2. The R&D Credit regime Ireland offers, in addition to the standard 12.5% tax deduction, a tax credit of 25% on

Transcription

1 Extegrity Exam4 > Section All Page 1 of 15 Answer-to-Question-_1_ Ireland continues to have a competitive tax landscape and the legislature has been diligent to respond to the changing needs of the international marketplace in that regard. For example, to anticipate BEPS/ATAD developments with regard to the eventual elimination of hybrid situations, Section 23A TCA 1997 was substantially recast by Finance Act For companies incorporated post 1 January 2015, such companies will automatically be Irish tax resident, save for a double tax agreement providing otherwise. A run-off period until 31st December 2020 was provided, however, for existing companies allowing these companies a period of time to plan for the change. Ireland continues, at every budget and at every opportunity, to emphasise the importance of the 12.5% headline rate of corporation tax. In the post BEPS environment, some companies are chosing to migrate their operations, particularly as regards IP, towards a stable but relatively low rate, particularly with the DEMPE requirements for IP and transfer pricing. With regard to the mobility of IP and the digital economy, Ireland has taken a number of steps to enhance the country's atractiveness for R&D. 1. The Knowledge Development Box Set forth at s 769G, the Irish Knowledge Development Box is the first BEPS compliant patent box regime. It permits qualifying income to be taxed at half the Irish rate i.e 6.25%. It does not include acquisition costs but aims to relate the income sheltered by the box to actual R&D spend i.e. there must be a nexus between the spend on R&D and the income arising from same. The take up of this option has been low so far, but given the deadlines to claim, Revenue expect a number of other companies to avail of it later this year (at present c. one dozen companies have taken it up, only) 2. The R&D Credit regime Ireland offers, in addition to the standard 12.5% tax deduction, a tax credit of 25% on

2 Extegrity Exam4 > Section All Page 2 of 15 qualifying R&D spend (Section 766 TCA 1997). For companies not anticipating profits in the short term, the credit can actually be encashed over a three year period, thus reducing the cash cost of R&D. Accounting wise, the R&D credit can be taken directly off the cost in the P&L account, because it may be encashed. This has been particularly popular with a tax cost of c. 800m per year. 3. Write off of purchased intangible assets Section 291A provides an ability for a company who purchases intangible assets to write those off over 15 years, or according to the accounting treatment of same. This is a generous relief, recently restricted to 80% of the qualifyig write off. It facilitates the onshoring of IP to Ireland. Given the DEMPE requirements for transfer pricing, and in circumstances where companies are looking for locations for real IP development (as opposed to post boxes in so called tax haven countries), this initial encouragement for onshoring will have further benefits for job creation in the R&D arena facilitated by the R&D credit and, in time, the KDB Ireland has introduced a number of reliefs assisting Ireland's position as a holding company including the participation exemption for capital gains tax on the sale of subsidiaries, set forth at s. 626B TCA In terms of attracting mobile workers, Ireland has introduced a Special Assignee Relief Programme which provides a 30% reduction in taxable pay for 5 years for certain international workers. To encourage Irish companies to invest in BRICS and other developing countries, a foreign earnings deduction is available. Companies can chose to give the benefit of an R&D credit to certain eligible key employees on a tax advantageous basis. Administratively, Revenue have introduced additional staffing to develop its mutual assistance programme capabilities to deal with international transfer pricing disputes, which are expected to increase because of country by country reporting information and the exchange of tax rulings between tax authorities. Revenue has also instituted a formal programme to provide Advance Pricing Agreements to companies so as to provide

3 Extegrity Exam4 > Section All Page 3 of 15 certainty to their transfer pricing decisions. The horizon, however, is still changing. ATAD will require Ireland to introduce for the first time controlled foreign company legislation and thin capitalisation rules. These follow from BEPS but are being impelemented unilaterally by the EU (with the agreement of all member states). Other matters on the horizon are the Trump tax package aimed at directing US investment at home, encouraged by a much lower tax rate. On the EU front, the CCCTB is still on the EU's agenda as is tax rate harmonisation. Ireland has been out in front of some BEPS development e.g. by having a GAAR rule, a disclosure regime for tax avoidance schemes, an exit tax on companies redomiciling etc. The State (and other states too) await the ECJ decision in the Apple and FIAT and Starbucks state aid cases. Ireland's defence of the state aid system is a signal to the marketplace that Ireland is prepared to defend its tax sovereignty come what may. In summary, Ireland remains competitive and has responded to the chief risks continually facing the economy. Ironically, BEPS has led to a flight to quality in some parts of international business, particuly i the digital sphere and Ireland has been particularly diligent in preparing, tax strategy wise for same DO-NOT-EDIT-THIS-DIVIDER Answer-to-Question - 2 Mr Emmet Smyth Main Street New York Dear Emmet

