I move:
That Dáil Éireann approve the following Order in draft:—
Double Taxation Relief (Taxes on Income and Capital Gains) (Sweden) Order, 1987.
a copy of which Order in draft was laid before the House on the 12th day of October, 1987.
Double Taxation Relief Convention between Ireland and Sweden: Motion.
To some extent this matter was discussed with the previous matter.
I have circulated a copy of the order. It is rather long and in greater detail, concerning a larger arrangement. I think I should put it on the record of the House, with your permission, a Cheann Comhairle.
A Convention between Ireland and Sweden for the avoidance of double taxation with respect to taxes on income and capital gains was signed on behalf of the respective Governments on 8 October 1986, at Stockholm. It will, when it becomes effective, replace the existing double taxation agreement between Ireland and Sweden which was signed at Dublin on 6 November 1959. The new provisions take into account changes which have been made in the fiscal legislation of both countries since that date.
Under the provisions of section 361 of the Income Tax Act, 1967, an arrangement with a foreign government to afford relief from double taxation will have the force of law in Ireland provided the Government make an order accordingly. Before such an order can be made, it must be laid in draft form before Dáil Éireann and a resolution approving it must be passed by the House.
The draft order was laid before the Dáil on 12 October 1987 and contains in its Schedule the text of the Convention. An explanatory memorandum which outlines the effects of the Convention has also been circulated. The White Paper containing the text of the Convention was laid before both Houses of the Oireachtas by the Minister for Foreign Affairs on 24 March 1987.
In relation to Ireland, the Convention will be effective for income tax and capital gains tax for any year of assessment beginning on or after 6 April in the year immediately following that in which the Convention enters into force. For corporation tax purposes, the Convention will have effect for any financial year beginning on or after 1 January in the year immediately following that in which the Convention enters into force.
The Convention follows the general principles of the Model Convention published by the Organisation for Economic Co-operation and Development in 1977. The provisions are similar to those contained in the treaties which Ireland has concluded with the United Kingdom and Australia in recent years and those which are in course of negotiations with other states.
For the purposes of eliminating double taxation, the Convention follows the two basic rules established in the OECD model. The first is that certain income may be taxed in one country only. Thus Government and local authority salaries will normally be taxable only in the country of source while interest and royalties will normally be taxable only in the country of residence of the beneficial recipient. The second basic rule is that where the same income or capital gains may be charged to tax in both countries, the country of residence will allow a credit against its own tax in respect of the tax paid in the country of source.
I will now briefly outline the main features of the Convention.
Article 4 covers residence. This Article provides a series of tests to determine the country of residence where, under the separate residence criteria used by each country, there would be a double residence position.
Article 5 covers permanent establishment. This Article defines the term "permanent establishment" as being, in general, a fixed place of business in which the business of an enterprise is carried on. This definition is particularly important for the taxation of business profits.
Article 8 is concerned with business profits. This Article is concerned with two questions. First, it restates the generally accepted principle of double taxation Conventions that an enterprise of one state shall not be taxed in the other state unless it carries on business in that other state through a permanent establishment situated therein. Secondly, when an enterprise carries on business through a permanent establishment in another state, that state may tax the profits of the enterprise but only so much of them as is attributable to the permanent establishment.
Article 11 relates to the treatment of dividends flowing from one country to the other. It provides that, in the case of dividends flowing from Ireland to Sweden, a Swedish resident portfolio investor is entitled to the same tax credit as an individual resident in Ireland subject to a charge to Irish tax at a rate not exceeding 15 per cent of the value of the dividend plus the tax credit attached to it. No tax credit is payable to a Swedish company which control at least 10 per cent of the voting power in the Irish company paying the dividend.
In the case of dividends paid by a Swedish company to an Irish resident, the Swedish withholding tax charge will be limited, in the normal case, to a rate of 15 per cent. This rate is reduced to 5 per cent where an Irish company controls at least 10 per cent of the voting power of the Swedish company paying the dividend.
Article 14 is concerned with the elimination of double taxation on capital gains. Gains derived by a resident of one state from immoveable property situated in the other state may be taxed in the other state. Gains derived from moveable property will, generally, be taxed only in the country of residence of the person disposing of that property.
Article 16 sets out the general rule for the taxation of remuneration from employments, other than pensions, namely, that such income is taxable in the state of residence. It may also be taxed in the country in which the employment is exercised where certain conditions apply.
