Module 7 International Tax Issues

1. Olivia Waldron 7th & 8th September 2012 CHARTERED TAX CONSULTANT Module 7 International Tax Issues

2. Friday Afternoon Taxation of Non-resident persons in Ireland Taxation of Irish residents on foreign income Double Taxation Agreements OECD Model Treaty Ireland/UK and Ireland/US DTA’s Practical Limitations

3. Saturday VAT on International Transactions Double Taxation Relief in Ireland: Trading income Branch income Dividends Interest income Capital Gains Cross-border worker relief International Tax Concepts: CFC Provisions Thin Capitalisation Transfer-Pricing

4. Overview Taxation of Non Residents on Irish income & Gains Taxation of Irish Residents on Foreign Income & Gains DTAs – OECD Model

5. Taxation of Non-Resident Persons in Ireland

6. Irish Taxation of Non-resident Income arising from: Irish Property, A trade, profession or employment exercised in Ireland, Sale of goods, wares or merchandise wholly or partly manufactured by the person in Ireland, or Irish source interest, annuities or other annual profits or gains not specifically exempted from tax.

7. Trading Income – Irish Source Trade exercised “in Ireland” - not “trading with” Ireland Trading with v Trading within a country Grainger & Sons v Gough 3TC 462 Concluding contracts in that country Delivering products there Requiring payments there Agent acting there Cunard Steam Ship Co v Herlihy Tickets issued in Cobh – purchased in US Held not trading in Ireland

8. Non-resident Companies A non-resident company that carries on a trade in the State through a branch or agency is subject to corporation tax on all income of the branch/ agency and chargeable gains on the disposal of branch assets - excluding dividends received by the branch from Irish resident companies

9. Non-resident Companies Non-resident companies continue to be subject to Income Taxon other Irish income, such as from Irish property (e.g., Irish rental income), Irish source interest etc and tax on capital gains (either CGT or CT) on specified Irish assets

10. CGT – Specified Assets Sec 29(3) TCA 1997 Non resident individuals and companies Specified Assets

11. Employment Income: Non-residents Subject to Income Tax under Schedule E on: All salaries, fees, wages, perquisites or profits whatever from any office, employment of profit in the State.

12. Employment Income: Non-residents Taxable if either: The employer is based in Ireland, or The duties of the employment are exercised in Ireland. PAYE exclusion order may be obtained where <183 days are spent in Ireland for treaty residents (on application) –automatic exemption where <60 work days are spent in Ireland and treaty resident

13. Dividend Income of Non-resident Dividends/distributions arising from an Irish resident company: Taxable as income under Schedule F Subject to various domestic exemptions as well as treaty exemptions

14. Collection of Tax from Non-Residents Direct assessment on: Income from a trade/employment. Certain interest, annuities & annual payments Withholding tax: Certain interest, annuities and annual payments Rents on Irish property PAYE on employment income/Irish office Dividends On disposal Irish specified assets

15. Collection & Exemption

16. Taxation of Irish Resident Persons on Foreign Income & Gains

17. Tax on Foreign Income & Gains in Ireland Irish resident persons are subject to tax in Ireland on their worldwide income and gains. They may also be subject to tax in the foreign jurisdiction on the foreign source income and gains

18. Tax on Foreign Income & Gains in Ireland Relief may be available in Ireland for foreign tax by: allowing a credit in Ireland for the foreign tax suffered, or giving a tax deduction in calculating the Irish tax Foreign tax compliance obligations must also be adhered to

19. Double Taxation Agreements

20. Overview Traditionally two approaches to the imposition of direct taxes in an international context: Source basis Residence basis

21. Overview Source basis = Tax on the source regardless of residence position of recipient Residence basis = Taxation on all income/gains of a resident person regardless of the source Result: Potential for double taxation or no taxation

22. Relieving Double Taxation A number of potential means to avoid double taxation: Local domestic provisions i.e., Unilateral relief EU Directives e.g., Parent-Subsidiary Directive Double Taxation Agreements Can anyone give an example of unilateral relief provided in an Irish context? Can anyone name another EU Directive that provides an approach to taxing income that reduces/avoids double taxation?

