently as it is possible that an examiner may focus in on these (see Question 2 STHL as an example which examined the double Irish structure).

Areas that have been answered badly on recent exams – examiners may focus in on areas of the course where students in general have not done well. For example on the international course, the area of computing double tax relief/unilateral relief has been an area of focus in recent years. In this current exam, Question 4 (dividends) and Question 5 (interest) had computational elements of this which some students did well in, whereas others did poorly. Students are reminded that this is key part of the international tax module and a key understanding of all aspects of this is important.

Part 1/Part 2 material - Future students are reminded that Part 1 and Part 2 material is examinable at Part 3 level. Whilst students are unlikely to get a full question on Part 1/Part 2 material, it may form a part of a question and it is therefore key that students retain a level of knowledge of the fundamental elements of these courses (see below comments on Question 2 – STHL)

Cross-over between modules – certain material may potentially be examined on more than 1 module albeit with a different focus, (see for example part (iv) of Question 2 below referring to CT payments group). Other examples of potential cross-over could be participation exemption, rules on share buybacks/redemptions, stamp duty provisions for companies etc. (clearly there may be other areas of cross over and students should note that you will not get a full Domestic question on the International paper or vice versa).

Maximising your marks – marks were lost by students in this exam for overlooking the basics. In broad terms, you should always put yourselves in the shoes of a client and think what questions they would ask if you were providing them with advice, and set them out in short, simple terms. Those students who did very well in this exam were able to do this. I would always think of the following as a typical, but not exhaustive list:

Is there a tax liability?

If yes – how much is the liability?

When do I have to pay the tax liability?

Is there a separate return I need to file disclosing details of the tax liability? If so, when is this return due? Is there a specific format required for this return (e.g. online via ROS)?

Is there any way to mitigate the tax liability (e.g. through a relief or exemption)?

What are the conditions for this relief/exemption to apply? Will I qualify for this? Are there any clawbacks with this relief/exemption? Is there any advance clearance/filing I need to obtain to get the relief/exemption? (e.g. a claim needs to be made for Associated Companies Relief from stamp duty, whereas if all conditions are met, participation exemption applies automatically)

Time management – there were a number of students who, unfortunately did not manage their time well. Whilst some picked up very high marks in some questions, a lack of time meant other questions were incomplete and marks lost.

Legislative references - a number of the questions specifically mentioned in the requirements that marks would be awarded for legislative references. Whilst some students were very good at this, a number of other students made vague or no references at all. A number of other students spent a significant amount of time explaining certain provisions without then actually including the reference. Students should focus on giving a specific reference which should cut down how much students need to write in an exam (e.g. rather than Section 81, include Section 81(2)(m)) and also demonstrates to the examiner that you know exactly where a specific provision is in the legislation

Application of legislation to the facts – a number of students spent significant time describing certain provisions in general terms but then did not actually apply them to the facts or come to any reasoned conclusion (e.g. in Question 3 on the offshore trust and references to Section 806/579 etc.). Students need to apply the legislation to the facts.

Statements of Practice – in general, students showed a poor understanding/knowledge of these. Some students did make reference to the income tax SOP’s in Question 1 and some students were able to apply them very well to the situation in hand. In Question 2, only a small number of students seemed to be aware of the 2010 statement of practice dealing with patent royalties. Where the examiner makes reference to marks being specifically awarded for reference to relevant Revenue guidance, it is likely that a SOP/tax briefing/ebriefs will have to be mentioned. An in-depth knowledge of every piece of Revenue guidance is not expected for the exam. However, where such guidance has been specifically referenced in the student manuals, students should be aware of the contents of these documents.

Answering the same question twice – in answering the questions, students should carefully read all parts of the question before answering and plan out roughly how they will answer this. In a number of instances, students answered the same point multiple in the same question (for example in Question 1, in dealing with SARP students made reference to the student fees in describing SARP and then again on the cash allowances.

Question 1

This question was generally well answered and students seemed well prepared for a question on SARP.

Some points to note include:

For part (i), most students dealt very well with establishing Steve’s treaty residence and received full marks. Some students lost valuable time in setting out the basis for Steve being Irish and US tax resident, under the respective domestic tax rules, when this information was provided in the question.

In addressing part (ii), a lot of students made reference to Irish Tech Ltd being accountable for the PAYE if Global Tech Inc did not operate it, which is correct. However, many students did not address the basis for the company’s requirement to operate PAYE/USC in the first place. Some students who did tackle this incorrectly attached the company’s requirement to operate PAYE/USC as being dependent upon the individual’s tax residence position.

Part (iii) carried most of the marks for Question 1 and many students, who had correctly interpreted the provisions within the SARP legislation in s825C, scored full (or almost full) marks. Where marks were lost, this was typically due to students referring to the conditions under the old (pre Finance Act 2014) SARP regime. Marks were also missed where students did not address the actions to be taken by the company to secure the application of SARP relief through payroll, even though this was a stated requirement in the question.

