Part 3 Past Papers

Autumn 2017

QUESTION 1

Colin works for Instant Solutions Ltd, a UK quoted company. He is married to Mary who is English and they have two children Seamus and Eibhlin. Colin was born in Ireland and lived in Ireland until he moved to the UK to go to university. He has lived in the UK for 20 years. His parents still live in Ireland and Colin retained his Irish citizenship as he plans on returning to Ireland when he and Mary retire.

Colin was seconded to the Irish subsidiary of Instant Solutions Ltd on 1 April 2016. Prior to his secondment, Colin has never spent more than 14 days in Ireland in any tax year. The following information is relevant to 2016:

Colin and his family moved to Ireland on 1 April 2016 for a three-year secondment. Instant Solutions Ltd provided him with accommodation for the duration of his assignment. The company also pays his utilities. As Eibhlin is in school, Instant Solutions Ltd has agreed to pay her Irish school fees of €3,000 per year (assume €3,000 paid in 2016). Instant Solutions Ltd has also agreed to provide the family with flights back to the UK once per year to visit their friends.

Colin will continue to be paid in the UK and will only bring in funds to Ireland to fund daily living expenses. His UK salary for 2016 is €300,000 which includes a bonus of €50,000. The bonus was paid in April 2016 but was earned during the period January to December 2015 during which time Colin was working only in the UK.

Colin expects that he will need to return to the UK during the period of his assignment and expects to spend approximately 28 days in the UK in 2017 and 2018. He does not expect to return to the UK in the period from 1 April 2016 to 31 December 2016.

Colin has been a member of the company pension scheme in the UK since he commenced his employment with Instant Solutions Ltd 15 years ago. He contributes €5,000 per annum to the pension and his employer matches his contribution.

REQUIREMENTS

(i) Describe what constitutes a foreign employment and how it is charged to tax in Ireland.

(3 marks)

(ii) Summarise the Irish tax legislation in relation to any relief that may be available to Colin on his secondment. Calculations are not required.

(7 marks)

(iii) Calculate Colin’s 2016 Irish tax liability. Your answer should include a calculation of any relief available to him in 2016 as a result of his secondment.

(10 marks)

(iv) Comment on the position regarding relief for Colin’s UK pension contributions. Advise Colin on how to make a claim for any applicable relief.

(3 marks)

(v) Comment on Colin’s social security position for the duration of his assignment.

(2 marks)

Total 25 Marks

Marks will be awarded for legislative references.

QUESTION 2

(a) Sporty Goods Ltd, an Irish tax resident trading company, began selling products in France in 2016. Sporty Goods Ltd initially decided to engage a number of independent agents located in France to sell the products on its behalf. It rented a warehouse in France for the purpose of storing these goods. However, sales to date have not been at the level anticipated and they are considering sending the Irish sales director to France for two years to oversee the development of the market there.

REQUIREMENT

Assuming that the Ireland-France Double Taxation Agreement/Convention is identical to the OECD Model Tax Convention, outline whether Sporty Goods Ltd will likely be subject to tax in France as a result of the current and proposed activities and any relief that may be available in Ireland for any French corporation tax suffered. You are not required to consider any payroll tax issues.

(10 marks)

(b) Big Money is an Irish tax resident holding company. In each of the following SEPARATE scenarios, outline whether an interest deduction is available and the amount of any deduction available for the year ended 31 December 2016. All group companies have common directors.

(i) Big Money lends €100,000 at annual interest of 5% to Red Ltd to acquire 100% of the ordinary shares in Blue Ltd, a UK tax resident trading company, from Green Ltd. Red Ltd and Green Ltd are 100% subsidiaries of Big Money Ltd.

(5 marks)

(ii) Big Money gets a loan of €1million from a third-party bank at an interest rate of 10% on 1 January 2016. Big Money lends this money to its 100% subsidiary, Pink Ltd interest-free who uses the funds to purchase plant and machinery for its trade. On 1 October 2016, Pink Ltd repays €400,000 of the loan to Big Money. Big Ltd does not use the €400,000 it receives to repay the third-party bank but instead places it on deposit.

(6 marks)

(iii) Big Money gets a loan of €1million from a bank at an interest rate of 10% on 1 January 2016. Big Money lends this money to its 100% subsidiary, Yellow Ltd, a Luxembourg tax resident company, interest-free who in turn on-lends these funds at an interest rate of 5% to its US tax resident trading subsidiary, +Yankee Inc.

(4 marks)

Total 25 Marks

QUESTION 3

(a) IP Co is an Irish tax resident company carrying on a trade of licensing intellectual property to related group companies. During the year ended 31 December 2016, it received royalties from related companies in the following jurisdictions:

 

Gross royalties (€)

Withholding Tax Suffered (€)

Australia

2million

200,000

New Zealand

4million

400,000

United Kingdom

8million

Nil

IP Co did not receive any other income in the period and had tax adjusted profits (before deduction for withholding tax suffered) of €840,000.

