| Careers: The tax implications of cross border employment |
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| The Celtic Tiger has led to many non-Irish persons coming to Ireland to take up employment, and many Irish people who had emigrated, returning to employment. There are tax advantages and tax traps waiting for the newly arrived employee John Bradley says. |
RRemittance basis
“The remittance basis” is the name given to a valuable tax relief. As it applies to income tax, it enables a non-domiciled resident to escape Irish tax on income from foreign sources other than from the UK provided the income is left abroad. This relief can also apply to an Irish domiciled person who has been non-resident for more than three years, and who returns to Ireland. Such a person can enjoy the benefit for the first three years of residence following his return. Persons entitled to relief are taxed only on their Irish and UK source income and on their non-UK foreign source income to the extent they remit it to Ireland while they are entitled to the remittance basis.
A similar relief applies in relation to capital gains tax, but this is available only to non-domiciled persons and not to domiciled persons who have returned after a period of absence.
The advantages in terms of foreign investment income are obvious but where the remittance basis can be applied to employment income, it is more valuable. If a person is engaged in performing his services in Ireland under a foreign contract of employment, and with his salary paid to him from a foreign pay point, to a foreign bank account, the remittance basis can apply even to the salary for services performed in Ireland. The structuring of such an arrangement takes a good deal of care. However it is an important part of Ireland’s “tax incentives” in that a multinational business will find it more easy to second their international staff to a new operation in Ireland where such an incentive can be offered to the staff member.
The incentive is likely to be valuable only if the foreign income is not also being taxed abroad at rates equal to or higher than those which would have applied in Ireland. Many of Ireland’s double tax agreements deny the benefit of the agreement in so far as income is taxed in Ireland only on a remittance basis.
Returning emigrants
As mentioned earlier, an Irish domiciled person returning to take up employment in Ireland may find himself entitled to the remittance basis of taxation in relation to income tax. However there can also be tax traps involved in a return to Ireland. If the returning emigrant is a beneficiary under a non-resident trust, including one which he or his spouse might have set up while they were abroad, they may find that they are liable to Irish taxation on the income, and on the capital gains of the foreign trust, and of companies controlled by the foreign trust. Indeed, an exposure to Irish capital gains tax on the gains of a foreign trust can arise to such a returned emigrant even if the trust was not one settled by him or by anybody with a connection with Ireland.
It is important to review all financial arrangements which were made during an absence from Ireland, in order to assess the implications that those arrangements have for tax liabilities once the emigrant has returned to Ireland. The matters to be reviewed can extend beyond trusts into areas such as investment in offshore funds, foreign life assurance policies and even an individual’s last will and testament!
Since the remittance basis in relation to capital gains tax is not available to the newly returned domiciled Irish person, and since that person will be liable to Irish capital gains tax on worldwide gains once resident, it is prudent to give thought in advance of returning to the possibility of crystallising gains on any investment assets held, subject however to the tax rules in the country of residence at the time.
The returning emigrant may also be caught by anti-avoidance provisions introduced a year ago and which were designed to deter those about to crystallise large capital gains from emigrating for a short period, so as to be outside the Irish tax net when crystallising the gains. If an individual held certain stakes in a company at the time he ceased to be Irish resident, and disposed of them while non-resident, he may be liable to Irish capital gains tax on that disposal should he return in under five years. Like all anti-avoidance legislation, it has the capacity to catch those who are not conscious that they were tax planning, and who may have left the country and disposed of affected shares without any tax avoidance intent.
An individual who has been ordinarily resident in Ireland, and leaves the country, is in any event liable to Irish capital gains tax on disposal of assets in the three years following his departure from Ireland under ordinary rules, unless protected by a double tax agreement in the country to which he has moved. Any liabilities which the individual failed to notify to the Revenue (probably through ignorance as the provision is not well known) could well come to light on his return, and his resumption of making tax returns. An individual may also have Irish income tax exposure in the period after his departure from Ireland, in relation to overseas investment income, unless protected by a double tax agreement. Again, such a liability could come to light on his return.
Some returning emigrants may find that Ireland is not entirely ‘Ireland of the welcomes’.
The CAT trap
The Finance Act 1999 changed the territorial basis for capital acquisitions tax. This covers gifts and inheritances. Prior to that date the tax applied to gifts or inheritances of assets located in Ireland, or received from an Irish domiciled person. From 1 December 1999 onwards the charge remained unchanged in respect of assets located in Ireland, but it was extended to include gifts and inheritances taken by Irish resident persons, and taken from Irish resident persons. A non-domiciled person was regarded as resident in Ireland after he had completed five consecutive years of residence, but for these purposes is not regarded as resident in Ireland earlier than 1 December 2004. The year 2004 seemed a long way away in 1999. December is now a matter of several months away.
From 1 December 2004, any expatriates resident in Ireland at that time for five consecutive tax years or more will, for example, find that if their parents, possibly domiciled and resident in Japan, die and leave them the family home in (say) Tokyo, they are exposed to Irish inheritance tax on the event.
Ireland has only two double tax agreements that cover capital acquisitions tax, and they do little or nothing to protect the foreigner from it. Expatriates in Ireland are likely to find the extension of capital acquisitions tax to them on a ‘residence basis’ in December 2004 a total disaster. The extension of the charge in 1999 in this fashion was bizarre and ill conceived. It is likely to inhibit investment in Ireland by making it difficult to second senior management for any lengthy periods. It is also unenforceable unless the expatriate is positively saintly in his compliance with tax law – it is unlikely that the Irish Revenue would ever know about the inheritance of a house in Tokyo from Japanese parents, unless the expatriate chooses to tell them of it.
A tax which is a positive invitation to evasion cannot be a good tax. A tax which damages the economic welfare of the country in which it must be paid, is a stupid tax. The Minister for Finance has one last chance in his 2004 Budget to undo the mistake he made five years ago. |
John Bradley is a tax partner at KPMG.
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| Article appeared in the May 2004 issue.
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