The purpose of Article 23 for which there is no corresponding provision in the OECD Model Convention is to regulate in an international context taxation rights in respect of profits, income or capital gains derived from offshore exploration. An enterprise which carries on offshore activities in connection with the exploration and exploitation of natural resources is deemed to be carrying on business through a permanent establishment provided that the activities in question are carried on for 30 days or more in any period of 12 months. The creation of a permanent establishment position means that the profits attributable to the activities of that permanent establishment are liable to tax in the country in which it is situated.
Article 24 deals with the elimination of double taxation where this has not been achieved either by the Convention or under the domestic law of the contracting states. Broadly speaking, it provides by way of the credit method for the country of residence to allow against its own tax a credit for the tax paid in the other country on the same income or capital gains.
Article 24 also ensures that the benefits of Ireland's various tax incentive reliefs are preserved for income flowing from Ireland to Sweden. Paragraph (3) secures that the profits of a Swedish company operating through a branch in Ireland will be exempt from Swedish tax. Paragraph (4) provides that, subject to certain conditions, dividends paid by an Irish subsidiary to a Swedish parent company will be exempt from Swedish tax. Paragraph (8) deals with the granting by Sweden of "matching credit" in relation to a dividend, which is not otherwise relieved under the convention from Swedish tax, paid by an Irish resident company to a Swedish resident out of profits which are relieved from Irish tax under the various incentive provisions.
The Convention will enter into force when instruments of ratification have been exchanged between the two countries. The existing agreement between ireland and Sweden shall cease to have effect as from the dates on which the provisions of this Convention become effective. The new Convention brings our double taxation arrangements with Sweden up-to-date in accordance with the domestic fiscal legislation of both countries and with international practice generally.
I, therefore, commend that Dáil Éireann approve the draft order.
(Limerick East): First, I should like to thank the Minister for a very informative briefing for all of us. I understand that the former agreement between the two countries is dated from 1960 and was signed on behalf of both Governments in 1959. I suppose that will automatically cease to have effect from the date this Convention becomes effective. The present Convention is to remain in force until terminated by one of the contracting states and either contracting state may terminate the Convention by giving notice of termination as provided for in Article 31.
It is timely that we had this double taxation agreement to replace the previous one because since 1960 the Irish tax system has been extensively overhauled and capital gains tax and corporation tax have been introduced through the Capital Gains Tax Act, 1975, and the Corporation Tax Act, 1976, respectively. It was evidently necessary to take account of these in a revised double taxation agreement between the two countries. Other treaties have been revised and replaced for similar reasons and I presume that others are in the course of preparation.
The Convention follows very largely the OECD model double taxation convention and the effect for the most part therefore is as expected. I would like to comment on some of the Articles and to ask the Minister a couple of questions, not so much about what the Articles mean but rather what is the thinking behind some of the provisions. Article 2 deals with the taxes covered and in the case of Ireland it applies to income tax, corporation tax and capital gains tax. Surtax and corporation profits tax were included in the former Article as well as income tax.
The Convention is stated also to apply to any identical or substantially similar taxes which were imposed after the signing of the Convention in addition to or in place of existing taxes. The competent authorities of the two countries shall notify each other of any substantial changes which have been made in their respective taxation rules but the Article provides no date by which this must be done. In the former Article the contracting parties were obliged to notify each other of any change at the end of the year. It is looser now and I wonder why? I do not think that it is a good idea that it should be looser.
Article 4 deals with residence and it follows the OECD Model Convention also. It provides a series of tests which result in the fixing of residence in one country to the exclusion of the other. Formerly, it was possible to be resident in both countries simultaneously. I would like the Minister to comment on the reason why this was changed from what pertained under the 1960 model and why this change has been introduced?
Article 5 deals with the concept of permanent establishment. This is similar to the original Article but the concept has been extended to include an oil or gas well and the installation or structure used for the exploration and exploitation of natural resources. Since under Article 8 the profits of an enterprise of one contracting state may be taxable in the other contracting state if it carries on business in that other state through a permanent establishment situated therein, the scope for taxation in that other state is widened somewhat by the extension of the meaning of permanent establishment.
Article 3 provides that the term "Ireland" is to include any area outside the territorial waters of Ireland which in accordance with international law has been or may be designated under the laws of Ireland concerning the continental shelf as an area within which the rights of Ireland with respect to the seabed, subsoil and natural resources may be exercised. The effect of all the foregoing appears to be intended to bring within the charge to Irish tax profits Swedish oil exploration enterprises operating in the Irish sector of the continental shelf. This provision is also reciprocated. I do not know whether there is any activity by Irish exploration companies in Swedish waters, or indeed if there is any activity by Swedish companies in Irish waters. It is just——
It is in the event of either happening.