23. Double Taxation Agreements Broad purpose is to allocate taxing rights between two States with a view to: Avoid double taxation, and Prevent fiscal evasion, with respect to taxes on income and capital gains Most treaties are bi-lateral treaties based on the OECD Model Convention Various updates to the Model Convention, most recently the 2010 update

24. Double Tax Agreements Forms of Double Tax Relief Allocation of taxing rights between countries Income source taxable only in 1 country Taxation right of source country limited to x% Allow credit for tax in source country against tax in country of residence Tax income in source country only – exempt in residence country

25. Interpretation of Tax Treaties Tax treaty itself defines terms Art 3, Para 2 – if not defined within treaty look to the domestic laws of that State with tax law taking precedence over general laws Arts 31-33 Vienna Convention on the Law of Treaties Cont.

26. Interpretation of Tax Treaties OECD Commentary Other official material such as Competent Authority Agreements, OECD Reports, Unilateral Official explanations etc Case law and doctrine

27. Article 3(2) OECD Model Treaty “As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purpose of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.”

28. Commentary on Article 3(2) “Para 2 specifies that this applies only if the context does not require an alternative interpretation. The context is determined...by the intention of the Contracting States when signing the Convention as well as the meaning given to the term in the legislation of the other Contracting State” “Consequently the wording provides a satisfactorybalance between...the need to ensure the permanency of commitments entered into by States and...the need to apply the Convention in a convenient and practical way over time.”

29. Article 31(1)- Vienna Convention “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” Art 31(2) provides that the context for interpretation of a treaty shall comprise: Preambles, annexes, subsequent agreements relating to the treaty entered into by the parties (e.g., protocols), subsequent practice in the application of the treaty, relevant rules of international law etc

30. TCA and Tax Treaties Sec 826 TCA 1997 DTAs have force of law form date inserted into Schedule 24A, Part 1 Sec 826 TCA 1997 Air transport agreements TIEAs – Sch 24A Part 3 TCA 1997

31. OECD MC Articles Persons Covered Taxes Covered 3. General Definitions 4. Resident 5. Permanent Establishment 6. Income from Immovable Property 7. Business Profits 8. Shipping, Inland Waterways Transport & Air Transport 9. Associated Enterprises 10. Dividends 11. Interest 12. Royalties 13. Capital Gains 14. Independent Personal Services * (now deleted) 15. Income from Employment 16. Directors’ Fees 17. Artistes and Sportsmen 18. Pensions 19. Government Service 20. Students 21. Other Income

32. OECD MC Articles 22. Taxation of Capital 23. Exemption and Credit Methods 24. Non-Discrimination 25. Mutual Agreement Procedure 26. Exchange of Information 27. Assistance in the Collection of Taxes 28. Members of Diplomatic Missions and Consular Posts 29. Territorial Extension 30. Entry into Force 31. Termination

33. Scope of the Treaty Art 1 provides that the treaty shall apply to: “persons who are residents of one or both of the Contracting States.” Art 2 provides that the treaty shall apply to: “taxes on income and on capital imposed on behalf of a Contracting State” For treaties entered into pre-1975 (CGT Act) need to consider whether treaty benefits apply

34. Example State R: State P: Ireland UK General enterprise Trading branch State S: France Source

35. Ireland-US treaty The Ireland-US treaty does not follow the approach of the OECD Model Art 1(4) provides that: “Notwithstanding any provision of the Convention, a Contracting State may tax its residents..and by reason of citizenship may tax its citizens, as if the Convention had not come into effect...” This applies for a period of 10 years after loss of citizenship unless the loss is not tax motivated

36. Limitation of Benefits (“LOB”) Not part of the OECD Model Convention Ireland-US treaty: - Detailed LOB article (Art 23) General rule = a resident must be a “qualified person” (e.g., a resident individual) to enjoy the benefits of the treaty - Other ways to qualify if not a qualified person include a company being owned at least 95% by qualified persons, residents of EU countries or of parties to NAFTA and that meet the base erosion test. - Read full Article if dealing with companies to ensure benefits apply

37. Limitation of Benefits (“LOB”) Ireland-UK treaty: - Where the remittance basis of taxation applies to any income of an individual, the benefits of the treaty will only apply to the income to the extent that it is actually remitted Essentially, an individual cannot get relief from tax in one Contracting State unless the income is subject to tax in the other Contracting State (there must be double taxation).