4 Extegrity Exam4 > Section All Page 4 of 15 Thank you for consulting me in relation to your planned purchase of properties in Ireland. I propose to answer your questions as follows Differences between corporate and personal ownership of properties There is no difference from a legal perspective between a person or a corporation owning property. Ireland's property is capable of being owned by both. Income from personal ownership of property is charged to income tax. You are non resident and non ordinary resident in Ireland and therefore would be taxed in Ireland only on Irish source income from property owned personally. Under the Ireland/US double tax treaty, you would, as a US resident, (assuming the US DTA follows the OECD model) obtain a credit against US tax for income tax paid in Ireland. Under the DTA (Aticle 6), income from the rental of immovable property may be taxed in both country of residence and country of situs of the property. Corporate taxation, in circumstances where corporations are involved in ownership, will depend on where the corporation is resident. Only Irish resident companies pay corporation tax, unless they trade in Ireland through a branch or agency, according to Section 25 of TCA 1997 In the absence of residence, as aforesaid, the corporation will pay Irish income tax at the rate of 20% and not corporation tax. An Irish resident company pays corporation tax at the rate of 25% i.e. a higher amount. Although Ireland is well known for having a trading tax rate of 12.5%, same does not apply to passive income. As well, undistributed income from passive sources in Ireland, if the company is closely held, attracts a surcharge which can greatly increase the effective rate of corporation tax if surplus income is not distributed out. There is therefore a benefit, tax wise, of holding the property personally or purchasing same by way of a foreign company i.e. a saving of 5% rate and saving the possibility of incurring a surcharge. In both cases, costs and expenses of property ownership, including interest on the

5 Extegrity Exam4 > Section All Page 5 of 15 purchase of same, will be deductible before arriving at the taxable amount. In the case of residential properties, the interest is restricted to 75% of the interest (Section 97 2J) and there is a requirement for the landlord to register with the Private Residential Tenancies Board to avail of the deduction - registration with the PRTB is, in any case, a legal requirement in itself. The double tax treaty benefits (Article 6) is applicable to both corporate and personal income - although taxed in both jurisdictions, a credit is available in the country of residence. As you remain Irish domiciled (I assume i.e. you have not abandoned your ties to Ireland), you will need to be careful not to become Irish resident again unwittingly. Anyone present in the state for 183 days in a calendar year or 280 days between 2 calendar years becomes resident in Ireland. Unlike the rules when you left Ireland in 2008, one only needs to be in the state for any part of the day for that day to qualify, so it is a serious matter to consider because you will be liable, if Irish resident, to Irish tax on your worldwide income (subject to DTA reliefs). Differences in treatment between foreign and Irish resident landlord Section 1041 provides that a tenant paying rent to a foreign landlord shall withhold tax at the standard rate and remit same to Revenue. This can be a difficult cash flow cost to bear if the properties are breaking even financially. It is possible to appoint a local agent in Ireland to receive the rent i.e. creating a local pay point to obviate the need for tenants to deduct tax from the gross rents. The issue of dividends i.e. return of capital in a corporate setting is important. If an Irish resident company were to be dividending out surplus income to you as a US resident person, a requirement on an Irish reident company to withhold 20% dividend withholding tax would not apply to you, pursuant to Section 12 D 3. Section 153 provides that income from property letting, for example, which is comprised