REQUIREMENT

Calculate IP Co’s Irish corporation tax liability for the year ended 31 December 2016. Marks will be specifically awarded for explanations in arriving at your answer and relevant statutory references.

(11 marks)

(b) In December 2012, Big Ltd, an Irish tax resident company, acquired 20% of the ordinary share capital of Bread Ltd, a UK tax resident bakery company, for €300,000. At the same time, it also paid €20,000 to acquire an option. The option allows Big Ltd to acquire a further 30% stake in Bread Ltd within a five-year period at a price of €500,000.

Due to a change in strategy, in 2016 a third party bought Big Ltd’s 20% stake for €350,000 and the option for €32,000.

REQUIREMENT

Outline the Irish tax implications of the sale of the shares and option, taking account of all reliefs available.

(11 marks)

(c) Give two examples in Irish tax legislation of where the arm’s length or open market price is substituted for the actual amount paid.

(3 marks)

Total 25 Marks

QUESTION 4

Smart IP Ltd, Dumb Ltd and Clever Ltd are Irish incorporated and Irish tax resident companies. They are wholly owned subsidiaries of a multinational group whose ultimate parent is listed on the New York Stock Exchange.

REQUIREMENTS

(i) Outline the Irish tax implications in each of the following SEPARATE scenarios. Your answer should include relevant legislative references, case law and Revenue practice.

(I) Smart IP Ltd licenses patented IP to third party customers. Smart IP Ltd has over 300 employees in Ireland, a significant number of whom are actively involved in the exploitation of this IP. The underlying patent is owned by Smart IP Ltd’s US parent company. In the year ended 31 December 2016, Smart IP Ltd’s net profit from licensing activities was €10million after deducting a €15million royalty expense paid to its US parent company.

(7 Marks)

(II) Dumb Ltd, a trading company had a net profit of €10million after deducting accrued interest of €5million. The amount of interest paid in the year by Dumb Ltd was €6.5million. The interest expense arises on an 8-year loan from a Bermuda tax resident company which is a 100% subsidiary of the US parent company of Dumb Ltd. The loan was used by Dumb Ltd for trading purposes.

(9 Marks)

(III) Clever Ltd licenses IP, which is primarily industrial processes and product designs protected by patents, to related party customers. Clever Ltd licenses the IP from a Cayman tax resident sister company (the common parent of Clever Ltd and the Cayman subsidiary is the US parent company). Clever Ltd has one part-time employee who carries out basic accounting and record keeping. In the year ended 31 December 2016, Clever Ltd received gross royalty income of €20million and paid royalties of €14million to its Cayman sister company.

(5 marks)

(ii) The group’s parent company is considering setting up an active treasury company to manage group financing and cash pooling. Outline some of the key features of the Irish tax system that make Ireland an attractive location for treasury activities.

(4 marks)

Total 25 Marks

QUESTION 5

(a) Lucca is an employee of Support Ireland Ltd (SIL), an Irish subsidiary of a US networks company (International Tech US Inc). He has been a member of SIL’s Revenue approved occupational pension scheme for many years. Lucca recently accepted a job offer from a French affiliate of SIL, as he wants to move to France permanently to be closer to his family. Lucca would like his pension fund benefits to be transferred from the occupational pension scheme operated by SIL to a pension scheme being operated by the French company.

Lucca is due to be paid a €30,000 performance bonus before he leaves SIL and he intends asking SIL to pay part of the gross amount of that bonus directly to his pension fund as an employer contribution.

REQUIREMENTS

(i) Advise Lucca on the issues associated with transferring his pension fund benefits from the occupational pension scheme operated by SIL to the pension scheme operated by the French company.

(4 marks)

(ii) Outline the tax implications for SIL and for Lucca, of Lucca’s suggestion in relation to his performance bonus.

(4 marks)

(b) Piotr is an employee of DTF Ltd, which is a company based in Poland. DTF Ltd does not have a presence in Ireland. DTF Ltd entered into an agreement with FGH Ltd to the effect that Piotr would work on a project in Cork for FGH Ltd in 2016. FGH Ltd is not connected to DTF Ltd.

Piotr is employed by DTF Ltd under a foreign contract of employment and pays his taxes at source in Poland. He came to Ireland for a short-term assignment from 1 January 2016 to 31 May 2016 returning to Poland on that date. While in Ireland, DTF Ltd provided Piotr with a serviced apartment in Cork and paid for him to return to Poland once a month to visit family. These visits included a weekend trip flying out Saturday and back to Ireland on a Sunday evening. Piotr owns a house in Poland and his partner remained living in the house while Piotr worked in Ireland.

REQUIREMENTS

(i) Comment on the obligation to operate PAYE, USC and PRSI in respect of Piotr’s salary, accommodation and flights in 2016. Give details of any reliefs which may have been available in relation to his salary and any travel and subsistence related items.

(10 marks)

(ii) If Piotr remained in Ireland working on the assignment until 10 July 2016, comment on the obligation to operate PAYE, USC and PRSI in this case.