38. Example Martin Smith (UK domiciled, Irish resident for past 10 years) Generates interest income in the UK paid into a UK bank account Assume UK withholding tax of 20% applies to the income Does the Ireland-UK treaty enable Martin to avoid this UK tax liability?

39. Article 3 - Definitions Art 3 defines the key terms as follows: - Person: “an individual, a company and any other body of persons.” - Company: “any body corporate or any entity that is treated as a body corporate for tax purposes” - National: “(i) any individual possessing the nationality or citizenship of that Contracting State; and (ii) any legal person, partnership or association deriving its status as such from the laws in force in that Contracting State.”

40. Resident Art 4 defines a resident as: “any person who, under the laws of that State is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof.” It does not include a person who is liable to tax only in respect of income from sources within that State or capital located therein

41. Dual Resident Time-breaker clause where a person would be resident in both contracting States under the general rule: Individuals – series of successive tests: Location where individual has a permanent home available, If permanent home in both States – centre of vital interests If centre of vital interests cannot be determined, place in which the person has an habitual abode If no habitual abode (or one in both States) deemed to be a resident of the State of which he/she is a national If a national of both/neither State then the Competent Authorities will agree the State of residence by mutual agreement

42. Dual Resident – Tie-breaker For a company that is regarded as a resident of both States, the OECD MC provides that: “it shall be deemed to be a resident only of the State in which its place of effective management is situated.” Not necessarily the same place as where central management and control is exercised. Per Comm: “the place where key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made”

43. Dual Resident – Older Treaties Some of Ireland’s older treaties do not follow the OECD Model with respect to residence. Such treaties define “resident” for individuals as resident in one Contracting State for tax purposes and not resident in the other Contracting State. This results in a “dual resident” individual having no treaty protection. Treaties concluded on this basis include: Cyprus, France, Germany, Italy and Zambia.

44. Art 5 – Permanent Establishment Definition: Article 5 defines a permanent establishment (PE) as: “A fixed place of business through which the business of an enterprise is wholly or partly carried on” Not the same as an establishment for VAT purposes To constitute a PE (general rule): There must be a place The place must be “fixed” The business of the enterprise must be carried on through that fixed place OECD Model Commentary examples Minimum 12 month rule for building sites under OECD MC

45. Exceptions to General Rule Certain activities are not regarded as substantial enough to create a PE, such as: Use of facilities for the storage/display/delivery of goods, Maintenance of stock for storage/display/delivery, Maintenance of stock for processing by another business,

46. Exceptions to General Rule cont. Certain activities are not regarded as substantial enough to create a PE, such as: Maintenance of a place of business for the purchase of goods or collecting information for the enterprise, Maintenance of a place of business for the purpose of carrying on activities of a preparatory or auxiliary nature, Maintenance of a fixed place of business solely for any combination of the above activities provided the overall activity carried on is of a preparatory or auxiliary nature

47. Art 5 – Permanent Establishment Use of concept: Determine the right of one state to tax the profits of an enterprise resident in another contracting state Under Art 7 of the OECD MC, a contracting state can only tax said profits if the enterprise carries on business through a permanent establishment established therein and only so much of them as is attributable to the PE

48. Art 5 – Permanent Establishment cont Under Art 7 the profits of the PE should be those it might be expected to make if it were a distinct and separate enterprise dealing independently with the enterprise of which it is a PE.

49. Agency PE If there is no fixed place of business there can still be a PE where there is someone acting for the enterprise otherwise than an agent of independent status To constitute a PE there must be a “dependent agent” who “has and habitually exercises...an authority to conclude contracts in the name of the enterprise” (Art 5 Para 5) Key test is can they bind the enterprise – rubber stamping of already agreed terms is not sufficient to avoid a PE

50. Income from Immovable Property Art 6 – Income from immovable property is taxable in the source State “Immovable property” is given its meaning under domestic law but includes all property accessory to immovable property e.g., livestock, farm equipment, rights to work minerals etc. UK/US treaties follow the OECD Model