6 Extegrity Exam4 > Section All Page 6 of 15 in dividends or distributions to non residents, is not taxable. If you were Irish resident, however, you would be taxed in Ireland on the dividend and at the marginal rates. Foreign landlords do not suffer PRSI on the income received. Section 246 provides that a payment of interest (if a loan were made by a person to an Irish company) will suffer withholding tax. According to section 246 (2), the same withholding tax does not apply to person whose usual abode is outside the State. This is relevant if you were considering forming an Irish company and putting it in funds by way of lending. Renting property Rent of property is taxable as income tax (personal or foreign corporate with no branch/agency) or corporation tax (Irish resident company) at the 25% rate on the rental properties. Non resident or ordinary resident persons and non resident companies are chargeable at the Irish standard rate of 20% whereas resident companies are charged at the 25% CT rate on the rental profits, with potential surcharge for undistributed income. Stamp duty is payable by the lessee (the landlord usually requires the lessee to pay the landlord and the landlord ensures the lease is stamped, so that the lease can be presented in court, for example, if there is a leasind dispute) at a rate of 1% of the annual rent. On sale of properties, it is the buyer who is required to pay stamp duty. The rate on residential property is 1/2% and the rate on commmercial property has recently been increased to 6%. On disposal of properties, Irish capital gains tax is payable on the gain achieved. The tax rate is 33% whether paid personally or corporately (corporations pay sufficient corporation tax to approximate the 33% rate). Capital Gains Tax is, pursuant to Section 29, always payable on Irish land, no matter where the owner is resident, and Irish CGT's reach also extends to a disposal of shares deriving the greater value of same from Irish land assets.

7 Extegrity Exam4 > Section All Page 7 of 15 Article 13 of the DTA provides that capital gains tax may be taxed in both the country of residence and the country where the land is situated. In those circumstances, a credit for the Irish tax will be available as agains foreign income (assuming the US DTA follows the OECD model). Returns and administration Resident corporations make an annual corporation tax return 9 months after the accounting date and must make interim payments of preliminary tax. Foreign corporations and individuals make income tax returns in relation the rent of Irish property and the due date for the return is 31st October in the following calendar year. Preliminary income tax must be paid, however there is a cash flow benefit to be had in the early years of this arrangement. Conclusion I trust the foregoing is appropriate for your needs at this time. Please do not hesitate to contact me if I can be of further assistance to you in relation to this matter. Yours sincerely A. Tax. Advisor DO-NOT-EDIT-THIS-DIVIDER Answer-to-Question- 3 Describe 3 tax reliefs

8 Extegrity Exam4 > Section All Page 8 of 15 1.Special Assignee Relief Programme - Section 825C This provides an income tax break to a person arriving in the State who has been employed by a parent company abroad (in a country Ireland has a DTA with) for at least 6 months and arrives in Ireland at the employers request to perform his/her duties in the state or to work for an associated company of the employer for a minimum period of 12 months. The person must not have been tax resident in Ireland for the 5 tax years immediately preceding the year of arrival in the State. The tax benefit is calculated at 30% of the difference between the employees pay for performing duties in Ireland (less pensions) and EUR 75,000. So, an employee earning EUR 300,000 would earn a tax deduction from taxable employment income of (EUR 300,000 - EUR 75,000 x 30%) = EUR 67,500 relievable at the marginal tax rate. The SARP doesnt give relief from USC or PRSI but an employee transferring in would be able (bilaterally or under EEA rules) to remain on their home territory national security for 2 years in EEA terms or up to 5 years normally in bilateral terms. SARP also allows a qualifying employee to receive school fees and the cost of relocation flights and the cost of an annual flight home tax free. The SARP relief only lasts for 5 years, including the first year of entitlement to the relief. 2. Deduction for income earned in certain foreign states This relief applies to employees who spend time working in particular countries e.g. BRICS and certain African/Arabic countries set forth at Section 823A. The relief is given according to the number of days (added up minimum of 3 consecutive at a time) the person spends in a relevant state compared to the total number of days the office was held for, multiplied by the income from the office. There must be a minimum

