On 1 July 2014, the Irish Revenue Commissioners issued a statement of practice (SoP) on double tax relief for foreign branches of Irish corporations. This SoP is of particular relevance to the (re)insurance industry.
The change of practice introduced by the statement may be significant for Irish (re)insurance companies with branches in foreign jurisdictions. For those companies, the SoP will be relevant where timing differences for accounting and tax purposes arise between Ireland and that foreign jurisdiction in relation to when income and expenses are recognised. These timing differences can give rise to unrelieved double taxation.
Before the SoP was issued, where income was recognised for tax purposes in Ireland in an earlier accounting period than that of the foreign branch jurisdiction, no double taxation relief would have been available. This was because no double taxed income would arise in Ireland in the relevant accounting period.
Under the SoP, where unrelieved double taxation occurs due to a timing difference regarding recognition of income between Ireland and a foreign jurisdiction, relief may be available. The relief applies to foreign tax paid for accounting periods commencing on or after 1 January 2013.
The SoP provides for double tax relief by means of a carry back of foreign tax credit. The credit will arise where foreign tax arises solely as a result of differences in the timing of recognition of income for tax purposes in Ireland and a foreign jurisdiction. The credit may be carried back where an overall loss of foreign tax credits would otherwise occur.
As a result, an Irish company which has paid a foreign tax on a foreign branch’s profits, and which would not otherwise be allowed as a tax credit solely due to the timing mismatch in profit recognition, can now claim 87.5% of that foreign tax paid as a tax credit. The tax credit can be applied against Irish corporation tax which has been paid in respect of the foreign branch profits for a preceding accounting period.
When calculating the level of tax relief available in the earlier accounting period, the Irish company must consider the Irish corporation tax attributable to the double taxed income. The impact of any other factors that could have affected the level of relief that may have been available (e.g. difference in tax rates between two jurisdictions, permanent disallowance of certain expenses, etc.) must be ignored.
This change in practice is a significant boost for the Irish (re)insurance sector and further enhances Ireland’s double taxation relief regime for Irish (re)insurance companies that operate branches in foreign jurisdictions. A tax refund claim under the SoP must be made within four years after the end of the accounting period in which the double taxed income was first recognised in Ireland.