(3 marks)

(c) On 1 April 2016, Emily Wallman moved to Ireland. Emily is UK domiciled and had lived in the UK all of her life.

Emily sold shares in a UK plc in March 2016 for €40,000. A capital gain of €20,000 arose on the sale. She also received UK dividends of €2,000 in February 2016. Emily lodged the sale proceeds from the sale of shares and the dividends to a UK bank account. She transfers €1,750 per month from the UK bank account to an Irish bank account to fund her living expenses while in Ireland. Emily will return permanently to the UK on 30 November 2017.

REQUIREMENT

Advise Emily on the extent of her exposure to Irish tax on the disposal of the shares in the UK plc. No calculations are required.

(4 marks)

Total 25 Marks

Marks will be awarded for legislative references.

SOLUTION 1

(i) Schedule D Case III charges tax on income from “possessions outside the State” (s18(2) TCA 1997). According to case law, the word “possession” denotes “anything that a person has as a source of income”. Therefore, a foreign possession includes an employment.

An employment will usually be treated as a foreign possession if:

(a) The employer is foreign;

(b) The contract of employment is governed by foreign law; and

(c) The income under the contract is paid abroad.

However, s18(2) TCA 1997 excludes income from an office or employment which is attributable to the performance of duties in Ireland from the charge to tax under Schedule D Case III. This income is instead charged under Schedule E.

(ii) Colin should make a claim for split year relief under Section 822 TCA. So long as he can demonstrate to the Inspector that he intends being resident in Ireland in 2017, his employment income for the period prior to his arrival in Ireland should not be liable to Irish income tax. On the basis he arrives on 1 April 2016, it is likely that he will be tax resident in Ireland under the 183 day test. Colin will be liable to Irish income tax in 2016 only in respect of his employment income earned following his arrival. Colin will receive the full benefit of the standard rate cut off point and tax credits notwithstanding he only arrived in April 2016.

The UK Company must operate PAYE and USC by reference to the income earned by Colin following his arrival on the basis that he is tax resident in Ireland.

Section 825C TCA 1997 provides relief from income tax (but not USC or PRSI) on a proportion of the income earned by a relevant employee who, having worked with a relevant employer for a minimum period of 12 months, is assigned by the employer to work in Ireland or is transferred by their employer to work in Ireland under an Irish employment contract. The relief can be claimed for a maximum period of five consecutive tax years and applies in the case of a relevant employee who is assigned/ transferred to work in Ireland from 2012 to 2017.

To be able to claim SARP a relevant employee must for a tax year:

Be resident in Ireland for tax purposes

Perform the duties of his/ her employment with a relevant employer (or associated company) in Ireland at the request of his/ her relevant employer, and

Have relevant income from his or her relevant employer (or associated company) which is not less than €75,000.

A relevant employee is an individual who:

Was a full time employee of a relevant employer and exercised the duties of his/ her employment with that relevant employment with that relevant employer outside Ireland for the whole of the 6 months immediately prior to arrival in Ireland.

Arrives in Ireland in any of the tax years 2012 to 2017 at the request of his or her relevant employer to:

(I) Perform the duties of his or her employment in Ireland for that relevant employer, or

(II) Take up employment in Ireland with an associated company of the relevant employer and to perform duties in Ireland for that company,

for a minimum period of 12 consecutive months from the date of arrival

Performs the duties of his, or her employment in Ireland for that relevant employer (or he or she first performs those duties in Ireland. Any duties performed outside the state may be considered incidental.

Was not tax resident in Ireland for the 5 tax years immediately preceding the tax year in which he or she first arrives in Ireland for the purpose of providing those duties and

In respect of whom the relevant employer or associate company certifies to Revenue on the SARP1A form within 30 days of arrival that the conditions will be met.

A relevant employer means a company that it incorporated and tax resident in a country or jurisdiction with which Ireland has a DTA or IEA.

The SARP relief under section 825C TCA 1997 has been extended to 2020.

(iii) As Colin meets the above conditions and makes a claim for SARP on his 2016 Irish tax return, he is entitled to have a specified amount of income from his relevant employment disregarded for income tax purposes (but not USC or PRSI).

As Colin arrived to Ireland in 2016 and in order for a SARP claim to be due, he will need to have relevant income from his relevant employer of €75,000 (pro-rated by reference to the time spent in Ireland). In this way, he will need to have relevant income of at least €56,250.

We are told that the bonus paid in April 2016, relates to his pre-assignment duties, therefore it is not considered relevant income in 2016.

Colin’s relevant income for 2016 is €183,750 which is calculated as follows:

(€300,000 − €50,000) * 9/12 = €187,500.

A reduction is made for the pension contributions i.e. €187,500 − €3,750 (€5,000 * 9/12) = €183,750

Salary and pension to be apportioned by time spent in Ireland.