9 Extegrity Exam4 > Section All Page 9 of 15 of 30 days in the year to qualify overall for the deduction and the deduction is limited to EUR 35,000 per annum. 3. Split year relief Section 822 TCA 1997 This relief provides that in a year of departure and arrival, an outgoing or incoming employee will only be taxed by way of income tax on the employment income earned in the state. For example, a person leaving Ireland in August to work abroad would normally be resident in Ireland that year and (if domiciled) liable to Irish tax on worldwide income. An application of Section 822 will provide an exemption from taxation on the foreign employment income for the rest of the year. The person must be departing in such circumstances as they expect to be non resident for the following tax year. The relief only covers foreign employment income - the rest of a persons income remains taxable as normal. For example, a person arriving in Ireland in February of a year would be resident in Ireland that year and, therefore, would be taxable on worldwide income that year (including the income earned e.g. in a job prior to arrival in Ireland). The application of the relief in these circumstances will be to relieve the pre-arrival foreign income from the scope of Irish tax DO-NOT-EDIT-THIS-DIVIDER Answer-to-Question- 5 The Financial Director VTex Ireland Limited

10 Extegrity Exam4 > Section All Page 10 of 15 Dear Sir Thank you for contacting me in relation to the IRS inquiry into your related company Realtek storage. I understand the situation to be that the IRS is seeking to increase the amount of income allocated to Realtek and that, therefore, same will result in double taxation in the absence of the Irish authorities permitting a correlative adjustment to the VTex Ireland Limited accounts. The starting point for considering the matter is Article 9 of the OECD model double tax agreement which provides that related companies, including companies inder common management and control (and VTex inc is such an entity) who do not deal with each other on an arms length basis risk having their profits adjusted by one or other tax authority unilaterally. Article 9.2, however, provides that when an adjustment is made in relation to one associated company, a correlative adjustment must be made in the accounts of the other company. As double tax agreements have as one of their aims the prevention of double taxation, the making of a correlative adjustment in these circumstances is an imperative. It is not certain, however, that the Irish authorities will immediately agree to the making of an adjustment. The Irish authorities are within their rights, if the situation so warrants objectively, to disagree with the US authorities and refuse to permit a correlative adjustment to be made. Secton 865 TCA 1997 permits a taxpayer to amend a tax return and make a claim for a refund in appropriate circumstances. Section b iii, however, that a correlative adjustment cannot be claimed until the said adjustment is agreed in writing between Revenue and the other tax authority. Article 25 of the OECD model treaty provides for a mutual agreement procedure in circumstances where a taxpayer considers that the actions of one or other tax authority have resulted in double taxation. The application must be made within 3 years of the

11 Extegrity Exam4 > Section All Page 11 of 15 relevant action. The procedure envisaged by the section is that the tax authority approached (the international branch of Irish Revenue in the first instance) shall endeavour to resolve the case by mutual agreement with the US tax authority. The MAP process envisages arbitration if the matter is not settled within two years. The MAP process has proven to be a considerably lengthy process in practice and one which does not envisage the direct involvement of the taxpayer. Revenue's notes for guidance on the procedure envisage an informal initial approach i.e. a meeting with their relevant officials at which time the matters shall be laid out and discussed and where the taxpayer will have an opportunity to present evidence. My view is that this is an opportunity for the Irish company to convince the Irish authorities to accept the IRS's judgment and to allow the correlative adjustment. From then on, Revenue's notes provide that the taxpayer will be regularly informed of progress on the matter. My view is that a considerable volume of material ought to be gathered to include the economic material used to calculate the Realtek adjustment according to the OECD guidelines on transfer pricing. The OECD transfer pricing guidelines are part of Irish law by virtue of Part 35A of TCA 1997 and form the basis upon which Irish Revenue ought to consider the relevant transfer pricing adjustment. It may also be appropriate, in due course, to consider making an appeal to the Tax Appeals Commission in respect of a refusal of Revenue to allow a unilateral adjustment to the Irish accounts. In those circumstances, and because Revenue cannot overrule a TAC/courts decision by way of a MAP process, any TAC appeal will be stayed during the currency of the MAP process. It would be prudent, however, to keep both options open i.e. if the MAP process does not result in the two tax authorities making the approprite agreement in the circumstances. I am available to provide further advice to you and your colleagues on this matter, and look forward to discussing the issue in person at the earliest opportunity. Yours sincerely

