Under existing income tax law annual payments, such as annuities and royalties made by companies, are not allowed as deductions when computing income for income tax purposes but the company has the right to deduct and retain income tax from the payments. For purposes of corporation tax annual payments such as annuities or royalties made by a resident company will be allowed as charges on income under section 10. They will have to be paid under deduction of income tax which the company will be obliged to remit to the Revenue under section 151. Interest, whether annual or not, paid by resident companies for the purposes of a trade or business of renting property will not be a charge on income but will continue to be allowed as a deduction in computing the income of the trade or business. Annual interest and short bank interest, etc., not so paid, will be allowed as a charge on income under section 10, subject to the same restrictions as apply under existing law. Annual interest which is allowed as a deduction in computing income and other annual interest, whether or not allowable as a charge on income, will be payable under deduction of income tax and the tax so deducted will, of course, have to be remitted to the Revenue under section 151. The situation is doing no more than preserving the situation as it now exists.
SECTION 3.
Chairman
It slightly varies the method of collection, the part that you collected from. It is a variation of section 433 of the Income Tax Acts.
What do you mean by that statement?
Chairman
There is a little worry abroad on the meaning of this section so perhaps the Minister could give us a full explanation of it?
Subsection (1) provides that annual payments such as interest and royalties made by a resident company after 6th April, 1976, are not to be treated as paid out of profits or gains brought into charge to income tax. As a consequence, the payments will not come within section 433 of the Income Tax Act, 1967, which entitles the payer to deduct and retain income tax on the payment, but it will fall within section 434 which obliges the payer to deduct income tax from the payment and to remit it to the Revenue.
Special provision is made in section 151, to which I have referred, for accounting to the Revenue for income tax deducted from such payments. The right or obligation to deduct income tax from any payment is not affected by the fact that the recipient is a company not chargeable to income tax in respect of the payment because, for example, it is chargeable to corporation tax on it.
Is it similar to ground rent where it is paid by one person first and now payable by the recipient?
It is simply a question of where the payment is made, the payer is under an obligation to deduct tax and then remit it to the Revenue. That is under the income tax code. Because we are blending income tax with corporation tax there is a necessity to identify this particular transaction separately, but ultimately the effect is going to be the same.
It is the recipient who pays now rather than the payer?
No, the payer will still deduct but it will not be a set-off against income tax because income tax is gone in so far as the corporation is concerned, but it is still under the obligation to account to the Revenue Commissioners.
If an individual is paying money to a company and deducts the income tax first, what happens the company who receive the amount of money? They are not liable for the amount that is deducted.
The company will set that particular deduction off against its corporation tax liability.
Chairman
The company's rate of tax might be higher than the actual payer and there would have to be an adjustment in the difference between the two rates. You might be paying at 38.5 per cent and you pay the money to a company whose rate is 50 per cent. There would have to be an adjustment on that.
The third line of subsection (2) reads:
. . . the income tax thereon shall be set off against any corporation tax assessable on the company . . .
If we take the general case of one company paying dividends and the other company being the recipient, in the case of the first company they pay a dividend, deducting tax. I am thinking now in terms of a company paying dividends generally, and company B hold an investment of that company. If it was a private person, that dividend would be paid with tax deducted.
No. That is the difference between the old and new system.
I am talking about the old system. In the new system the payment is made. Is the tax deducted at the start from the dividend?
No.
Then the dividend is paid tax free? The recipient is responsible for accounting for the dividend?
The corporation tax will be charged on the profits of the company. It will not be a deduction made from the distribution as such. It will be charged on the profits. We are dealing with payments other than dividends where the duty to deduct income tax arises. In such cases there can be a set-off of that income tax so deducted against corporation tax of the person receiving the payment.
Chairman
Under section 433 of the Income Tax Act which deals with this problem, am I correct in saying that section 3 is dealing with the same matters? It seems to me that the subject matter of section 433 of the Income Tax Act, 1967, merely deals with annual payments. What about the 11-month system that has been used in the past to avoid certain accounting in relation to interest paid? Is that relevant to this section?
I shall have to look at the actual text before I answer that. Section 433 entitles the payer to deduct and retain income tax on the payment. Section 434 obliges the payer to deduct income tax from the payment and to remit it to the Revenue.
Chairman
Both only deal with annual payments. The heading to Part 27 of the Income Tax Act, 1967, states that it is annual payments. I know this might be important as far as the reciprocal arrangements with other countries are concerned. Perhaps we have to do it on the basis of annual payments. I am thinking of things other than annual payments within the year.
It certainly deals with annual payments.
Chairman
I am wondering about other payments.
The payments caught are payments to a company on which they bear income tax by deduction.
Chairman
In the case of a company with a large amount of land and using the 11-month system—it does not seem to be covered by this.
I believe they are. There can be deductions other than deductions on annual payments.
Chairman
This is not an annual payment. I am dealing with short-term cases.
The obligation to deduct income tax arises on several cases other than cases of annual payment. Off-hand, I am thinking of interest of purchase money.
Chairman
I am thinking about what is called six months' or nine months' money.
The section goes beyond the annual payments. It covers all payments where income tax deductions are made.
In the explanatory memorandum it states that it provides for annual payments.
I am reminded I amended sections 433 and 434. Since 1974 there is no longer a right or an obligation to deduct income tax from payments other than annual payments.
That accounts for it being specifically mentioned here?
That is right. I am sorry I might have been too cautious in my earlier remarks. The section could be further extended if there were obligations applying to payments other than annual payments.
It only applies to annual payments? Does that leave any loophole?
Chairman
It would come under the general profits charge. It is the question of the feasibility of doing it on the short term—I wondered if there was something else that needed to be looked at from the point of view of a person managing his accounts and making provision for tax. This is the kind of section that could give rise to a lot of trouble in the yearly accounts.
I think your query is valuable. It has helped all of us to clarify our minds.