As this is greater than €75,000 * 9/12 (56,250) he can claim a refund of PAYE on the “specified amount” which is determined as follows:

(A−B) * 30% 0.5

A = €183,750

B = €56,250 (75K * 9/12)

Specified amount is €127,500 * 30% 5 €38,250

Colin will be entitled to an income tax repayment of €15,300 (€38,250 * 40%)

The relief does not cover USC and PRSI, which remain payable on the specified amount.

Colin will make a claim for SARP on his 2016 Income Tax Return.

(iv) Although Colin remains in his home country pension scheme, tax relief will be available in Ireland for pension contributions paid as he will be considered a relevant migrant member who comes to the State and wishes to continue to contribute to a pre-existing "qualifying overseas pension plan" concluded with a pension provider in another EU Member State. Relief is also available in respect of employer pension contributions which means that such amounts can be paid without being considered a taxable benefit in kind.

(v) As Colin is only temporarily assigned to Ireland, and continues to be employed by the UK employer, it will be possible to obtain a A1 Certificate for him which will exempt him from PRSI.

SOLUTION 2

(a) The extent to which Sporty Goods is taxable or not in France will depend on whether it has a permanent establishment in France.

Article 5 of the OECD MTC provides that a PE can exist in another country where either 1) a resident of one country operates in the other country through a fixed place of business (e.g. office, branch, factory) or 2) a person habitually concludes contracts in one country on behalf of a resident of another country.

Specific exemptions from a PE arising are included in Article 5(4) such as facilities used solely for storage, maintenance of stock solely for storage, carrying on business in a country through an independent agent or broker.

In the current situation, it is unlikely that a PE will arise in France as the rented building is only being used for storage and independent agents (not dependent agents) are acting on behalf of the company. Consequently, the income from the French operations should only be taxable in Ireland.

However, if the Irish sales director moves to France to develop the market there, it is likely that a PE would arise as the sales director is likely to be habitually concluding contracts in France on behalf of Sporty Goods.

In that case, the profits from the French operations would be taxable in France in the first instance. However, as Sporty Goods is an Irish tax resident company, it would subject to corporation tax on its worldwide income, meaning that the profits attributable to the French PE would also be taxable in Ireland.

To mitigate against this double tax on those profits, a credit for the French tax suffered should be allowed against the Irish corporation tax. The amount of that credit is limited to the lower of the Irish and French effective rates of tax on those profits. In determining the French effective rate, the usual P*(I/R) formula applying to double tax relief is specifically disregarding in the cases of branches (Para 4(2A) of Schedule 24 refers). Instead, the IMI for the purposes of computing the French tax rate will be computed by reference to Irish Case I principles.

The OECD approved updates to the OECD Model Tax Convention in September 2017 – the updated version of the Model Tax Convention is expected to be published in 2018.

(b) (i) In the first instance, the proceeds of the loan to Red are being applied for a qualifying purpose (the acquisition of ordinary shares in a trading company, Blue), per section 247(2)(a), and the loan appears to be a qualifying loan per s247(3) (e.g. common directors, material interest and no recovery of capital).

However, notwithstanding this, s247(4A)(a) denies a deduction where the proceeds of a loan are received from a person who is connected with the investing company. Per section 10, Big Money and Red Ltd would be connected companies. As such no deduction for interest would be available.

(ii) In the first instance, the proceeds of the loan to Pink are being applied for a qualifying purpose (the on-lending to a company for the purposes of its trade), per section 247(2)(b). Furthermore, the material interest and common directors requirements are met per s247(3). However, per s249(2)(a)(ii), Big Money has recovered capital from Pink by virtue of Pink having repaid €400,000 of the loan. As such the deductible interest will be restricted to €90,000. The amount of the deduction will be computed as:

1/1/16 – 30/09/16: 1m * 10% * 9/12 = 75,000

1/10/16-31/12/16: 600k * 10% * 3/12 = 15,000

(iii) In the first instance, the proceeds of the loan to Yellow are being applied for a qualifying purpose (the on-lending of funds to a company for the purpose of holding shares in a trading company, Yankee), per section 247(2)(a), and the loan appears to be a qualifying loan per s247(3) (e.g. common directors, material interest and no recovery of capital).

However, notwithstanding this, section 247(4F)(b) seeks to restrict the amount of interest deduction where the investing company has on-lent interest free or at a lower interest rate to a company not within the charge to Irish corporation tax. As such, this provision will apply to restrict the amount of the deduction in Ireland by reference to the amount of interest income that Big Money will receive from a non-tax resident company it has on-lent to (i.e. Yellow). Given the loan to Yellow was interest-free and therefore Big Money has not received any interest income, it will therefore not be entitled to any interest deduction.

Finance Act 2017 introduced changes to section 247 TCA 1997 to allow relief where the funds are used to lend to/acquire shares in trading companies via multi-tiered holding company structures. This is subject to a bona fide test. The recovery of capital provisions in section 249 TCA 1997 were also amended to take account of the new section 247 provisions.