12 Extegrity Exam4 > Section All Page 12 of 15 A. Tax. Advisor DO-NOT-EDIT-THIS-DIVIDER Answer-to-Question- 7 The Customs Union The European Union is also a customs union. Customs and trade policy is an exclusive competence of the European Union. This means that individual EU member states may not set their own customs rates with other countries and may not negotiate unilaterally trade deals. The EU Commission is the body which represents the member states collectively in trade negotiations and at the World Trade Organisation. The Customs Union means that goods imported into the EU from abroad, whether at Dublin or Dubrovnik are subject to the same inward tariffs an same inward customs procedures. Once inside the EU single market, those goods move intra EU without encountering any further customs barriers. Individuals and businesses in the UK and Ireland are concerned at the possibility of the UK leaving the EU Customs Union. At present, same is the expressed intention of the UK government who wish to set their own trade policies with the rest of the world and conclude trade deals according to the UK's wishes. If the UK leaves the EU without there being a trade deal in place, the UK will trade with the EU as a third country, meaning that goods going in both directions will attract tariffs. Tariffs are particularly severe in relation to agricultural and food products and, given Ireland's significant level of exports to the UK, same would be severly affected by a hard Brexit i.e. the UK leaving the EU without a trade deal in place. However, it is the case that both the UK and the EU

13 Extegrity Exam4 > Section All Page 13 of 15 are agreed that a future trade deal between themselves will provide for zero tariffs on all physical goods so (unless talks completely break down and the transitional period is not extended) the possible presence of tariffs is perhaps not the most worrisome aspect of the UK leaving the customs union. What is worrisome is the prospect of additional paperwork and delays occasioned by the existence of co-existent customs regimes in the UK and the EU. Customs exists not just for tariff collections but to control trade for reasons of animal welfare, drugs, medicines, food safety etc. Post Brexit, unless the UK remains in the customs union, each time a good is exported from Britain to the EU and vice versa, an export declaration will need to be prepared. And the importer on the other side will need to prepare an import declaration. For integrated industries such as the UK car industry which employs 650,000 people, same will be an absolute nightmare in circumstances where, for example, the chassis of a Mini crosses the English channel 3 times before the car is ready for export. In relation to the customs union, Ireland and the UK cannot make their own arrangements with regard to customs because customs is an exclusive competence of the EU and it is the EU only which makes arrangements with third countries in relation to customs procedures, which need to remain in strict conformity throughout the EU. Customs duties also directly (less 20% costs for local collection) fund the EU in Brussels so, therefore, the EU has an additional interest in maintaining appropriate customs controls post Brexit, and it is anticipated they will do so, notwithstanding nobody's desire for a hard border on the island. Britain leaving the European Union The DTA between Ireland and the UK may provide clarity and an opporunity for interaction post Brexit, however. Many of Ireland's reliefs are available to persons resident in a double tax agreement country i.e. where arrangements have been made under section 826 as well as being

14 Extegrity Exam4 > Section All Page 14 of 15 available to countries and residents of EU member states. In those circumstances, these benefits will continue to enure post Brexit. It is not the full picture, however. Ireland and the UK are part of a Common Travel Area which is an administrative facility existing since Irish independence in On the UK side, the Ireland Act 1949 states that Ireland is not considered a foreign country and, in consequence, Irish people are treated no different to British people e.g. Irish people have the right to vote in the UK and there is the receiprocal right for UK people in Ireland. The common travel area benefits can continue and it is envisaged that the matters set forth in the Double Tax Agreement will be complemented and supplemented by primary Irish law providing that British people will be treated no less favourably than Irish people in a whole range of areas. As DTAs require to follow, within reason, the OECD guidelines, the DTA is perhaps not flexible enough to provide for all of the new arrangements required to be made between Irland and the UK on tax terms post hard Brexit. The actual DTA between Ireland and the UK, at present, provides for relief as against double taxation which said reliefs are to be found in EU directives e.g. Interest and Royalties Directive and Parent Subsidiary Directive and in Treaty provisions such as the right to freedom of establishment, free movement of capital etc which said directives/eu legislation will not be binding on the UK post Brexit. The Irish/UK DTA on matters such as non discrimination, for example, at article 24 will become more important post Brexit, certainly than it is now. While many of Ireland's tax benefits are available to treaty members (and the DTA with the UK will survive Brexit), the complexity of the relationships between the two sides means that there is a considerable amount to worry about from the prespective of the UK leaving both the EU and the EU customs union. ENDS Thank you.

15 Extegrity Exam4 > Section All Page 15 of 15