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Work abroad to save tax? Back  
Foreign earnings deduction is a relief whereby taxpayers with Irish employment income can have part of their salary exempt from tax effectively, to the extent that they work abroad during the tax year. It is self evidently intended to encourage Irish workers to accept jobs that may involve them being away from Ireland for significant periods of time.

The good news

It was always quite a restricted relief. Prior to Finance Act 2000, to obtain the relief you had to spend at least 90 days working abroad. In counting those 90 days, only days that were in blocks of 14 consecutive days spent abroad were counted. Days in the United Kingdom are not taken into account for this purpose. Therefore only lengthy absences from home qualified for the relief.

The Finance Act 2000 has liberalised the regime to the extent of permitting periods abroad of only 11 days to be counted towards the required total of 90 days per annum. The significance of this slight reduction of three days is that the consecutive period of absence need now not involve two weekends abroad. A person who departs on a Monday and does not return until the following Friday week will have the necessary 11 days of absence. Previously a person who was abroad for two full working weeks and the intervening week-end would not have qualified, unless they also spent either the week-end at the beginning of the period of absence, or at the end of the week of absence abroad also.

The bad news

This sensible relaxation is overshadowed by a major restriction. Hitherto there was no limit to the amount of relief that was available under the scheme. Now a maximum deduction from taxable salary of IEP25,000 per annum has been introduced. This gives a maximum tax saving of approximately IEP11,000.

In the Dail debates the Minister justified this restriction on the basis that there had been unintended use of the relief in relation to very significant sums of money. He and the opposition spokesman on finance, Mr Noonan appeared to share some common source of information regarding this use in that Mr Noonan suggested that those involved were singers, and the Minister appeared to agree that that was the case.

Don't shoot the singer

Since in Ireland no limit is placed to the contribution in any one year that a taxpayer may be expected to make towards the running of the State, it is strange that we should find it objectionable that taxpayers should be able to obtain relief without limit. This is especially so if the relief is predicated on their not being in the State in order to enjoy the benefits provided by it.

If the restriction was indeed designed specifically with the entertainment industry in view, it would be as well to remember that the entertainment industry is global in its operations. Successful entertainers are under no compulsion to reside in Ireland. They have the ability, by the judicious use of an airline ticket, to place their own limits on the contribution they wish to make to Ireland. Against that background, the restriction of reliefs, while leaving potential tax liability unrestricted, is probably self defeating.

The restriction was introduced in respect of income earned or paid on or after 29 February. This was especially unjust. Consider an employee who had, by 29 February, spent six months seconded abroad on a civil engineering project in Africa. He would have undertaken this assignment on the basis that the tax relief had been legislated for and was available for the current tax year. By 29 February he would have already earned an entitlement to relief. If however a substantial bonus became payable to him on 31 March 2000 in relation to the period spent abroad, he would find the relief denied to most of that bonus, because it was paid on or after 29 February. This is so notwithstanding that it may have been earned prior to that date.

On a more minor level, the choice of introducing the restriction by reference to payments on or after 29 February meant that it caught February payrolls, where these were paid on the last day of the month.

Although not formally retrospective legislation, it is in effect retrospective, given that salaries are normally paid in arrears. Retrospective legislation is always objectionable. In the present instance it is difficult to see any justification for this approach.

Get the high earner?

This is the second year that restrictions have been introduced on FED. Last year the Finance Act provided that it would not apply to reduce tax on benefits in kind, or on share options/employee shares. It is difficult to understand the thinking behind these restrictions. Salaries cost an employer money, share options do not. If employer and employee agree that the employee be remunerated for working abroad by means of share options, why should he be more harshly treated than if the employer provides him with cash?

The philosophy lying behind many of the restrictions on reliefs in Finance Acts in recent years seems to be that reliefs should be tailored for the 'average man'. They should not be enjoyed by the very high earners. The average man appears to be defined by reference to a middle ranking civil servant (who incidentally is not entitled to avail of FED!). This is a relic of the thinking that gave the UK, under 'old Labour', top marginal tax rates of approximately 98 per cent. Old attitudes die hard.

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