Part (iv) was well answered. Most students hit the relevant points succinctly.

Part (v) was generally not well answered with many students confusing the treatment of restricted stock units (RSUs) with that of share options. As the treatment of RSUs is not dealt with in tax legislation and many students were not familiar with the relevant Revenue guidance, in many cases no marks were awarded. However, as there was only two marks for part (v), it did not preclude many students from otherwise scoring high marks overall for Question 1.

Part (vi) was also mostly well answered. Most students were aware of the relevant reliefs for reimbursement of school fees and for temporary accommodation costs for inbound assignees. Where full marks were not awarded, it was generally as a result of students not applying the reliefs to Steve’s case or for confusing the different treatment that applies depending on whether the payment is a ‘round sum’ allowance or for reimbursement of vouched expenses.

Question 2

This question examined an area that has been very topical, it examined some new Finance Act 2014 changes and material from earlier parts of the course (e.g. general rules on corporate tax residency).

In respect of parts (i) and (ii), the answers were mixed, with the requirement being to apply the old and new Section 23A to the facts provided in the question. Those who did this scored well. However, a number of students spent time describing the “central control and management” test, including case law references, when the question specifically stated that no case law analysis was required. As the material on the concept of corporate residence is Part 2 level, this seemed to show a lack of understanding of the basic corporate tax residency rules, namely in the first instance reference is always made to the provisions of Section 23A, which is binding law, compared with much of the case law, which is non-Irish in nature and therefore would only be considered to be persuasive in Ireland.

Regarding part (iii), a significant number of students did not reference the 2010 statement of practice on patent royalties which was the key part of this question. The requirements stated students should make reference to relevant Revenue guidance, future students should take note of this in the requirements when answering questions if you see similar references in the future.

In this question, marks were specifically awarded for reference the statement of practice, setting out the conditions to get relief under it and applying them to the facts in hand (i.e. not just listing conditions and not applying them/giving a reasoned conclusion), as well as mentioning the requirement for advance clearance and who needed to get this clearance. A number of students ignored the Irish tax implications for STHL, focusing only on CTIL. Students who did well on this part of the question included comments on the statement of practice as well as covering the basics for both parties (e.g. deductibility of the royalty for CITL and Irish tax treatment for STHL on receipt of the royalty).

For part (iv), marks were lost for not stating when STHL becomes Irish tax resident (e.g. subject to Irish corporation tax on worldwide income and the tax rate that would apply to this income). When approaching questions at Part 3 level, students need to be able to demonstrate an understanding of the basics as well as some of the more complex areas of the course.

Question 3

In general, Question 3 was answered well. This was particularly the case for parts (b) and (c).

Some points of note:

While most students were aware of the relevant anti-avoidance legislation, some students struggled to apply it to the relevant facts of the scenario presented in part (a). Students were typically better prepared for applying the income tax anti-avoidance provisions of Sections 806/807A, having recognised that Section 806 did not apply to James or Anne since they did not retain any power to enjoy the income. However, application of the CGT anti-avoidance provisions was not as well dealt with by students. Some students displayed a lack of understanding of the difference between the application of Section 579 and Section 579A.

Part (b) was very well answered with a lot of students scoring full marks in the application of some fundamental CGT provisions that tested their knowledge of earlier parts of the programme.

The CAT and CGT implications in part (c) were also well answered with most students identifying the application of dwelling house relief for CAT and principle private residence relief for CGT. Answers were generally very well presented with students setting out the basis for the charge/no charge to CAT/CGT for each individual, together with the availability of any reliefs to reduce the charge, and supporting their answers with the relevant legislative provisions.

Question 4

Part (i) of this question dealt with foreign exchanges issues. These aspects have been covered at various places in Part 1 and Part 2 level, have been examined on Part 3 exams before and frequently arise in practice.

Generally, a lot of students were aware that non-euro currency would be an asset for CGT purposes and once this was identified, most were able to compute the tax liability that would arise.

Those who did really well in this question were those who noted that Section 79 (which deals with trading transactions) would not apply, that the provisions of Section 541 (dealing with debts) would also not apply and were able to explain the reason for how the gain was computed (by reference to the Bentley v Pike principle).

Marks were lost for not giving legislative references and also not mentioning points like the pay and file obligations for any tax liability due. Some students were not sure what tax rate to apply to the gain, with some taxing it at 25%. While the liability would form part of the corporation tax liability for the company, it will be taxed at 33%, albeit you gross up as it forms part of the total profits of the company (again this covered in earlier parts of the programme).

Part (ii) of this question was generally well answered with most students correctly confirming DWT should not apply on dividends to the pension fund or Swiss AG. Marks were lost where students did not refer to the underlying income tax treatment (e.g. Swiss AG, as a non-Irish tax resident company would only be liable to income tax on Irish source income, as did not have Irish trading branch, but Section 153 generally provides exemption).

