1.Why was a new offshore provision introduced by this year’s Finance Bill?
- Increased sharing of information intended to curb international tax evasion has been introduced under Common Reporting Standards. This means that Revenue now have several new sources of information regarding Irish residents non-Irish assets. During the last year, the names of over 340,000 Irish residents were supplied to Irish Revenue under various anti-evasion provisions.
- Coinciding with revelations of offshore tax evasion in the “Panama Papers”, the Minister for Finance announced on budget day, 12 October 2016 that this year’s Finance Act would tackle offshore tax evasion and restrict the opportunity for offshore defaulters to use the Revenue’s qualifying disclosure regime with effect from 1 May 2017.
- This will apply to all disclosures whether from domestic sources or offshore made from 1 May 2017.
2.What is the impact of the new offshore provision?
- Offshore most unusually means any country outside Ireland rather than its usual meaning of sunny tax haven locations i.e. such as Jersey, Guernsey, Isle of Man, Cayman Islands etc. any undisclosed source of income or gains outside Ireland i.e. where there is a failure to report non-Irish income or gains correctly by an Irish resident. Examples include non-Irish inherited property, bank accounts, rental income or non-Irish pension which have not been reported or have been incorrectly reported.
3.Has the risk of prosecution for tax offences increased since the introduction of the new offshore provision?
- The new law precludes an Irish taxpayer from availing of the possible benefits of a “qualifying disclosure” to Revenue where it relates directly or indirectly to undeclared or incorrectly declared income or assets outside Ireland.
- The penalty for underpaid Irish tax will be substantially increased (potentially to 100% of any underpaid Irish tax).
- The increased penalty rate will apply not only to the offshore default but to any domestic default which is disclosed to Revenue at any time post 1 May 2017.
- Where a disclosure relating to domestic matters is accepted after 1 May 2017 and a default relating to offshore matters is subsequently discovered, the benefits of the qualifying disclosure will be withdrawn.
- The taxpayer’s name and settlement details will be published by Revenue in the quarterly list of tax defaulters where the Revenue threshold of €35,000 is exceeded (was €30,000 for Pre-Finance Act 2016 defaults).
- Crucially, a taxpayer will be unable to obtain an assurance that the matter will not be referred to the Direction of Public Prosecution (“DPP”) for investigation with a view to criminal prosecution.
4.What does offshore mean in the context of the new provision?
- The Minister for Finance announced on Budget Day, following the introduction of a similar provision in the UK Finance Act this year, that a new strict liability criminal offence would be introduced to facilitate the prosecution of serious cases of offshore tax evasion, this has not materialised.
- The absence of a new strict liability provision will have little effect in reality as, in practice where it is not possible to make a qualifying disclosure, it is then open to the Revenue Commissioners to refer the matter to the DPP in all cases. The Revenue criteria for the types of tax offences which are most likely to be prosecuted are set out in the Revenue Audit Code of Practice.
- However, the likelihood of detection has increased significantly.
- The Courts recommended sentencing guidelines for serious tax evasion indicate a custodial sentence of 3 or more years. This is a matter for the individual Judge but cognisance will be taken of the maximum potential sentence of 5 years on conviction on indictment and/or a fine of up to €126,970 (for each offence which is at the discretion of the Judge). The Court penalties on conviction are payable in addition to tax geared penalties to Revenue which relate to the amount of tax underpaid at rates of up to 100% of underpaid tax.
5.What automatic new information will be provided to the Irish Revenue Commissioners in 2017 regarding Irish Residents by foreign Revenue authorities?
- The introduction of this provision is intended to coincide with information which will be passed to Irish Revenue in relation to offshore income and gains under the EU Council Directive on mandatory automatic exchange of information which becomes effective after 1 January 2016 with the first exchanges of information by September 2017. 101 jurisdictions have committed to exchange information to date.
- Under Foreign Account Tax Compliance Act (USA), over 250,000 records will be received by Irish Revenue per year. Additionally, records are received by Irish Revenue under Directive of Administrative Cooperation (over 90,000 records were received in respect of the 2015 period).
- Future initiatives include the establishment of compulsory registration of beneficial ownership of corporates and trusts. It is anticipated that this will be introduced during 2017 also.
- It is clear that Revenue will be receiving new and incisive material regarding Irish residents non-Irish assets whether held in the name of the Irish resident or not. Moreover, the risk of detection has substantially increased.
6.What steps are recommended to be taken before 1 May 2017?
- There is a once off opportunity for taxpayers to make a qualifying disclosure in relation to offshore matters provided it is done before May 2017. Assuming the normal conditions for a qualifying disclosure are satisfied, this will mean that all of the advantages associated with this course of action are available. In particular, the level of penalties in respect of unpaid tax will be reduced to potentially 10% and the matter will not be referred to the DPP for investigation with a view to criminal prosecution by Revenue.
- Many of those who might otherwise be unable to come forward may now do so with certainty regarding the outcome, assuming of course that a full and complete disclosure is made with payment or an arrangement to pay. Clearly, the Revenue authorities have approved this course of action and this implies that all parties are working towards an early finalisation of what normally can be a complex and protracted matter.
7.Are there any other advantages of making a qualifying disclosure before 1 May 2017?
- One of the less obvious implications of the new offshore provision (in addition to potentially 100% penalties and risk of prosecution), is that it will prevent a qualifying disclosure being made in respect of ordinary Irish taxes where a non-reported offshore matter is part of the disclosure. In effect, treating an Irish tax underpayment in the same way as an offshore default with very limited exemptions.
8.Will there be exemptions from the new offshore provision?
- There will be limited exceptions for an innocent error of less than €6,000. Generally, this limit will be exceeded where tax and interest are payable. In addition, evidence that the default was not deliberate will be required.
9.What action is recommended for Irish tax payers both individual and corporate?
- It is recommended that Individuals and Companies review their tax filings to ensure that all income or gains from non-Irish assets such as properties, pensions and bank accounts are accurately reported. If there is a problem, there is an opportunity to resolve it prior to 1 May 2017. Revenue have confirmed that there will be no extensions beyond 1 May 2017.