Encashment tax impacts the financial services sector operating in Ireland. There have been some recent amendments to this tax, so it is useful to outline the present position with regard to the operation of the tax.
Encashment Tax may apply on interest, dividends, or other annual payments payable in respect of stocks, funds, shares, or securities of any non-Irish resident persons which are entrusted to persons based in Ireland for encashment of the payment to Irish resident persons. It can apply to foreign dividends when paid by paying agents in Ireland or when received or realised by banks, brokers or other receiving agents in Ireland on behalf of the legal or beneficial owner of the income.
Under these rules, where an agent in Ireland is so entrusted with the encashment, it is obliged to deduct income tax from such payments and account for it to the Revenue Commissioners.
Where a sub-custodian arrangement exists, the obligation to deduct encashment tax lies with the sub-custodian. However, Revenue is prepared to enter into an arrangement whereby the custodian may receive this income without deduction of encashment tax on the basis that the custodian will act as the person entrusted with the payment and will accept the obligation to deduct the encashment tax.
The chargeable person is required to return completed encashment tax forms to Revenue together with a remittance for the tax payable. The return must be filed within one month of being required to do so by a Revenue notice published in Irish Official Gazette. Compliant payers receive remuneration for operating encashment, calculated at 0.0675% of the tax withheld.
Any foreign dividends that have not otherwise been subject to Irish WHT are in certain circumstances subject to Irish encashment tax. These circumstances are:
Up until 1 January 2021, the tax rate of encashment tax was based on the standard rate of income tax (20%). The Finance Act 2020 has now increased the rate of encashment tax to 25%, with effect from 1 January 2021.
Encashment tax is creditable against the recipient’s Irish income tax/corporation tax liability (excess being refundable) so the increase in the rate will only represent an incremental cash-flow cost for taxpayers rather than an absolute cost. Therefore, with careful planning of the timing of payments any adverse cash flow implications can be mitigated.
Exemption for companies
The encashment tax legislation empowers the Revenue Commissioners to relieve agents of their obligation to deduct encashment tax on payments to Irish residents in certain circumstances. In this regard, the Revenue Commissioners currently exempt payments to Irish investment undertakings, credit unions, banks, building societies, life-assurance companies, pension schemes, securitisation vehicles and charities.
The Finance Act 2020 also introduces a statutory exemption from 1 January 2021 from encashment tax for payments made to companies who are beneficially entitled to and within the charge to Irish corporation tax in respect of those payments.
This exemption is a positive change and provides administrative simplification and reduction of cash flow costs for these companies.
Relief from encashment tax was previously granted in respect of Sterling Dividends of British commercial companies. This exemption has been withdrawn as and from 1 January 2021. This is a good example of how Brexit will have ongoing implications to the Irish Direct Tax code, in addition to VAT and customs.
The Finance Act 2020 amends the record keeping requirements and information reporting returns which agents are required to make to the Revenue Commissioners. This also provides symmetry with the WHT obligations for Irish companies.
The changes include a requirement to automatically report details such as the amount and type of the payment, the amount of tax deducted from the payment and the name and address of the recipient.
These amendments prompted by representations for the Irish Tax Institute in its pre-budget submission of July 2020, provide greater clarity, in particular in the context of certain financial institutions that may be moving to Ireland as a result of Brexit and may now be within the remit of encashment tax.
The impact of the increase in the rate of encashment tax to 25% should largely be on cash-flow rather than a real cost to taxpayers, as encashment tax is creditable against the Irish income tax/corporation tax of the recipient, with a tax refund available for any excess.
For companies that meet the exemption criteria, there will be a cash-flow benefit, in addition to the removal of administrative requirements.
The fact that the updates to the reporting and record-keeping requirements are subject to a Ministerial Commencement Order should allow companies time to update systems to report/record the correct information.
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