There have been recent changes to Ireland’s dividend withholding regime, with the rate of withholding having increased to 25% with effect from 1 January 2020. The rate of dividend withholding tax is to be brought into line with the individual shareholder’s marginal tax rate from 1 January 2021. Revenue have also released updated guidance on the tax treatment of accruals and provisions made for financial statement purposes.
Changes to the Dividend Withholding Tax (DWT) regime
- From 1 January 2020, the rate of DWT increased from 20% to 25%. The company paying the relevant distribution is now also obliged to keep a record of the tax reference number of the person “beneficially entitled” to the dividend, the recipient.
- From 1 January 2021, Revenue are to introduce a modified DWT regime. This will utilise real-time data collected under the PAYE modernisation system, essentially allowing a personalised rate of DWT to be applied to each individual taxpayer, based on his or her marginal rate of tax, including USC and PRSI where applicable. There are practical difficulties with the imposition of a personalised DWT regime and these are expected to be ironed out in advance of its introduction from 1 January 2021.
It is the responsibility of the paying company to ensure that the correct amount of DWT is deducted and paid over to Revenue by the due date. The company making the distribution (or its Authorised Withholding Agent), should file the DWT return in electronic format and make the relevant payment by the 14th day of the month following that in which the dividend is paid. Interest is applied at 0.0274% a day for each day or part of a day from the date the dividend withholding tax becomes payable.
Certain exemptions from DWT for non-resident recipients of dividend payments, where the necessary conditions are met, continue to apply.
Updated Revenue guidance on the tax treatment of accruals and provisions
The Revenue Tax and Duty Manual, Part 04-05-06 – Taxation of Provisions and Accruals, was updated to reflect the changes in Finance Act 2019 relating to the tax treatment of IFRS 9 impairment allowances in the context of doubtful debts to the extent estimated to be bad. The manual provides some helpful clarifications around provisions including for onerous contracts such as leases, stating that once the provision is made in full compliance with Irish GAAP or IFRS, the tax treatment should follow the accounting treatment, so that an increase in such a provision should be deductible for tax purposes. In relation to construction contracts, Revenue have stated that a provision for a loss on a contract made in accordance with Irish GAAP is allowable, provided the provision is sufficiently reliable. The manual also confirms that holiday accruals recognised in full compliance with IFRS or Irish GAAP are allowable deductions in computing profits for tax purposes, provided they are sufficiently reliable. It should be noted that for tax purposes, provisions and accruals are regarded as substantially the same. The deductibility of a provision depends on whether the accounts accurately reflect the taxpayer’s position for the year and whether the provision is sufficiently reliable. Normal tax rules apply, in that a provision for expenditure that is considered capital in nature or expected to have a long term benefit over a period of more than one year from when incurred is not deductible for tax purposes in arriving at the tax adjusted profits of a trade.
If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars corporate tax team below: