The Irish Tax Institute notes the statement by the Minister for Finance, Michael McGrath T.D. on corporation tax published yesterday (Thursday, 14 September 2023).

Tom Reynolds, President of the Irish Tax Institute, said: “We welcome the Minister’s commitment to legislate for a participation exemption for foreign dividends of companies based in Ireland, but we are disappointed that the legislation will not be published until Finance Act 2024, to come into effect on 1 January 2025.

The Pillar Two rules, which come into effect on 1 January 2024, are grounded in the assumption that countries adopting the 15% global minimum rate permit a foreign dividend exemption. Postponing the introduction of this critical change in our corporation tax code for a year will add complication to the implementation of Pillar Two in Ireland.

In his statement, the Minister makes several references to the increasing complexity of our business tax regime. Earlier in the week, he acknowledged the very significant challenge that large businesses will face in complying with the Pillar Two rules.  He said “it is becoming ever more challenging” for such businesses to meet the increasingly complex requirements of Ireland’s corporate tax code.

The Institute could not agree more and that is why we have been calling for the legislation to allow a participation exemption for foreign dividends to be published in tandem with the implementation of Pillar Two. It is our firm view that this would have gone a long way towards reducing the uncertainty and the administrative burden that the new global regime will bring to large business in Ireland.

It would also have brought us into line with competitor countries in Europe. The statement accepts that Ireland is “an outlier” in not having an exemption for foreign dividends. Competition for foreign direct investment has never been more intense across Europe with larger countries like France and Germany now actively wooing multinationals. In that context, it makes no sense for Ireland to delay another 15 months before reforming its uniquely anachronistic tax treatment of foreign dividends.

The statement provides no clarity on the Government’s plans to provide a foreign branch exemption, the second element of a territorial system of taxation.  The Institute acknowledges that legislating for this change may require further consideration, but it is not even mentioned in the Project Timeline which accompanied yesterday’s statement.

Now that the introduction of an exemption for foreign dividends is being put on hold, we strongly believe work on both elements of territoriality should progress simultaneously so that a territorial approach to the tax treatment of the foreign earnings of companies based in Ireland can be introduced no later than January 2025.

It is six years since the Coffey Review first recommended moving to a territorial system of taxation with the introduction of a participation exemption for foreign dividends and/or foreign branch profits. The recommendation has also featured in the roadmaps published by the Department of Finance. The public consultation announced in yesterday’s statement is the third since that Review.

The Institute has already answered many of the questions in this latest consultation; nonetheless, we will, as always, respond and engage with the Department and the Minister. But questions must quickly give way to decisions and progress towards the simplification of Ireland’s tax system.

Businesses based here are currently making decisions about their structure in a post-Pillar Two world. Above all else, they want certainty and clarity. Yesterday’s statement sets a firm date for the introduction of a dividend exemption, albeit 15 months away. It offers no clarity on the introduction of a foreign branch exemption.”