SOLUTION 3

(a) Profits earned by IP Co relating to its IP trade will be taxable at 12.5% per s21 TCA 1997.

As Ireland has a double tax treaty with Australia and New Zealand, relief for the withholding tax suffered will be computed by reference to the formula P*(I/R) as set out in Paragraph 4(2A) of Schedule 24 TCA 1997, with the maximum credit being allowed being restricted to the lower of the Irish and foreign effective rates of tax.

Any foreign withholding tax not relieved by credit may be deductible up to the Irish measure of income attributable to a royalty per Paragraph 7(3)(c) of Schedule 24 TCA 1997.

The table below sets out the relief for the foreign withholding tax suffered on the royalties:

Royalty Income

WHT

Irish Measure of Income (“IMI”) (P*I/R)

Foreign Effective Rate

Max credit

Max deduction restricted to IMI – para 7(3)(c)

Unrelieved WHT available to pool – Para 9DB (4)

2,000,000

200,000

120,000

166%

Nil

120,000

80,000

4,000,000

400,000

240,000

166%

Nil

240,000

160,000

8,000,000

Nil

480,000

Nil

Nil

Nil

Nil

 

 

 

 

 

 

 

14,000,000

600,000

 

 

 

360,000

240,000

The corporation tax liability of IP Co will be computed as follows:

 

Case I profits

840,000

Less deduction for WHT restricted to IMI – para 7(3)(c)

(360,000)

Less deduction for unrelieved WHT pooled against UK IMI – para 9DB(4)

(240,000)

 

 

Case I profits after relief for WHT

240,000

Corporation tax at 12.5%

30,000

(b) The disposal of the shares is generating a capital gain of €50,000.

However, consideration needs to be given to the application of the participation exemption under section 626B in respect of the sale of the shares. It would appear that the conditions of the participation exemption are met as:

Big Ltd held the shares in Bread for at 12 months before the sale;

It held at least 5% of the ordinary share capital in Bread;

Bread Ltd is tax resident in Ireland; and

Bread Ltd is a trading company

As such, the conditions of the participation exemption are met. Where this is the case, the participation exemption applies automatically (i.e. there is not an option to claim or not claim the exemption). Therefore, no taxable gain arises.

An option is also an asset for capital gains purposes per section 532(a). Similar to the sale of the shares, it is necessary to consider the application of the participation exemption which is extended to options in section 626C(1)(a)(i). As Big Ltd held shares in Bread Ltd immediately before the disposal and the disposal qualifies for participation exemption, any gain on the disposal of the option should also equally qualify for participation exemption per s626C(2)(a). As such, any gain arising will be exempt from tax.

As the consideration for the disposal does not exceed €500,000, no capital gains withholding tax or advance clearance obligation should arise.

The transfer of the shares will be subject to stamp duty at 1% under Schedule 1 SDCA 1999, resulting in a liability of €3,500 for the purchaser. The transfer of the option (which is included in the definition of stock in s1 SDCA 1999) will also be subject to stamp duty at 1% giving an additional liability of €320 for the purchaser.

(c) The arm's-length principle means the amount charged by one related party to another for a given product must be the same as if the parties were not related. An arm's-length price for a transaction is therefore what the price of that transaction would be on the open market.

Examples where the arm’s length or open market price in Irish tax law include the transfer pricing rules in Part 35A and the connected party rules for capital gains tax in section 549.

SOLUTION 4

(i) (I) There are two issues that need to be addressed in this part of the question 1) what is the appropriate tax rate to apply to the profits of Smart Ltd and 2) the deductibility and withholding tax treatment of the royalties paid the US parent company.

Regarding the tax rate to apply to the profits, the question arises as to whether Smart IP Ltd is trading for tax purposes. Under Irish tax law there is no meaningful definition of trading. As such, reliance is placed on Revenue guidance, Revenue precedents and case law.

Some of the key criteria that Revenue would consider indicative of trading include:

Activity that is more that the mere passive holding of IP rights;

The frequency and number of transactions carried out by the company;

Whether the product/property being exploited is worked up in any way by the company prior to onward sale/distribution

What is the motive of the company carrying out the transaction

A key case often referenced in the case of IP exploitation as being authority is the Noddy Subsidiary Rights v IRC. In this case, the company (Noddy) was established to exploit certain IP rights such as copyright and trademarks. The court held that depending on the circumstances, the licencing of IP rights may amount to the carrying on of a trade and that in the specific circumstances of the case (i.e. the activities of the general manager, the activities of the staff, the fact that customers were actively sought out, etc.) the company was in fact carrying on a trade.

Based on the information provided, it appears that Smart IP Ltd is involved in the development of the IP it supplies, that it likely has a large customer base and has retained a significant number of employees to carry out these activities. As such, it is likely that Smart IP Ltd is likely to be carrying on a trade of licensing IP and the profits from this trade should qualify for the 12.5% trading rate.

