Tax | FEATURE
THE PROPERTY BOOM is over, global recession is a reality, and the significant liquidity problems in the Irish banking sector will continue for a while. Many Irish businesses find themselves in unchartered waters. Those previously involved in the Irish property boom are experiencing significantly reduced volumes of work in Ireland and are forced to go abroad to tender for construction and infrastructural projects in emerging markets in the Middle East and Africa. Commentators are indicating that export‐led growth is the only sustainable strategy to secure long-term growth and prosperity in Ireland. However, for those companies already exporting goods and services, the dynamics of the world market are changing – the traditional export locations’ (EU, US and Japan) share of world GDP has fallen from two thirds in 2000 to 48 per cent today and is expected to reach one third by 2016; China, India and other countries in the East will most likely account for a higher proportion of world GDP in future years. However, the problem for Irish exporters is that only 10 per cent of Ireland’s exports go to emerging markets and developing economies so a major change in focus is required. Therefore, many Irish companies are looking to do business abroad for the first time while others are seeking to export to new markets that they have no experience in. The National Competitiveness Council recently published its report, ‘Driving Export Growth: Statement on Sectoral Competitiveness’. In the report, tax is identified as a critical factor driving competitiveness in six out of the eight sectors analysed. While the reference to tax in this report may refer to the Irish tax landscape, any company expanding abroad or exploring new markets will have to address some or all of the following Irish domestic and international issues:
• Operating structure; • Repatriation of profits; • Financing of foreign operation; • Exit mechanisms; • Anti-avoidance legislation; • Indirect tax considerations; • Employee secondments; • Miscellaneous taxes; and • Assistance from Governmental agencies.
OPERATING STRUCTURE
The structures used by companies when expanding overseas are representative office, branch and subsidiary.
with a branch structure and profits arise in same, these profits are taxable in Ireland and the territory in which the branch is located. The Irish company can however claim a credit in respect of foreign corporation tax paid on profits of the branch and excess foreign tax credits from one branch may be offset against Irish tax on another branch or carried forward to future periods.
Subsidiary companies
Marie Bradley, Managing Partner of Bradley Tax Consulting.
Representative Office
A representative office is the easiest way for a company to commence activities in a foreign location and does not require the incorporation of a separate legal entity. Such offices are generally used to carrying out preparatory activities, e.g. marketing, and give rise to no taxable presence. There is generally a requirement to register for local payroll taxes in respect of any employees.
Branch
A branch structure, like a representative office, does not necessitate the incorporation of a separate legal entity. The branch will, however, create a taxable presence for the Irish company in the foreign location because of the increased level of activities. It is therefore necessary to register and account for local corporate tax on the branch’s profits.
Subsidiary
This generally involves the incorporation of a separate legal entity that will be tax resident in the foreign jurisdiction. The Irish parent will only be subject to Irish tax on profits to the extent that they are repatriated via dividends. Establishing a subsidiary may be a commercial necessity in many instances so the establishment of a branch or representative office may not be relevant.
REPATRIATIONS
Branch operations
Where an Irish company decides to proceed
Irish companies repatriating dividends from foreign subsidiaries must consider how these dividends will be taxed in Ireland. Dividends received by an Irish resident company from a foreign subsidiary are liable to tax at 25 per cent or 12.5 per cent. It is possible to get a credit for withholding tax deducted at the time of payment of the dividend and for underlying tax paid by the subsidiary. Should excess foreign tax credits arise, excess credits from one dividend source may be offset against the Irish tax arising on other foreign dividends and unused credits can be carried forward to future periods indefinitely.
Transfer pricing
Transfer pricing rules seek to enforce arm’s length pricing on transactions between related parties. Ireland recently introduced transfer pricing provisions for groups that employ more than 250 employees and/or have a turnover of more than €50 million, or assets of more than €43 million. These figures apply to the worldwide group and are reviewed annually. Even if an Irish group is outside the scope of the Irish transfer pricing provisions, Irish companies operating in foreign jurisdictions will need to be conscious of foreign transfer pricing regimes when structuring their international operations.
FINANCING OF FOREIGN OPERATION
Setting up international operations abroad will require an efficient financing structure to be put in place which seeks to achieve some or all of the following: • Tax deduction in Ireland where the Irish parent funds the expansion with increased borrowings; or
• Tax deduction for interest paid by the foreign subsidiary on loans provided to fund operations.
With regard to the second point above, foreign country capitalisation provisions that
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