PwC is fully supportive of a flexible territorial regime, incorporating a broad participation exemption for all dividends and a branch profits exemption. Ireland’s tax system is becoming increasingly complex, particularly with ongoing comprehensive reform in the international tax landscape. In this context, the introduction of a territorial regime would be a significant step in simplifying Ireland’s tax code, which would almost certainly enhance the country’s competitiveness as a destination for investment.

In this insight, we comment broadly on the issues involved in moving to a territorial regime, why we support the introduction of such a regime, and some of the key recommendations in our submission. We also attach our full response, which includes our commentary on other questions raised in the consultation document.

Ireland’s “worldwide” method of double tax relief

Under current rules, Irish-resident companies are subject to tax on their worldwide income, with foreign tax paid on foreign income qualifying for a credit against Irish tax payable on that income. The effect is that limited amounts of incremental tax are payable in Ireland on foreign income.

The primary difficulty with this approach is that its practical application is often complex. As acknowledged in the consultation document, the provisions that provide for the calculation of foreign tax credits (the tax credit rules) are a product of many years of evolution – both in response to changes in Irish tax policy as well as to accommodate principles established in European case law. Applying the tax credit rules often involves performing a complex set of calculations, which only creates uncertainty and places a compliance burden both on taxpayers and Revenue.

Aside from complexity, other practical difficulties may arise. By way of example, insurers established in Ireland with foreign branch profits often face situations in which there are significant differences in the timing of taxable income between their head office and their branches. This occurs as, for example, some countries have different rules for the timing of tax deductions for insurance reserves and expenses. The result is further tax uncertainty and complications.

The solution: a territorial system

In a territorial regime, double tax relief is delivered by exempting the income concerned (i.e. foreign dividends or branch profits) from taxation in the state of residence. The benefits of such a system are not difficult to identify – instead of performing complex calculations of tax credits, it is much simpler to exempt the relevant income. There is (generally) no loss to the public purse and in most instances, the effect of the operation of foreign tax credits is that the relevant income is not taxable.

Ireland’s competitiveness

The complexity of Ireland’s worldwide system of double taxation relief stands in stark contrast to the relative simplicity of a territorial system, which (as is acknowledged in the consultation document) is a typical feature of the tax codes of most other OECD and EU countries. In this context, the relative complexity of Ireland’s approach to relieving double taxation is a distinct competitive disadvantage in attracting investment into Ireland.

Comprehensive reforms in the international tax landscape

The consultation document acknowledges that Ireland’s corporation tax framework has undergone substantial reform over the past decade, and is set to undergo further fundamental reform with the implementation of the OECD BEPS 2.0 proposals. In implementing these reforms, Ireland must assess the compatibility of its tax code with new global norms.

In this regard, the consultation sought input on the impact of and interaction with many recently introduced reforms (such as the anti-hybrid rules, controlled foreign company (CFC) rules, the exit tax and Pillar Two). Regarding Pillar Two in particular, foreign dividends effectively qualify for a participation exemption and foreign branch profits are exempt in the hands of the head office (being subject to tax at the local branch level). Consequently, the adoption of a participation exemption and an exemption in respect of foreign branch profits is congruent with Pillar Two.

The need for flexibility

As noted in our submission, the Irish economy is diverse with a multitude of corporate taxpayers, each with different tax profiles, investment platforms and operations. Certain taxpayers would likely be significantly disadvantaged if Ireland were to implement an exemption regime without an option to elect out of exemption treatment (and to apply an appropriately simplified credit mechanism in these situations).

Our recommendations

In light of the above, our submission recommended that Ireland move to a territorial regime of double taxation relief, with the following key design features:

• A broad exemption from tax for Irish resident companies for all foreign dividends, as well as profits of foreign branches, subject to appropriate anti-avoidance rules.
• The option to elect out of exempt treatment and to apply the credit relief mechanism.
• Simplification of the tax credit rules, which will be needed to deal with situations in which an exemption does not apply (for example, as a result of an election out of the regime).

Critically, our submission emphasised the urgency of the situation and that the introduction of a territorial regime with effect from 1 January 2023 would be most welcome. In the current environment of change, many investment decisions (such as those involving the location of a holding company or central hub) are being made by investors. In this context, postponing the introduction of such a regime beyond 2023 will likely have long-term adverse effects on investment in Ireland.

Given the recent postponement of the transposition of Pillar Two (via EU Directive) into Irish law, the Department of Finance now has the space to proceed with implementation of a territorial regime with effect from 1 January 2023. At a minimum, a clear commitment should be given to provide certainty to investors and businesses that an appropriate regime will indeed be introduced from 1 January 2024 at the very latest.

The three key actions businesses can take now

The Department of Finance has indicated that this consultation is an initial consultation seeking broad views on a move to a territorial system. The purpose of this initial consultation was to assist the Department in identifying the potential impacts of a move to a territorial system, and to inform policy debates thereon.

Further consultation will follow. On the basis that the introduction of a territorial regime will have a significant impact on many businesses, there are three key actions you can take to prepare for the introduction of the regime and have your say in the design of the legislation:

1. Read the consultation document and the PwC submission for further commentary. The consultation document, which is useful in setting out the overall background to the consultation, is available here.
2. Assess the potential impact of the introduction of a territorial regime on your tax position. We would be happy to assist you with such an assessment.
3. Share your thoughts and concerns with PwC through your usual PwC contact. Although the public consultation is closed, further consultations and discussions with the Department of Finance are likely in the months ahead. PwC will be a leading voice in these discussions. By sharing your thoughts and insights with PwC, you are ensuring that the rules will continue to be shaped with taxpayers in mind. Effective stakeholder engagement at this stage of the legislative process results in a demonstrably better outcome for all parties. 

We are here to help you

PwC can assist you in assessing the potential impact of a move to a territorial system of double taxation relief on your company or group. We are also happy to feed your comments into the wider stakeholder consultation process. Contact your usual PwC contact today for more information.