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A tax c?ad m?le f?ilte Back  
Ireland and the UK are amongst the very small group of countries that operate an unusual basis of taxation known as ‘remittance basis’. This taxes income and gains in certain circumstances, not on the amount of such income and gains which arise, but rather on the amount brought into the State out of such income or gains in a tax year. The UK Labour Party have long been suspected of hostility to this basis of taxation. Latest indications are that it has survived the most recent threat.
The UK media have, for the last month approximately, been awash with rumours that Chancellor Brown intended to significantly restrict the remittance basis of taxation. This caused a certain frisson of panic amongst some of the UK’s most moneyed inhabitants. What was it all about?

Most people in Ireland are domiciled here, resident here, and ordinarily resident here. In other words, except for the occasional foreign holiday, they were born here, live here permanently, and intend to die here. Without going into the technical meanings of domicile, ordinary residence, and residence, such individuals are liable to tax in Ireland on their income from any place in the world, and on their capital gains on the disposal of assets in any place in the world. It matters not whether they leave the income and gains in bank accounts abroad (which of course they have an obligation to notify to the Revenue) or bring it home. What they do with the gain or income does not affect their liability.

Certain other individuals are taxed on a more restricted basis. A resident individual who is not domiciled here (ie broadly is not here with a view to living here indefinitely) is liable to tax on his Irish income and on his UK income, but only on income from other sources to the extent that he brings that income into Ireland. If he leaves (say) his US dividend income in an offshore bank account, then that income is not liable to tax in Ireland for so long as it is kept abroad. Capital gains are dealt with similarly (ie non Irish and non UK capital gains are taxable in Ireland only to the extent that the proceeds of disposal of the asset are remitted into Ireland).

A similar but slightly different relaxed system of taxation applies to an Irish domiciled individual who, although resident, is not ‘ordinarily resident’. You only become ordinarily resident in your fourth year of consecutive years of residence. Such an individual is entitled to the remittance basis of taxation in respect of his income but not in respect of his capital gains.

Why the generosity?
The remittance basis is obviously nice for some, but why is it tolerated by the rest? The answer is simple. The system is designed to cater for transient taxpayers ie for those taxpayers who come to Ireland for a period but without the intent of remaining here indefinitely. The tax system has been designed to make a stay in Ireland reasonably attractive for such people. A person who is resident in Ireland but deriving substantial income or gains from abroad is in all probability a relatively wealthy person. He has a choice as to where he chooses to live. The remittance basis of taxation makes it attractive for him to come to Ireland, acquire property here, provide employment here, spend money here, and generally help the economy. Such persons do not have to come to Ireland. If the full rigours of our tax system were applied to them, very probably they would not come here. And we would be the loser.

The remittance basis is important in economic development. It makes it attractive for senior management to be seconded to Ireland by a multinational. They will find the Irish tax regime quite favourable. A move to Ireland can generally result in an overall lowering of tax liability for an international executive. That makes it easier for multinationals to get top management to locate here.

The remittance basis is also important in attracting back Irish emigrants. For the first three years of their return, they will be entitled to the remittance basis of taxation. Given the choice between a foreign job and a job in Ireland, this may tip the balance in deciding to bring their skills back home to Ireland.

From any perspective, the remittance basis of taxation is a highly sensible arrangement. Many of our fellow members of the EU have special tax reliefs designed to favour expatriates who are seconded to headquarters in their country. Ireland is therefore not being unduly generous by international standards.

UK tremors
Part of the media in the UK have recorded rumours in the last month that the Chancellor’s budget statement would severely limit the remittance basis in the UK. One rumour was that the non-domiciled basis would be removed, and be replaced by the ‘non ordinarily resident’ basis described above ie the remittance basis would be available for three years only. This rumour caused upset particularly in the City of London where attracting international talent is vital to its competitiveness and in the UK housing market where the upper end of the market is significantly supported by foreign purchasers of UK property.

We will never know for sure if this was a serious proposal by ideologically driven wreckers or a journalistic fantasy. The budget has come and gone without any attack on the remittance basis. But it has been a timely reminder of the importance of this basis of taxation to our economic development.

The gift tax anomaly
It is strange, that having perfected the remittance basis as an important part of our tax armoury in attracting multinational investment, changes made in 1999 to capital acquisitions tax legislation tended in the opposite direction. Up to that time non-domiciled persons did not have a liability to Irish capital acquisitions tax in respect of either giving or receiving gifts or inheritances of non-Irish assets. In an incredibly misguided move, this sensible situation, which complemented the remittance basis in income tax and in capital gains tax, was changed so that from the year 2004 individuals will become fully exposed to CAT on gifts and inheritances given and received, of assets worldwide, after they have been resident in Ireland for five consecutive years. This is a piece of legislation which surely has to be changed before it comes into force in 2004. Otherwise it will go a long way towards negating the advantages of the remittance basis in attracting seconded executives, and the well heeled internationally mobile.

John Bradley is Head of Personal Financial Services in KPMG and President of the Institute of Taxation in Ireland. He is author of ‘PRSI and Levy Contributions’ published by the Institute of Taxation in Ireland.

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