Thought leadership from our experts

Irish revenue issues statement on foreign branch double taxation relief

The Irish Revenue recently issued a statement of practice on the calculation of foreign branch double taxation relief. The change of practice is of relevance for Irish companies with foreign branches, where timing differences arise between jurisdictions for accounting and tax purposes in relation to when the income or expenses are recognised. The statement of practice now provides for relief by way of a carryback of foreign tax credits.

In the absence of this statement of practice, broadly, where income was recognised for tax purposes in Ireland in an earlier accounting period than that of the foreign branch territory, no double taxation relief would be available because no double-taxed income would have arisen during the taxable period.

The statement of practice applies to foreign tax paid for accounting periods commencing on or after 1 January 2013 and provides relief in the circumstances described above, where an overall loss of foreign tax credits would otherwise occur. The relief is provided by way of a carryback of foreign tax credits (the amount of the credit allowed to be carried back is 87.5% of the foreign tax paid at the level of the foreign branch in respect to income that had been previously recognised for Irish tax purposes at the level of the Irish company in an earlier accounting period). The tax refund claim also must be made within a certain time period.

Example

By way of example, suppose an Irish insurance company has a French branch. Under IFRS rules, the branch results are calculated as follows:

  2012 2013
Unrealised investment gains 7,000,000 Nil
Other trading profits/losses 3,000,000 (2,000,000)
IFRS accounting profits 10,000,000 (2,000,000)

 

In FY2012, the branch profits of EU$10 million are recognised for tax purposes in Ireland. However, in France, assume unrealised investment gains are ignored until they are realised for French tax purposes.

  French computation Irish computation
IFRS accounting profits 10,000,000 10,000,000
Deduct unrealised gains 7,000,000 xxx
Taxable profits 3,000,000 10,000,000
 
French tax @ 33% 990,000  
Irish tax @ 12.5%   1,250,000

 

Subject to undertaking specific calculations, the double tax relief available in Ireland in FY2012 is as follows:

Irish corporation tax computation in FY2012

Taxable profits 10,000,000
Tax payable @ 12.5% 1,250,000
Less double tax credit (990,000)
Tax due 260,000
 

 

Therefore, in FY2012, some branch profits remained within the charge to Irish corporation tax that could not be fully relieved by foreign tax credits.

In FY2013, investment gains of EU$7 million are realised and subsequently recognised for French tax purposes. However, as such gains were taxed in Ireland in the prior year and the branch is in a loss position in FY2013, there will be no Irish tax arising in respect of the French branch in FY2013.

  French computation Irish computation
IFRS accounting losses (2,000,000) (2,000,000)
Add realised gains 7,000,000  
Taxable profits/losses 5,000,000 (2,000,000)
 
French tax @ 33% 1,650,000  
Irish tax @ 12.5%   Nil

 

Therefore, in the absence of the statement of practice, there was no credit relief in Ireland for the French tax arising in FY2013 despite the fact that the realised gains had been taxed in Ireland in the earlier period.

The statement of practice now provides for relief by means of a carryback of foreign tax credits, where the foreign tax arises solely as a result of differences in the timing of the recognition of income for tax purposes in Ireland and in another territory. The Irish company is entitled to make a claim whereby 87.5% of the foreign tax may be allowed as a credit against Irish corporation tax that has been paid in respect of the foreign branch profits for a preceding accounting period.

In the high-level example above, the French tax arising in FY2013 is EU$1,650,000. The amount of foreign tax that potentially is allowed to be carried back is EU$1,443,750 (i.e., EU$1,650,000 at 87.5%). However, the credit is limited to the Irish corporation tax that has been paid in respect of the foreign branch profits (i.e., EU$260,000).

Observations

In light of the revised practice of the tax authorities, taxpayers, particularly insurance companies, should consider whether foreign tax suffered for accounting periods commencing on or after 1 January 2013 may be available to be carried back as a credit against Irish corporation tax previously paid in respect of the same income.

This is a welcome development and further enhances Ireland's double taxation relief regime for Irish companies with operations in foreign jurisdictions.

To increase Ireland's competiveness, it would be beneficial if companies were given the alternative of opting for either a foreign tax credit regime or a branch exemption regime. A branch exemption regime already exists in a number of other EU counties, and a branch exemption regime generally is simpler and more transparent for taxpayers. In any case, the foreign tax credit regime, as it currently operates, broadly ensures that no further Irish tax arises on foreign branch profits.