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Saturday, 13th April 2024
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Expatriates hit Back  
The ending of the remittance basis of taxation of expatriates, in so far as it applied to employment income from duties in Ireland, requires both employees and employers to urgently consider their situation. Both face potential, difficult to quantify, tax exposures as a result of the hasty curtailment of the remittance basis.
Background
The remittance basis of taxation computes Irish income tax on the income of Irish resident but non-domiciled persons – ‘expatriates’ – and Irish domiciled persons in their first three years of residence after a lengthy absence, on their Irish and UK source income as it arises, and on other income only to the extent that it is remitted into Ireland. Many expatriates seconded to Ireland by multinationals have foreign employment contracts and foreign pay-points in relation to their salaries etc, and are able to avail of that basis of taxation, thus minimising their Irish tax bills. The regime made it attractive for an expatriate to be seconded to Ireland, and helped minimise the cost to a multinational of sending key executives to Ireland. It was an important part of Ireland’s tax package for multinationals.

Apparently arising out of the potential application of this basis of taxation to a recent influx of foreign construction workers, this long-standing relief was withdrawn with effect from 1 January 2006, in so far as it had application to employment income where the duties of the employment were carried out in the State.
The withdrawal of the relief potentially affects employers in that they may face compensation claims from seconded expatriates, and in that they are facing PAYE obligations. It affects many expatriates who find that the basis upon which they were seconded to Ireland has changed overnight, without consultation.

The employer
The PAYE implications of the changes are possibly the most urgent matter which an employer needs to address. Although all payments from 1 January 2006 onwards in respect of 2006 income must be processed through the PAYE system, the Revenue have indicated that employers may postpone the implementation of PAYE until 1 March. PAYE is therefore a very immediate problem.

The PAYE issue will affect not only somebody who is the direct employer of the expatriate, and who is Irish based, but also anybody in Ireland making payments of remuneration on behalf of an employer, and also any Irish based business for whom an expatriate is working, notwithstanding that they are employed by a non-resident employer who does not operate PAYE. In most instances the expatriate will be directly employed by a non-resident company and seconded to work in Ireland for the benefit of another group company. That company is therefore the company which must now gear itself up to account for PAYE, whether or not it is making the salary payments.

The operation of PAYE will require knowledge of what part of the remuneration package relates to Irish duties, something which prima facie will require knowledge of the overall remuneration package. In some cases that
information is not normally available to the Irish business and divulging it may raise HR and other issues.

Many individuals affected by the restriction of the remittance basis will have duties both in Ireland and abroad. If that arrangement is continued with, this obliges the employer and the employee to agree on the appropriate apportionment of the remuneration package as between the two types of duties. The Finance Act does not offer guidance as to how that is to be done.

By definition, the employees affected by the new rules are paid from abroad, under a foreign contract of employment. Some such employees are already subject to salary withholding taxes in another jurisdiction. The Finance Act contains no provisions to avoid a double withholding tax situation which would have a severe impact on the employees’ cash flow. In some of those cases, where the foreign withholding is in a Treaty State, the double withholding will not necessarily result in double taxation at the end of the day, but it could take a long time to get the necessary tax refunds etc. If the foreign withholding is in a non-Treaty State, then the double withholding could represent effective double taxation.

Going forward
Both employers and employees have an interest in ensuring that the remuneration package of the expatriate is tax efficient, in a global sense. Since the basis on which it was structured has changed, it is probably prudent to take advice on how it can be restructured efficiently.

In the short term employers need to protect themselves against PAYE exposure, and interest on late payments of PAYE by gearing up to apply PAYE.

Expatriates who will continue to avail of the remittance basis on part of their income will need to review their banking arrangements to ensure that in the future what is now Irish taxed income does not get mixed in with foreign source income taxable in Ireland should it be remitted to Ireland.

The tax exposure in Ireland on employer contributions to a foreign pension scheme should be reviewed to see if they come within an exemption which applies where certain criteria are met. A side effect of the restriction of the remittance basis is to potentially bring such pension contributions into charge on an employee, in a manner akin to benefits in kind.

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