(Limerick East): Is there any particular proposal in the offing?
Not that I am aware of but this is now the standard thing.
(Limerick East): Article 9 deals with shipping and air transport and is on the lines of the original Article. There is specific reference in the revised Article to the Scandinavian airline system. The Article provides that the profits of an enterprise of that contracting state from the operation of aircraft and international traffic is to be taxable only in the state but it is further provided that in the case of Scandinavian Air Services this provision is to apply only to such part of the profits as arise to ABA, the Swedish partner of SAS. Again, I would like to ask, is that reciprocated? I am sure the Minister will come in subsequently.
In which way is it reciprocated?
(Limerick East): By Aer Lingus operating in Sweden. The Article deals with dividends and the original Article has been completely revised. A feature of the new Article is that a resident of Sweden in receipt of dividends from an Irish resident company is to be entitled to the tax credit relating to the dividend to which an Irish resident individually would have been entitled. Furthermore, such resident of Sweden may be entitled to payment of part of that tax credit. In this respect the Article is on the lines of the corresponding Article in the Ireland-United Kingdom double taxation Convention but in that Convention the repayment can operate on a two-way basis where as under the present Article there is provision only for repayment by Ireland. Could the Minister confirm that I am correct in this and that there is no reciprocation here in this Article, Article 11, and could he explain why there is no reciprocation? In the case of dividends paid by a Swedish resident to a resident in Ireland, the maximum Swedish tax is to be at 15 per cent of the gross amount of the dividends. The OECD model Article here makes no provision for repayment of tax relating to dividends by one country to a resident of another so the questions that arise there are why no reciprocation and why the departure from the OECD model. There must be some reason behind that.
Article 14 deals with capital gains tax where there was no corresponding Article in the original Convention. In accordance with the Article, capital gains derived by a resident of one country from the disposal of immovable property in the other country or from the disposal of shares deriving their value or the greater part of their value from immovable property situated in that country may be taxed in that other country. Gains resulting from the disposal of movable property may also be taxed in the country in which the movable property was situated, if that property formed part of the business property of a permanent establishment located here. Capital gains derived by a resident of one country from the disposal or rights to assets to be produced by the exploration or exploitation of the seabed or subsoil and the natural resources situated in the other contracting state, may be taxed in that other state together with gains from the disposal of any rights to interest or to benefit such assets or from the disposal of shares deriving their value or the greater part of their value from such rights. In other cases capital gains from the disposal of property are to be taxable only in the state of which the disposing party is resident.
I have a question on Article 19 as well. This deals with pensions and annuities. I would like the Minister to clarify this. It seems that pensions other than Government pensions paid in respect of past employment in a contracting state and payments under the social security legislation of a contracting state may be taxed in that state. That contrasts with the previous position under which such payments were to be taxed only in the country of which the recipent was resident. The former position was in line with the OECD model, so there is a change in the model here.
The reason is that Sweden changed the law.
(Limerick East): Is the situation now that if a Swedish citizen is resident in Ireland and is deriving a retirement pension from a Swedish private company that that person will be subject to Swedish income tax at home rather than to Irish tax here?
He would be subject to Irish tax but would get credit.
(Limerick East): Article 23 contains miscellaneous rules applicable to certain offshore activities carried on offshore in connection with the explorations or exploitation of the seabed. There are exclusions in this Article in respect of activities for periods not exceeding, in the aggregate, 30 days within any period of 12 months. I would like a comment on that also.
Article 24 deals with the elimination of double taxation and this is to be achieved either by way of crediting tax paid in one country against the tax payable in the other country or by way of exempting profits from taxation in one of the countries. The most significant provision from an Irish standpoint is contained in paragraph 3 and 4 of this Article. Under paragraph 3 a resident of Sweden deriving income from a business carried on through a permanent establishment in Ireland is to be exempt from Swedish tax, while under paragraph 4 dividends received from an Irish company by its Swedish parent company are generally to be exempt from Swedish tax. These provisions must be considered favourable from the Irish point of view. They stand to enhance the value of incentive reliefs provided under the Irish taxation system. Thus, Swedish enterprise, whether it is in the form of a subsidiary company or an Irish branch of a Swedish company, which is entitled to the 10 per cent corporation tax rate in respect of manufacturing activities may repatriate such profits to Sweden without further tax penalty there. I presume as the Department of Finance continue to negotiate double taxation agreements with other countries, that they will seek to have this provision applied on a widespread basis. Any of us who had any involvement in industry and commerce are aware of the difficulties for multinational companies, offshore companies, operating here when it comes to repatriating profits. Quite frequently when they repatriate they are subject to the taxation regime of the parent country.
