Committee Reports > List of Committees > Joint > 1976 > Committee on the Secondary Legislation of the European Communities > Report No. 26 - Company Taxation and Witholding of Taxes on Dividends, Harmonisation of Systems

REPORT

1. Introduction

The Joint Committee has examined the proposal of the Commission for a Council Directive on the harmonisation of systems of company taxation and of withholding taxes on dividends. This proposal is based on Article 100 of the EEC Treaty which is concerned with the approximation of national measures which directly affect the establishment or functioning of the Common Market.

In its Resolution of 22nd March, 1971 on the creation of economic and monetary union the Council of Ministers decided that the harmonisation of company taxation should form part of the first stage. Differences between national systems are seen as a constraint on the free movement of capital and as distorting the conditions of competition. If the Council adhered to its Resolution of 22nd March, 1971 it would act on this proposal by the end of September, 1976. However the proposal depends to some extent on the adoption of two earlier proposals in relation to company law concerning parent-subsidiary relationship and mergers. As these latter proposals have been under consideration since 1969 it is not unlikely that the processing of the present proposal will take some considerable time.

2. The Draft Directive

Briefly the purpose of the draft Directive is to harmonise the national systems of tax on the profits of corporations on the basis of an imputation system. Under this system the same rate of tax is imposed on profits, whether distributed or undistributed, but shareholders are given a tax credit for the corporate tax underlying their dividends.

The adoption of the draft Directive would involve:—

(a) the imposition of a single rate of tax of between 45% and 55% on the profits of corporations. By way of derogation Member States would be allowed “for well defined reasons of economic, regional or social policy” to depart from the rate or grant exemption from it in special cases for a period or permanently. To avail of such derogation Member States would be required to notify the Commission and the latter would be required to make its views known within thirty days;

(b) subject to certain derogations, the introduction of an imputation system whereby recipients of dividends would be entitled to tax credit of between 45% and 55% of the corporation tax on a sum representing the distributed dividend increased by such tax. Tax credits granted to persons resident in third countries under double taxation agreements may not be on a more favourable basis than that applying to Community residents; and

(c) the imposition of a withholding tax of 25% on distributed dividends except in the case of dividends distributed by a subsidiary to a parent corporation. In the case of its own residents, when the name and address of the recipient is notified to the taxation authorities or where securities are registered in the name of the holders, a Member State would have power not to impose the withholding tax.

3. Implementation in Irish Law

The Corporation Tax Bill, 1976 which is at present before the Seanad provides that, subject to special relief for certain categories of companies, corporation tax will be charged at the rate of 50% on the income of companies which is the present maximum combined rate of income tax and corporation profits tax and effectively at the existing capital gains tax rate of 26% on their capital gains. Where, on or after April 6th, 1976, a distribution is made by a company, part of the corporation tax on the income underlying the distribution will be imputed to the shareholder by way of a tax credit. The amount of the tax credit to be so imputed will be equivalent to income tax at the standard rate for the year of assessment in which the distribution is made on the aggregate of the distribution and the tax credit in respect of it. For income tax purposes, this aggregate will be the measure of the shareholder’s income represented by the distribution and that amount of income will be regarded as having borne tax equal to the amount of the tax credit.

Under existing law an Irish resident company is chargeable to income tax on the full amount of its profits whether they are distributed or not. When paying a dividend out of those profits the company is entitled to deduct and retain income tax at the standard rate on the gross amount of the dividend and that amount is treated in the hands of the shareholder as income taxed by deduction at the standard rate. Under the new system the tax credit in respect of a distribution will, as already explained, be equivalent to income tax at the standard rate on the aggregate of the distribution and the tax credit. Accordingly the shareholder will in effect be left in the same position under the new system as under the existing system.

These proposals are in accord with the provisions of the draft Directive. Certain tax reliefs, however, which are to be continued under the provisions of the Bill may be affected if the draft Directive is adopted.

4. Tax Reliefs to encourage Industrial Production

The main reliefs available in Ireland are as follows:—

(a) Export Sales Relief;

Profits from certain new and increased exports are exempted from corporation profits and income taxes for up to 15 years and thereafter on a reducing basis for a further period of five years. This scheme is to operate until 1990.

(b) Shannon Relief:

Profits from export trading and servicing arrangements carried on within the duty free area of the Airport are exempt from corporation profits and income taxes up to 5th April, 1990.