Regarding part (iii), most students were able to correctly identify that the dividends received would only be taxable at 25% (no possibility of Section 21B election) and compute the normal underlying credit of €162,000. There were, however, a number of students who seemed to get confused between the effective rate of 14% and the nominal rate of 29%. Furthermore, having been given the effective rate of 14% on which to compute the normal credit, there were a few students who proceeded to work out what the effective rate was. Going forward, students should note that if you are given information like this, you should accept it.

A small number of students correctly identified that the additional tax credit under Paragraph 9I of Schedule 24 would be available. There are some numerical examples of this in manual. The question of the availability of this credit does arise in practice and students should be aware of this and mechanics of how it is computed.

Part (b) was generally well answered by most students with many obtaining the full marks. The vast majority of students referenced the Marks and Spencers and FII cases, which were perfectly valid, although variation on this would have been welcome. Future students are referred to the model solution which gives some other examples which may be worth noting going forward.

Question 5

This question sought to comprehensively examine students’ knowledge of double tax relief for interest income. Overall, the standard of answers on this question requires improvement. The ability to compute double tax relief is a key part of the international tax course and has been highlighted in many previous exams as a key area of focus and takes up a considerable part of the student manual.

This question brought together a number of computational aspects, namely:

Tax rate to apply to the interest income received;

Computation of double tax credits from treaty source countries;

Computation of deduction for foreign tax from treaty source countries;

Computation of unilateral tax credit from non-treaty source countries;

Computation of deduction for foreign tax from non-treaty source countries; and

Computation of pooling provisions for interest.

A similar question could have been asked for dividends, royalties or foreign branches and students should also be able to compute relief for these areas as well as interest income. There are a number of numerical examples of these aspects in the student manual, past exam papers, Irish Tax Institute books and other material (e.g. Revenue’s guidance notes) which students should consult if they do not understand this area.

A number of students did not give sufficient explanation and supporting legislative references for the solution, which was specifically requested in the requirement.

Some issues that arose included:

Application of the 12.5% tax rate - whilst the majority of students correctly identified that the company would be carrying on a treasury trade (and therefore the income would be taxable at 12.5%), there was a number of students who made reference to the ability to make an election under Section 21B to tax the income at 12.5%. This election only applies to dividend income, not interest or any other source of income.

Computation of IMI –some students had difficulty in how to compute this and apply the P*I/R formula. It is essentially the operating margin of the Irish company multiplied by the gross foreign income received. Taking Singapore Co in this question as an example, the operating margin of the XYZ Finco is 46% (11.5m/25m), so the IMI of the Singapore income is 46% of the gross interest income of €6million which is €2.76million.

Computation of the foreign effective rate (FER) – similar to the point above on IMI, a number of students who incorrectly computed the foreign effective rate for Singapore and Australia, which in turn meant that the double tax credit was often incorrect. To clarify, the FER is the foreign tax suffered/Irish measure of income (not as a lot of students computed it, the foreign tax suffered/net foreign income). To give a simple example, if my IMI is 100 and foreign tax suffered is 20, my net foreign income is 80. My foreign effective rate is 20% (i.e. 20/100) not 25% (i.e. 20/80) as some of students would have thought in the exam.

A number of students did not realise that Ireland does not have a double tax treaty with Brazil, a list of which was included in the Rates and Tables material booklet provided in the exam hall and a list of these is also included in Schedule 24A.

Pooling provisions for interest – while a lot of students recognised the potential for pooling to apply to the excess foreign tax arising in respect of the Australian income, some students assumed that pooling would be available and did not actually consider the specific conditions that need to be met under Paragraph 9F of Schedule 24 (e.g. 25% ownership requirement, interest income from Australia being trading income of XYZ Finco and the interest income arising from a treaty state (Australia)). Whilst the conditions were met in this case, some students did not confirm that the conditions for pooling were met.

Unilateral relief – similar to the pooling, some students assumed that unilateral relief would be available and did not make any reference to the specific conditions that need to be met under Paragraph 9D of Schedule 24 (e.g. the tax having been deducted under Brazilian domestic law, corresponding to corporation tax, not having been repaid etc.). Whilst the majority of students were aware of the difference in computing unilateral relief compared with double tax relief, there was confusion amongst some students. This is an area that should be known very well (and has been referenced in previous examiners reports) and future students are advised to make sure that they are very clear on how this is to be computed. One final point on this is that in addition to the credit available, a number of students did not also take the deduction allowed under Section 77(6A) in computing the taxable income of XYZ Finco.

Maximum amount of credit received – in a number instances, students computed a credit available which was in excess of the foreign tax suffered on the interest income. Generally, it is not possible to get relief in excess of the foreign tax suffered, so students should always double check this when computing their relief.

 

Q1

Q2

Q3

Q4

Q5

Highest

25

24

25

24

22

Lowest

7

1

2

1

1

Average

17

10

15

12

10