It would be automatically requested.
(Limerick East): Getting that right is of more benefit than a lot of the other activity in industrial promotion which is going on at the moment.
We do not always get it but we always look for it.
Again, we have no objection to this. My advice is to the effect that this agreement is good from the Irish point of view. It is supportive of our general programme to attract investment. The team that negotiated it over such a long period have done a good job on behalf of this State.
The one item I would like to draw to the Minister's attention is the following. It is a problem which this agreement solves in relation to Sweden but not in respect of other foreign investors. The non-resident recipient of dividends from an Irish resident company is, strictly speaking, liable to Irish income tax on dividends. In the case of corporate shareholders the rate of tax is 35 per cent of the dividend plus the tax credit attributable to the income tax so computed. In the case of companies liable at the 10 per cent rate of corporation tax, the rate of tax credit is just over 5 per cent, leaving a theoretical liability to income tax of 31 per cent of the net dividend received. This liability is unique to dividends paid from profits taxed at the 10 per cent incentive rate. In the case of dividends from export sales, these are exempted under Irish law; in the case of other profits, the tax credit applicable to the dividend usually covers the Irish tax liability.
Article 11(1) (c) of the agreement the Minister is bringing before the House provides an exemption from this residual tax, if I could call it that, for Swedish corporate shareholders owning more than 10 per cent of an Irish company paying such dividends but the point I want the Minister to note — and it is a point with some substance — is that this residual tax liability will continue to exist for most other foreign companies investing in Irish resident subsidiaries. Despite persistent representations made to the Department of Finance and to the Revenue Commissioners since the 10 per cent tax incentive was introduced in 1980, the law has not been changed to remove this liability.
I appreciate that in one sense it is academic because the Revenue Commissioners have no way to recover these taxes. However, it is not simply academic in this respect — and this is the point I would like the Minister to pay particular attention to — because accountants who advise and audit these companies feel they are under an obligation to advise their clients to pay all taxes due and it simply is undesirable that accountants should be put in the position of indicating that this money is theoretically due to the Irish Revenue Commissioners but they have no way of getting it so it can be ignored, because proper professional standards require that accountants should say to their clients that they should pay everything they owe and should say to the shareholders that theoretically there is a liability here but it just cannot be recovered.
What I am suggesting to the Minister is that in the forthcoming Finance Bill he should bring in a clause to deal with this residual liability, to remove it or to rectify the situation so as not to leave it as a theoretically payable tax which cannot, in practice, be recovered. It is undesirable from the point of view of professional accountants and it is undesirable to have a theoretical tax liability with no practical way of recovering it. Having made that point, it is not one which would occur to me but it does concern professional accountants advising international investors in Ireland and I ask the Minister to remedy it as soon as he can. Apart from that, we agree with the agreement completely.
Taking the last point first and again thanking Deputies for their contributions and their welcome for this second agreement, there is no doubt but that this is a problem we are aware of. I will take what the Deputy has said into account and see what can be done but at present we have no way of collecting that tax.
Turning to the points made by Deputy Noonan, one of the first points he raised was in regard to the notification of changes. There is now an automatic procedure, which was not there in 1959, whereby each year the Finance Bill is sent to all countries with whom we have double taxation agreements. It is an automatic procedure now and I do not think that in 1959 it was in operation or as streamlined as it is now.
The Deputy made a point about air transport and Aer Lingus operating to Sweden and that there would not be reciprocation if they did. When they do so there will be reciprocation. I understand they are not doing so at present.
(Limerick East): It is covered.
It is covered. If they do it will be reciprocated. The Deputy said a great deal on Article 11. He made the point that we did not have the same arrangements here mainly because we do not have a withholding tax here. Sweden has it. We do not have it so the issue the Deputy raised is not involved. Perhaps there are other things on which the Deputy wants clarification?
(Limerick East): On Article 11 I talked about repayments not operating on a two-way basis under the UK-Irish double taxation agreement and it is not in this one.
It is in it only to the extent that it does not cover the withholding tax. We give credit for portfolio taxes and Sweden do not. Does that answer the Deputy's question?
(Limerick East): I see where it is going
Question put and agreed to.