Irish resident companies are obliged to apply Dividend Withholding Tax (DWT) on dividend payments and other distributions made to Irish taxpayers. Dividends are treated as income and are ultimately liable to income tax at the individual’s marginal rate which is the highest rate of income tax to which they are liable. Universal Social Charge (USC) is also chargeable on the payments and in certain instances PRSI.
As I announced in my Budget 2020 speech, Revenue has identified a potential gap between the DWT remitted by companies and the income tax and USC ultimately payable by Irish taxpayers.
The rate of DWT that is currently applied is the standard 20% rate of income tax, but most individuals are also subject to the USC (0.5%, 2%, 4.5% and 8% rates). When DWT was first introduced in 1999 and standard rated, there was no USC and the WHT rate has never been updated to take account of the USC. As a result, the current 20% DWT rate does not cover the income taxes that are ultimately be due on a self-assessment basis so, while DWT has been applied to a dividend payment, a further amount of tax may be due.
To address this gap, I announced changes to the DWT regime. Firstly, an increase in the rate of DWT from 20% to 25% from 1 January 2020. Secondly, from 1 January 2021, Revenue will introduce a modernised DWT regime that will utilise real-time data, which will allow a personalised rate of DWT to be applied to each individual taxpayer based on their marginal rate.
The revised 25% rate is considered a reasonable combination of the 20% rate of income tax and the most common rate of USC which is the 4.5% that applies to income between €19,874 and €70,044. In addition, it is likely that many of the taxpayers in question are also subject to the higher 40% rate of income tax.
The €80 million budgeted yield from the increase in the DWT rate from 20% to 25% is estimated based on prudent assumptions from payments in 2018 and to date in 2019. The yield is expected to arise on payments from Irish resident companies to Irish resident individuals in 2020 through reducing the potential gap described above between DWT withheld and the final tax payable by individuals.
From 2021 onwards, the modernized DWT regime arising out of the newly modernized PAYE system will eliminate this gap by ensuring all individual taxpayers pay the right tax at the right time. It is important to note there is no proposed change to due dates for companies to return DWT as part of the modernised regime.