Ireland weighs move to territorial tax system

By Doug Connolly, MNE Tax

The Irish Department of Finance on December 22 opened a public consultation inviting comments on a possible transition to a territorial tax regime for corporations.

Such a system “could be simpler and provide greater certainty for businesses — but would also have to be accompanied by robust anti-abuse measures,” the consultation document suggests.

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

The changes under consideration would move Ireland from a credit method of 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 about the benefits of a move to such a system, as well as any indirect consequences or risks for multinationals. It further enquires whether any existing exemplary regimes might serve as a model for minimizing compliance burdens without increasing risks of tax avoidance.

The consultation lists several variations of possible regimes. A participation exemption regime could exempt related-party foreign dividends and foreign branch income. Variations could include providing a wider participation exemption for gains, limiting the regime to dividends paid out of trading profits of companies, or limiting it to foreign branch trading income.

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

The consultation seeks feedback on these potential design elements.

The Department of Finance also asks about how Ireland’s current controlled foreign corporation (CFC) rules would align with a participation exemption or branch exemption regime and what amendments might be necessary. Likewise, the government would like to hear from stakeholders on potential interactions of such a regime with Ireland’s existing exit tax and anti-hybrid rules.

The consultation document suggests that changes to the country’s corporate tax regime prompted by the recent OECD tax deal have made it an appropriate time to reevaluate the country’s corporate tax approach, with an aim to retain the country’s attractiveness as an investment destination. However, the government also seeks input about how the global deal could impact the move to an exemption regime.

Finally, the consultation asks 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.