Why Does Ireland Need To Change Its Tax Regime?

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recently Tax Notes International The article provides a useful reminder about the nature of global tax competition: the Irish government may soon adopt the participation exemption. This is a fancy way of saying that Ireland may be replacing its worldwide corporate tax regime with a regional regime.

Many American readers would have the same response: “Isn’t Ireland already a regional system?” Not so, but you could be forgiven for thinking so.

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Through review, a worldwide or supernumerary system typically taxes corporations on both foreign and domestic profits and relieves double taxation through a foreign tax credit.

In contrast, a territorial system primarily taxes corporations on their domestic-sourced income and provides double taxation relief by excluding foreign-sourced income from the standard tax base. The idea is that you shouldn’t need a credit for any foreign taxes paid if the associated profit was not included in taxable income.

Ireland is renowned for its business-friendly tax environment. Legions of multinational corporations have gathered there to set up regional headquarters or holding companies.

The national economy – sometimes referred to as the “Celtic Tiger” – is the bastion of international tax competition. Yet here we are reminded that Ireland retains a fairly old FTC system. Universal governance is linked to the way of thinking of the last century; It is often criticized that they are a poor fit in the era of globalization.

To borrow a crude automotive analogy, a worldwide system is like your grandfather’s rusty Oldsmobile, while a regional system is like a new Tesla.
, Or so we’ve been led to think. Reality may not be so cut and dry.

Broadly speaking, Ireland’s traditional FTC regime is the same mechanism that the United States has been using for generations. With the enactment of the Tax Cuts and Jobs Act in 2017, the United States recently moved into a territorial regime.

The US FTC framework survived the TCJA reforms, but the border crossings around the availability of those credits do not hold the same relevance as the plan before. (For example, Congress opted to disallow certain FTC carryforwards and carrybacks. It further decided that certain foreign taxes paid would be only partially creditable.)

Part of the sales pitch behind the TCJA was that discounting foreign profits would increase growth and investment and make life easier for corporate taxpayers in general.

The US FTC rules were a source of chronic friction between taxpayers and the IRS as the government sought to restrict the application of the rules when the consequences were deemed inappropriate. Some of those disputes are settled entirely under the TCJA, which disallows credit of taxes paid on foreign source dividends that are received tax-free under the partnership exemption.

I wonder if a similar sale is happening in Dublin today. Probably not, as the Irish are in a better position to manage their collective expectations of what regionality they will actually get. They understand some basic comments about tax competition, including three main points.

First, for a country like Ireland, there is little practical difference between ecumenical and territorial governance. FTC rules typically result in a residual layer of taxation when taxes paid in the foreign country do not fully offset the corresponding home-country tax on the same pool of income.

This is unlikely to happen as the Irish corporate rate is already below international standards. Irish companies may not see a difference between the two systems unless the relevant foreign jurisdiction is a pure tax haven. A properly designed worldwide system can be highly competitive under the right circumstances. Ireland’s success over the past 20 years underscores that point.

Second, from the perspective of many US taxpayers, the distinction between the previous worldwide system and the TCJA’s version of regionalism was greatly exaggerated. Yes, there is a participation exemption, which operates like 100% dividend received deduction.

However, so much foreign-sourced income is garnered back through various base defenders that it doesn’t feel like a true waterslide approach. That’s not to say that the TCJA achieved nothing: It repealed the deferment and reduced the corporate rate significantly. But the overall experience of the past few years shows that our illusions about territorial behavior often do not match reality.

Finally, the whole process of lumping countries’ international tax systems into two camps – worldwide or regional – is of limited utility. It suggests binary options when a spectrum of options is more realistic.

No country operates any kind of net system. In practice, each country relies on a hybrid approach that selectively mixes and mixes the characteristics of each model. Labels will be thrown around, but they don’t always say much about the actual competition.

The bottom line is that Ireland, or any other country contemplating regional reforms, should be kicking the tires before making fundamental changes. Maybe their traditional mechanism for double taxation relief is fine.


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