With its highly popular 12.5% corporate income tax rate, technologically advanced infrastructure and support programmes, and business-friendly government, Ireland has made a name for itself as being on the cutting edge — a reputation that will no doubt is cemented by the government's proposal to introduce a territorial corporate tax regime.
Territorial Versus Worldwide
While there is a lot of nuance in this area, as a general rule, tax systems are divided into worldwide and territorial tax regimes. Worldwide tax regimes differ from their territorial counterparts in taxing resident entities worldwide income and not just domestically sourced income streams.
After allowing for foreign tax credits, Ireland taxes dividends received by Irish-resident companies from overseas as well as foreign-sourced capital gains. That said, a number of exemptions are available, which are too numerous to list but include the "participation exemption" for capital gains, and an EU-level exemption for intra-group dividends.
Now, the Irish Government, seeking simplification, is considering whether to provide that Irish taxation should apply only to income sourced from Ireland.
The move could further boost Ireland's attractiveness as a place to establish a business, headquarter or holding company, and further reduce tax complexity for multinationals.
Ireland's Corporation Tax Roadmap
Ireland's plans for international tax reform are set out in its Corporation Tax Roadmap. The document was first drawn up in 2018 and was updated for the first time in January this year.
The update to the Roadmap first takes stock of the measures introduced since the first edition, and also the changing international tax environment, with particular reference to the OECD's base erosion and profit shifting (BEPS) initiative and the EU's tax transparency and fairness efforts. It then outlines potential future actions.
The Finance Ministry noted that since the Roadmap was published in 2018, Ireland has made significant changes to its international tax regime, including:
- introducing controlled foreign company (CFC) rules;
- ratifying the BEPS Multilateral Instrument to modify its network of bilateral tax treaties;
- introducing an exit tax regime in line with the EU's Anti-Tax Avoidance Directive (ATAD);
- and reforming the country's transfer pricing rules.
The Roadmap says the Government now considers this to be the right time to consider a territorial tax regime, having postponed a consultation in 2019 on this issue until more clarity was available on related developments at OECD level.
Territorial Taxes Talked Up
In its commentary on the possible introduction of a territorial tax regime, the Irish Government explained that there had been broad support for a move to simplify this area of taxation in previous consultations, and observed that: "A territorial system can be less complex and provide greater certainty for businesses, but must also be accompanied by robust anti-abuse measures."
Introducing the Roadmap, the Government said: "Ireland will continue to foster economic activity in Ireland, the EU and beyond by adapting and evolving our corporate tax regime while maintaining our key 12.5% rate. This Update to the Roadmap demonstrates the Government's commitment to continuing the significant progress already made to strengthen and modernise Ireland's corporation tax system now and in the years to come.'"
Having amended its international tax regime in recent years and buttressed its anti-abuse measures with a new CFC regime, Ireland now has the foundations in place to move ahead with a territorial tax regime.
While the finer details of the Government's proposal in this area are currently thin on the ground, the Government is expected to work with businesses and the tax community to ensure that its plans bolster Ireland's appeal as a place to do business.
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