Although an obligation to operate withholding tax at 20% would apply in the first instance on the patent royalties, section 242A provides a domestic exemption from withholding tax on royalties paid to residents of a treaty state and Article 12 of the Ireland/US treaty provides that royalties are only taxed in the country of residence of the recipient.

(II) The key issues to address in this part of the question are whether the interest is deductible and whether withholding tax will apply.

In respect of the deductibility of interest, as the interest expense is incurred for trading purposes and is yearly interest, a deduction should be available on an accruals basis in the first instance per s77(3).

However, as the interest is being paid to a non-Irish tax resident related company, it is necessary to consider the application of s130(2)(d)(iv) which provides that interest paid on a security issued by an Irish company (i.e. the loan) to company not tax resident in Ireland where both companies are part of the same 75% group shall be treated as a distribution. As such, the interest will likely be reclassified as a distribution, and therefore not deductible per s76(5)(a).

It is possible to disregard distribution treatment in certain circumstances. The exclusion provided for in s130(2B) will not apply as the interest is not being paid to an EU tax resident company. However s452(3A) provides that where interest is treated as a distribution by s130(2)(d)(iv) is payable in the ordinary course of a trade carried on by the company and would otherwise be treated as a trading deduction, it is possible to make an election in the corporation tax return to have the distribution treatment disregarded. As such it should be possible for Dumb Ltd to make this election.

If the interest is treated as distribution (i.e. no s452 election is made), no dividend withholding tax should arise as the Bermuda company is a qualifying non-resident company under section 172D(3)(b), although Dumb Ltd would not be entitled to a deduction for the interest cost.

Conversely, if a s452 election is made, Dumb Ltd would be entitled to a deduction on an accruals basis for the interest costs. However, no exemption from withholding tax would be available under s246(3) and therefore withholding tax at 20% would apply per s246(2) being €1.3 million.

(III) In this scenario, Clever is merely licensing IP in and out of Ireland without carrying on any other activities. Based on the decision in the Noddy case and the general Revenue guidance, Clever is not likely to be considered trading for Irish tax purposes.

As such, the license income received by Clever is therefore taxable under Case III at 25% per section 21A.

Withholding tax at 20% would apply to the royalties paid to the sister Cayman company under section 237(2). As the royalty is being paid to a company tax resident in a country outside the EU nor a treaty jurisdiction, neither the interest and royalties directive nor the domestic exemption under s242A will provide a basis to exempt withholding tax applying. Furthermore, as the royalty is not being paid in respect of a trade being carried on by Smart IP, it will not be possible to rely on Revenue’s Statement of Practice CT 1/10.

As the IP licensed is patented, the royalty costs incurred will be allowed on a paid basis as a charge on income against total profits under s243.

(ii) Key attributes of Irish tax system that can make Ireland an attractive location for treasury activities include:

Low tax rate on treasury trading income;

Unilateral credit relief for withholding tax suffered on interest income;

Domestic exemptions on interest and dividends paid by Irish companies to residents of the EU/DTA countries;

Availability for deductions for interest payable for trading purposes and non-trading interest (subject to various restrictions in s247, 249 and other anti-avoidance provisions dealing with interest);

No thin capitalisation legislation which would restrict availability of interest deductions; and

Limited transfer pricing rules.

SOLUTION 5

(a) (i) It is possible for a pension fund to be transferred overseas at the request of the member.

However, the scheme administrators of the occupational pension scheme operated by SIL must ensure that scheme to which the fund is being transferred will provide retirement benefits. The transfer must comply with the rules set out in the “Occupational Pension Schemes and Personal Retirement Savings Accounts (Overseas Transfer Payments) Regulations 2003”. Furthermore, the transfer must be for bona-fide reasons, which appears to be the case here.

As the transfer is to another EU country, the pension scheme to which the pension fund is being transferred must be operated or managed by an Institution for Occupational Retirement Provision within the meaning of the EU Pensions Directive 2003/41/EC.

(ii) While an employee is not taxed on employer contributions to an occupational pension scheme, this would be regarded as a salary sacrifice arrangement. Therefore, the amount paid directly to Lucca’s pension fund would be treated as an emolument and would be liable to income tax, PRSI and USC in the normal way (s. 118B(2)(b) TCA 1997 and Tax Briefing 70).

SIL would be required to account for the income tax, PRSI and USC through the PAYE system on the gross amount of the bonus paid.

SIL should be entitled to a corporation tax deduction for the payments.

If Lucca had made the contributions, he would be entitled to tax relief for the contribution subject to the age-related thresholds.

(b) (i) Employers are released from the obligation to operate PAYE in relation to certain temporary assignees. This is a valuable concession in practice as it eases the administrative burden for foreign employers that arises from operating PAYE in relation to non-resident employees who are only in Ireland for short periods.

The details of this release of obligations are set out on Chapter 4 of SP- IT 3 07 and relate to:

(1) Short-term business visits to Ireland by DTA residents (up to 60 working days);

(2) Simultaneous deductions under the Irish PAYE system and under a tax deduction system of another DTA jurisdiction (for assignments of more than 60 days but less than 183 days);

(3) Short-term business visits to Ireland by non-DTA residents (30 days or less).

