With effect from 1 May 2017, it is no longer possible for taxpayers to make a qualifying disclosure in respect of offshore income and gains
What is defined as offshore income?
The definition of offshore income is broad and includes income and assets such as foreign pensions, foreign properties and foreign bank accounts, amongst other assets. Before 1 May 2017, a taxpayer could disclose income and gains arising on offshore assets to the Revenue Commissioners through a qualifying disclosure, which allowed the taxpayer to benefit from reduced penalties imposed where the taxpayer had not been fully tax compliant. A qualifying disclosure is a written submission made to the Revenue Commissioners explaining why tax was underpaid, the circumstances leading to the underpayment, and calculation of interest, surcharge and penalties arising.
The changes in this area mean that where foreign assets are not disclosed to Revenue, the taxpayer can expect Revenue to take a more punitive stance. It is worth noting that depending on the tax treaty between Ireland and the country where the foreign asset is located, an additional tax credit may be available to claim in Ireland on foreign taxes paid.
Foreign tax authorities and the Automatic Exchange of Information (AEOI)
As part of a broader global initiative to improve tax reporting and increase transparency concerning tax matters, the Automatic Exchange of Information (AEOI) agreement amongst OECD member countries means that the Irish Revenue has access to greater taxpayer information spontaneously and on request. 113 countries have committed to this agreement as of January 2020.
The AEOI agreement has the following real-life implications. Suppose income has been reported for tax purposes in a foreign country and not in Ireland. In that case, it will fall to the Irish taxpayer to explain why reporting was not completed in Ireland and why tax had not been paid to Revenue on the asset in question. This increased visibility on taxpayer offshore assets places more obligation on taxpayers who have not provided true and accurate information to Revenue.
Revenue compliance interventions
When carrying out compliance interventions, Revenue looks for reporting inconsistencies for areas to carry out further investigation.
For example, a taxpayer who is an Irish resident, ordinary resident, and domiciled in Ireland is charged with tax on worldwide income and gains. Prior to 1 May 2017, a taxpayer who did not disclose a rented holiday home located in France on their Irish income tax return, and where a qualifying disclosure was made to Revenue about this holiday home, this would have reduced the penalties and interest the taxpayer could expect on their non-compliance. However, with the changes to the rules now in place since 2017, this means increased interest and penalties, the possibility of prosecution, and publication in Revenue's tax defaulters list as the benefits of a qualifying disclosure are not available.
It is important to note that while Revenue compliance investigations may initially centre on this one area of investigation, Revenue also has the right to expand these investigations should they have reason to believe a taxpayer needs to be further investigated.
Offshore income tax penalties
The scope of penalties arising for a taxpayer is set out in the Revenue Code of Practice. Generally, the categories of behaviour in a qualifying disclosure from which a penalty can arise can affect the rate used, with the penalties ranging from 3% -100% of the tax underpaid. With the benefits of a qualifying disclosure not available on foreign income disclosures, the reduction in penalties is also a concern. Interest is also charged at 0.0219% from the date of underpayment.
The best course of action for a taxpayer to take while Revenue conducts their investigation is to fully cooperate with Revenue, which means the taxpayer must respond to requests for information in a timely fashion and respond to any Revenue queries.
Revenue also can prosecute taxpayers and publish the taxpayer's names on the list of Revenue tax defaulters, which is widely available to the public.
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 private client team below: