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Thursday, 25th April 2024 |
| Budget 2006 - end of the employment offshore nest egg? |
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| One new measure in the Budget 2006 will not have found favour with many foreign financial services companies operating in Ireland. This was the abolition of the ‘remittance basis’ of taxation for employment income. |
The remittance basis of taxation is available at present to individuals tax resident in Ireland who are either not domiciled (a simple definition being non nationals intent on leaving Ireland again in the future) or not ordinarily resident in Ireland (for example Irish nationals returning to Ireland after a period of tax residence abroad).
For individuals in such circumstances, it has been possible to structure their employment remuneration in such a manner so as to avoid a liability to Irish tax on all or part of such income. Such avoidance could apply for up to three years in the case of those not ordinarily resident and with no time limit applying to those considered non-domiciled in Ireland. This has generally been done through the use of foreign pay points or split service contracts.
Many multi-nationals apply a system of tax equalisation for their international secondees. This operates so that the employee being transferred to a foreign location is not disadvantaged through the application of either higher local tax rates or higher local costs of living than those experienced in their home country. The availability of the remittance basis of taxation has been attractive to multi-national employers in applying the tax equalisation calculations to Ireland, and in encouraging key-executives to move to Ireland, in that foreign executives could essentially arrange to have an element of their remuneration roll-up tax-free outside Ireland for the duration of their secondment.
This all changes with effect from 1st January next. A Financial Resolution passed on Budget night abolishes the remittance basis of taxation for income derived from an employment exercised in Ireland, with effect from 1 January 2006. This has been done according to the Minister for Finance to ‘place all employees and firms, irrespective of nationality or employer, on the same tax footing when working in the State.’
It is important to note that the new restriction only applies to that element of remuneration attributable to the performance of the employment duties within the State and therefore, if it can be argued that some of an individual’s employment duties are exercised outside Ireland, such element of the income properly attributable to the work carried on outside Ireland would appear to still qualify for the remittance basis of taxation, provided of course that contractual and payments arrangements are arranged as appropriate.
Secondly some employers may wish to consider the window of opportunity to possibly make an advance payment of remuneration, which may not otherwise qualify for the exemption, between now and 31 December 2005.
Obviously the Minister for Finance believes this to be a wide-spread tax avoidance measure in that he estimates an additional tax take of up to ?100 million per annum will arise in the future from the closure of this ‘scheme’. While it is politically beneficial to have all employers operating on a level playing field as regards the cost base of remunerating key executives, the increased remuneration costs that will invariably arise for many multi-nationals as a result of this measure must be combined with the 25 per cent increase in corporate tax for many such companies operating in the IFSC thereby adding to an already increasing tax burden for such companies. |
Martin Lacey is a partner in tax services at RSM Robson Rhodes LLP.
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| Article appeared in the December 2005 issue.
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