Ireland plans to switch to a territorial tax system – MNE Tax


By Doug Connolly, Multinational Corporate Taxation

The Irish Department of Finance opened a public consultation on 22 December seeking comment on a possible transition to a territorial tax regime for companies.

Such a system “could be simpler and offer greater security to businesses – but should also be accompanied by robust anti-abuse measures,” suggests the consultation document.

Ireland currently has a global corporate income tax system under which Irish resident entities are subject to domestic and foreign source income tax. Double taxation relief for foreign taxes paid on foreign source income is provided through credits against domestic tax liability.

The proposed changes would move Ireland from a credit method for relieving double taxation to an exemption method. Ireland is considering adopting a limited territorial regime using a participation exemption or branch exemption approach, as is common among EU member states, as opposed to a fully territorial regime.

The Finance Department asks for feedback on the benefits of switching to such a system, as well as any consequences or indirect risks for multinationals. He further asks if existing exemplary regimes could serve as a model to minimize compliance burdens without increasing the risk of tax evasion.

The consultation lists several possible diet variants. A participation exemption regime could exempt foreign dividends from related parties and income from foreign branches. The variations could include granting a broader participation exemption for earnings, limiting the scheme to dividends paid out of corporate trading profits, or limiting it to trading income from foreign branches.

The participation regime could also be limited to specified categories of jurisdictions, such as tax treaty partners and EU member states, while retaining the global regime for other jurisdictions.

The consultation is seeking feedback on these potential design elements.

The Finance Department is also asking how Ireland’s current Controlled Foreign Companies (SEC) rules would align with a participation or branch exemption scheme and what changes might be needed. Likewise, the government would like to hear from stakeholders on the potential interactions of such a regime with the exit tax and existing anti-hybrid rules in Ireland.

The consultation paper suggests that the changes to the country’s corporate tax regime brought about by the recent OECD tax deal have made it an appropriate time to reassess the country’s approach to corporate tax, in the aim of maintaining the attractiveness of the country as an investment destination. However, the government is also seeking comments on how the global agreement might affect the move to an exemption regime.

Finally, the consultation asks questions about the implications of a transition to a territorial regime for Ireland’s tax treaty network, as well as any necessary transitional arrangements or other considerations that should be taken into account.

The consultation is open until March 7, 2022.

Doug Connolly is editor-in-chief of MNE Tax. He has over 10 years of experience in tax legal developments, previously working with both a Big Four firm and a leading legal publisher. He holds a law degree from the American University Washington College of Law.

Doug Connolly
Doug Connolly


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