In this case, Piotr will spend greater than 60 but less than 183 days in Ireland in 2016.

Revenue will not require the non-resident employer to operate PAYE in the case of the temporary assignee where all of the following criteria are satisfied:

(a) The individual is resident in a country with which Ireland has a DTA and is not Irish tax resident for the relevant year (resident in this context is determined under domestic rather than DTA rules);

(b) There is a genuine foreign office or employment;

(c) The individual is not paid by, or on behalf, directly or indirectly, by an Irish permanent establishment of the foreign employer;

(d) The cost of the office or employment is not borne, directly or indirectly, by an Irish permanent establishment of the foreign employer; and

(e) The duties of that office or employment are performed in Ireland for up to 60 working days in total in a year of assessment (or ay continuous period of up to 60 days)

In addition, Revenue will not require a non-resident employer to operate PAYE in relation to temporary assignees of DTA countries where:

Conditions (a) to (d) above are satisfied and:

The temporary assignee of the DTA country is present in Ireland for a period or periods of up to 183 days in aggregate in a year of assessment; and

The temporary assignee suffers withholding taxes at source in their home country on the income attributable to the performance of the duties of the foreign employment in Ireland.

In order for this relief to apply, the individual must qualify for exemption from Irish tax under the terms of the relevant DTA.

In this case, Piotr expects to be Ireland for the period 1 January to 31 May. Therefore on the basis that Piotr meets the above conditions, DTF Ltd will not be required to operate PAYE on his behalf provided the following conditions are met:

(a) DTF Ltd is registered as an employer for PAYE tax purposes;

(b) DTF Ltd is require to maintain a record of the full name, latest Irish and overseas address, date of commencement and cessation of the individual’s temporary assignment, the location where the individual carries out the duties of the temporary assignment and the amount of earnings in respect of the temporary assignment;

(c) Sign a written acknowledgement that, in all cases where lability is subsequently found to arise in respect of payments of emoluments to assignees, the employer will be liable to the relevant provisions of TCA 1997 to pay the tax should have been deducted from those emoluments;

(d) Supply withholding evidence of withholding tax in the foreign jurisdiction on the income attributable to the performance of the duties of the foreign employment in Ireland;

(e) On request, supply a copy of the contract(s) relating to the employer’s engagement in Ireland; and

(f) Seek clearance in writing from Revenue within 21 days of the date after the assignee takes up their duties in Ireland.

As Piotr qualifies for relief under Article 15 of the Ireland/ Poland DTA, no Irish tax will be due in respect of travel and subsistence expenses incurred with respect to his temporary assignment to Ireland.

(ii) Where Piotr has been in Ireland only for the period 1 January 2016 to 10 July 2016, he will be tax resident under the 183 test. DTF Ltd will not be able to meet the above conditions and will need to account for PAYE and USC attributable to Piotr’s foreign employment income earned in Ireland.

Where DTF Ltd does not operate PAYE a secondary liability for FGH Ltd would exist under 985D. Revenue could issue a direction under 985F which would require FGH Ltd. to operate PAYE in Piotr’s case.

Based on SP IT/2/07 tax-free subsistence can, in Piotr’s case, be paid or reimbursed for the duration of his temporary assignment.

The vouched costs of Piotr’s journeys to Ireland at the commencement of the assignment and his journey home at the cessation of the assignment may be reimbursed tax free. In the case of the accommodation, Piotr should also be reimbursed the vouched rent including utilities.

All other flights home will be considered a taxable benefit in kind.

The reimbursement of expensed could also be done on a flat rate (rather than a vouched basis) provided it is in accordance with the Civil Service schedule of rates see SP It/2/07.

Piotr will need to obtain a PPSN and apply for a tax credit certificate in order for DEF to apply the correct payroll withholding taxes.

(c) Emily is tax resident in Ireland for 2016 as she spent more than 183 days here (i.e. she spent 8 months here). She is not ordinarily resident here and she is non-domiciled. Therefore, under Irish tax law, she would be chargeable to Irish CGT on any gains arising on the disposal of Irish assets and on the disposal of non-Irish assets to the extent that they are remitted into Ireland. Emily remitted €12,250 into Ireland in 2016 (€1,750 × 7). As the remittance was from a mixed funds account, Irish Revenue would regard the remittances as first having been made out of income (i.e. the dividend of €2,000) and the balance (€10,250) as a remittance of capital.

However, by virtue of Article 14(5) of the Ireland-UK DTA, the gain would only be taxable in the UK as provided that Emily would be regarded as being a resident of the UK under the DTA.

Emily has a permanent home in the UK. As we are not told that she has a permanent home available to her in Ireland, she would be considered to be resident of the UK under the Ireland/ UK DTA.

Examiner’s Report

Overall comments

Overall, the standard of answers by students on this paper was poor.