(c) 20% relief given to shareholders in certain manufacturing and other companies:

This scheme, introduced in 1932, provides for a 20% abatement of tax on dividends and interest on shares and securities in resident Irish companies. The abatement only applies to shares held by individuals resident in the State.

The reliefs mentioned at (a) and (b) above are given only to companies and they are obliged to pass on the relief to shareholders when paying dividends out of relieved profits. The proposed Directive would appear to envisage the relief to companies being continued only if they come within the terms of the derogation already referred to in paragraph 2 (a). As far as their shareholders are concerned the draft Directive would seem to preclude their obtaining the benefit of the proposed tax credit. At present all EEC countries with the exception of the United Kingdom allow some shareholders in Irish companies enjoying these reliefs a measure of “matching credit” so that the benefit of the tax relief given by this country is passed on to them in whole or in part. Similar concessions are conceded in bilateral agreements with some third countries.

The relief referred to at (c) is given not to companies but to individual shareholders. It seems to be affected by the proposed Directive to the extent that Article 4 (1) (b) precludes shareholders who enjoy the relief from being granted the benefit of the proposed tax credit and Article 21 provides that shareholders of another Member State shall not be subjected to less favourable taxation treatment than shareholders resident in the same State as the Corporation paying the dividend.

Formerly the tax relief given for mining operations would have been of importance in this connection. The concession now enjoyed by large mining concerns is in the computation of profits and not in the rate of tax these bear. There is still a tax concession for marginal mines but in these cases profits are small and consequently tax collected is also small.

5. State Aids

Irish tax reliefs are a form of state aids which come within the terms of Articles 92-94 of the EEC Treaty and Protocol 30 to the Treaty of Accession which recognises, as far as Ireland is concerned, that in the application of the afore-mentioned Articles “it will be necessary to take into account the objectives of economic expansion and the raising of the standard of living of the population”. Acting under the powers conferred on it by Article 93 of the EEC Treaty, the Commission informed the Council on 27th February, 1975 [R/650/75 (ECO 77)] that it had decided that the state aids obtaining in Ireland on 1st January, 1975 would be “valid for a first period of three years”. In the opinion of the Joint Committee, when the Commission comes to consider the continuance of these aids from 1978 onwards, it must have regard to Protocol 30 wherein Member States take note of a policy “designed to align the standards of living in Ireland with those of the other European nations and to eliminate underemployment while progressively evening out regional differences in levels of development” and “recognise it to be in their common interest that the objectives of this policy be so attained”. The Joint Committee can find nothing at variance with this opinion in the views expressed by the Commission in its communication of 27th February, 1975.

In the foregoing circumstances the Joint Committee finds it wholly unacceptable that the Irish tax reliefs which have been referred to should be comprehended implicitly in a harmonisation Directive depending on Article 100 of the EEC Treaty. Having regard to the fact that it has been agreed that the tax reliefs can continue, it is particularly objectionable that there should be any suggestion that the benefit of the reliefs cannot be passed on to individual investors. Accordingly, the Joint Committee recommends that the strongest pressure be brought to bear at Council level to exclude entirely the Irish system of tax reliefs from the terms of the proposed Directive.

6. Withholding Tax

The provision in the draft Directive for a withholding tax of 25% is intended to prevent tax evasion. At present, Ireland in common with the United Kingdom does not apply a withholding tax on dividends. No need for such a tax is felt in our circumstances where bearer securities present no problem and where many small investors who invest in Irish or British securities would in any event be entitled to claim repayment of the tax withheld or have it offset against other liabilities. The proposed Directive allows for a derogation in respect of Irish company dividends paid to Irish residents but, if adopted, all trans-frontier payments of dividends would have tax withheld. The Joint Committee notes that the Commission hopes that the imputation system will encourage more medium-scale investment. In the Joint Committee’s view the withholding tax may well have the opposite effect in Irish circumstances. Such a tax would be of little assistance in combating tax evasion and could have a detrimental effect on the significant flow of capital between this country and the United Kingdom. It would be most unfortunate if a proposal designed to promote the free movement of capital in the Community led to a reduction of the capital being made available in an area where the need for investment is most acute. Accordingly, the Joint Committee recommends that the strongest pressure be brought to bear at Council level to seek a general derogation for Ireland from the provisions of the proposed Directive insofar as they relate to withholding taxes.

7. Acknowledgement

The Joint Committee wishes to acknowledge with thanks the assistance it received from the Industrial Development Authority and the Stock Exchange in examining this proposal.

(Signed) CHARLES J. HAUGHEY,

Chairman of the Joint Committee.

24th March, 1976.