Some general comments from across the paper that students should consider:

Not considering all taxheads –a number of students did not consider all taxheads in certain questions when asked to consider the tax implications of a particular scenario. In particular, stamp duty appears to be frequently overlooked.

Time management – this was a common issue coming through in a number of scripts. There was poor time management in a number of scripts with a number of students picking up good marks on one or two questions but then often performing poorly in the remaining questions with often very little written for some of those questions.

Restating the facts – linked to the previous comment above on time management is the trend of a number of students restating the facts, often writing a number of sentences repeating the information in the question. There are no marks awarded for this.

Not addressing the question – a number of students followed a “write all you know” approach in answering a question hoping that something they wrote might be correct. Adopting such an approach wastes valuable time.

Overreliance on the material in the Part 3 manual – it is clear from the overall results that some students incorrectly assumed that only using the manual for this module is sufficient. The Part 3 manual for this module, is meant as a guideline and students are expected to undertake the additional reading recommended. Of particular concern on this exam was the lack of knowledge of a number of topics that would have been considered at Part 2. For example, in general question 4 where trading status, recharacterisation of interest as a distribution etc were examined.

Poor handwriting – students must ensure their handwriting is legible.

Question 1

Overall, this question was answered well.

However, in part (i) many students did not set out the facts which are used to determine whether an employment is a foreign possession.

Part (ii) was answered well with many students achieving full marks.

In part (iii), some students made errors in at least one part of the SARP calculation.

Part (iv) was answered well with many students picking up full marks.

Part (v) was also answered well with many students achieving full marks.

Question 2

Overall, this question was answered reasonably well.

In part (a), most students identified the permanent establishment issues and were able to make a good attempt at interpreting the relevant provisions of the OECD Model Convention.

In part (b), most students identified the Section 247 issues generally. However a number of students ran into issues when considering the various anti-avoidance provisions. In particular, a large number of students did not consider section 247(4F) in part b(iii).

One other point of note that emerged from a number of scripts was the application of our formal transfer pricing rules to the interest rate applied, Big Money was specifically noted as being a holding company and Irish transfer pricing rules generally only apply to trading transactions.

Question 3

Answers to this question were mixed, with responses to part (a) in general being poor but part (b) and (c) were reasonably well answered.

Part (a) of this question sought to examine students ability to compute double tax relief. This is a topic that is asked on almost every exam in one shape or other and a significant amount of the manual covers this topic. Notwithstanding this, the vast majority of students answered this very poorly making a number of mistakes. Examples of mistakes include stating that Australia and New Zealand are non-treaty countries and attempting to compute unilateral relief incorrectly, not correctly computing the Irish Measure of Income or Foreign Effective Rate, not being aware of the pooling by way of deduction of unused tax up to the IMI.

Part (b) of this question sought to test students knowledge of the participation exemption and its extension to options. Generally most students gave good answers, although some did miss the application of Section 626C and/or did not cover all taxheads such as stamp duty.

Part (c) was generally well answered.

Question 4

Overall, answers to this question were mixed. Many students missed many of the Part 2 type issues that arose.

In part (i)(I), most students identified the issue, being whether the company carried on a trade, albeit a lot of students only made a very general reference to it, with only a very small number making reference to relevant case law (e.g. Noddy).

In Part (i)(II) some students missed the point of the interest payment being recharacterised as a distribution and the possibility to make an election under Section 452 to mitigate this.

Part (i)(III) was reasonably well answered with many students identifying that the company was not trading. However a number of students proceeded to analyse the application of Irish transfer pricing rules to the royalty when those rules would not have been relevant here.

Part (ii) was generally well answered.

Question 5

Part (a)(i) was answered poorly and very few students referenced the required regulations and EU Pensions Directive. Furthermore, very few students commented on the transfer being required to be made for bone fide purposes.

Part (a)(ii) was dealt with well with many students achieving full marks.

Part (b)(i) answers were mixed. Most students failed to mention the concessional nature of the statement of practice in terms of releasing employers from the operation of PAYE. Few students mentioned the applicability of the statement of practice to short term business visits of up to 60 days; short term assignments of between 60 and 183 days and business trips of less than 30 days.

Most students realised that a dispensation from the operation of PAYE could be obtained however the majority of students referred to the dispensation as being a PAYE exclusion order. Few students made the connection between the applicability of DTA relief in the home country and the release from the operation of PAYE.

Part (b)(ii) was well answered with all students confirming the PAYE will apply. However, few students mentioned the requirement for Piotr to register for Irish taxes in terms of obtaining a PPSN and applying for a tax credit certificate.

Part (c) was poorly answered. Most students recognised that Emily was subject to the remittance basis of tax. However, many students incorrectly determined the basis on which the remittances would be deemed to have been made. Furthermore, only a handful of students referred to DTA relief applying to the disposal.

 

Q1

Q2

Q3

Q4

Q5

Highest

23

24

21

23

20

Lowest

5

4

2

2

1

Average

14

13

10

12

11