Introduction

As part of the Budget 2020 measures announced by the Minister for Finance, Revenue launched a consultation for a new collection system for applying and collecting Dividend Withholding Tax (DWT) from dividends and distributions made by Irish resident companies to individuals.

In his speech on Budget day the Minister outlined that ‘Revenue has identified a potential gap between the DWT remitted by companies and the income tax and USC that is ultimately payable by the individual Irish resident taxpayer’. Revenue’s consultation document also outlines that ‘we are now in an era where modern information and communications technologies present opportunities for real-time reporting. The modernisation which Revenue proposes to implement will better accommodate paying the right tax at the right time’.

CCAB-I’s submission highlights some key areas that should be considered and included in the modernisation project. We have set out our key points below.

Objective of the system

We understand that the objective of this new system is to ensure individuals (shareholders) pay the correct amount of income tax and USC on dividend income received by them at the right time. The consultation document outlines that moving to real-time reporting will reduce instances where overpayments and underpayments of tax occur and ultimately reduce the administrative cost associated with both collecting and refunding income tax and USC.

In order to for Revenue to achieve this objective we feel that the points made in this submission should be considered.

Company, Qualifying Intermediary and Withholding Agent reporting requirements

Under the proposed new system, it our understanding that Revenue will inform the ultimate payer (the payer) of the amount of DWT to deduct. Revenue intend to make available to the payer a personal withholding tax rate for each individual in receipt of dividends and distributions. The payer will report the gross dividend paid and associated DWT in real-time to Revenue for each individual shareholder. For this to operate the payer will be required to obtain a Personal Public Service Number (PPSN) for each individual shareholder25. Revenue will need to ensure that this transfer of data is not in breach of any General Data Protection Regulation (GDPR) and equivalent data protection requirements. In this regard, we suggest that consideration should be given to the fact that companies will have information on a shareholder’s income level and their marginal tax rate. This may be particularly sensitive in the case of widely held companies.

We suggest that the data required to be submitted by the payer is clearly detailed by Revenue and communicated to payers well in advance of 1 January 2021, particularly if it varies from the current data supplied. This will reduce the level of error, delays and therefore improve the quality of information received by Revenue. We would request that any additional information requested should only be information that is really needed by the system. Otherwise this creates an unnecessary administrative burden on the paying company.

Clarification is required from Revenue on how the new process will work for Qualifying Intermediaries and Withholding Agents with regard to nominees i.e. will a separate PPSN be assigned to nominee activities, so that the system will prescribe a 0 per cent DWT rate where that number is used?

Communicating to the shareholder

It is understood that the details of dividend income will be made available to the individual shareholder in real time via Revenue’s online platforms. The dividend amount, as well as credit for the DWT paid will be pre-populated onto the individual’s income tax return. In the case of individuals who are taxed under the PAYE system the income amount, as well as credit for the DWT paid will be included on the individual’s End of Year Statement. If the system is to move to real-time then taxpayers will need to see real time updates of their tax information. We would suggest that an email is sent to the individual via Revenue Online Service (ROS)/MyAccount notifying them of any updates to their account.

We understand that Revenue will make available a personal withholding tax rate to enable the ultimate recipient of the dividend to pay the appropriate amount of DWT. The personal rate will be determined by Revenue having regard to the income tax rates and the USC rates and may be based on estimated income and information available to Revenue. The personal rate will be made available to each individual shareholder. We recommend this is made available to individuals via their ROS/MyAccount and in other formats for individuals not active on ROS/MyAccount.

It is our understanding from discussions with Revenue that the new DWT system will be modelled on the PAYE real time system. In that regard Revenue should be able to leverage information for PAYE taxpayers in real time through the payroll reporting system of their employers to generate the personal withholding tax rate. However, Revenue will need to give a real time rate for all taxpayers equally. More detail from Revenue is required on how the system proposes to apply a real-time rate for taxpayers not within the PAYE system, e.g. self-employed individuals. For such individuals, income may in some instances vary significantly from year to year. As such, applying the income tax rate that applied in the previous year may not be appropriate. Specific consideration should be given to how these taxpayers are facilitated, e.g. through an ability to notify Revenue through ROS that they anticipate being in a different tax band in the following year. More detail is also needed on how Revenue intendeds to deal in real-time with individuals not within the Irish tax system.

Given the wide range of USC and income tax rates and bands that apply, and which are not aligned, a wide range of DWT rates may apply in practice. It is suggested that Revenue consults further with stakeholders on its proposed DWT rates and how companies, qualifying intermediaries and withholding agents can comply.

The consultation document outlines that where the individual’s circumstances change, they can advise Revenue of any change in circumstances which may ultimately affect the personal withholding tax rate. We suggest that individual shareholders be able to notify Revenue of such changes via their ROS/MyAccount and in other formats for individuals not active on ROS/MyAccount. MyEnquiries should not be used for communicating changes to Revenue as it does not work in real-time and would likely cause unnecessary delays for taxpayers and Revenue alike.

Non-Irish tax resident shareholders

Reform of the DWT system presents an opportunity for Revenue to streamline and reduce the administrative burden for a population of non-resident shareholders who are entitled to relief from DWT, but do not met the current requirements for DWT relief at source and have to claim refunds. To place additional administrative requirements on non-resident shareholders could have significant negative implications for the price of publicly traded Irish shares and on the ability of Irish listed companies to raise capital, e.g. in relation to providing tax reference numbers.

In this context, it is suggested that the same system should be applied in principle to all shareholders so that companies, withholding agents, qualifying intermediaries, etc. do not have to operate a number of regimes, i.e. a zero rate of DWT should be applied to non-resident investors that qualify for exemption from DWT or an appropriate rate to those who are entitled to a reduced rate of DWT under a Double Tax Agreement (DTA). We suggest that non-residents wishing to avail of a reduced treaty rate in real time could provide a copy of a tax residence certificate on top of the current declaration requirements that already apply in evidencing their entitlement to a particular rate, which would be considered valid for a defined period of time, e.g. 4 years. A designated “marker” ID could then be assigned to the non-resident.

Legislation

Currently Irish resident companies are obliged under the provisions set out in Chapter 8A of Part 6 of the Taxes Consolidation Act (TCA) 1997 to withhold tax on dividend payments and other distributions that they make to Irish resident individuals. DWT real-time reporting may require new legislation in the TCA 1997. We recommend that such draft legislation is made available at least six months in advance of implementation of the new system, is well discussed and debated with representative bodies and all relevant stakeholders and that revisions are made as required.

In addition to the above, we note that under section 172F TCA 1997, dividends paid on American Depositary Receipts (ADR) are treated as exempt from DWT where the qualifying intermediary is informed that the “specified intermediary” (e.g. a brokerage firm) has a US address on file for the ultimate beneficial owner of the shares. Long standing Revenue practice has been to extend this “simplification procedure” to shares traded through a Depositary Trust Company. It would be welcomed if this practice was codified into Irish law as part of any broader legislative measures.

Exemptions

We understand that there is no proposal to amend the current DWT exemptions and that these exemptions will continue. If there is any intention to change the process in which an exemption is claimed, we suggest that at least six months’ notice is given, and that guidance is published on Revenue’s website.

Timeframe for Delivery

We understand that the timescale for implementing the project is 12 months; with a proposed ‘go live’ date of 1 January 2021. The scale of the planned changes will require that significant resources are available to Revenue in order to work with stakeholders in order to test all possible scenarios and special situations. We recommend that a representative sample of all types of businesses and ultimate payers and shareholders are chosen to be within the testing pool.

We note that the consultation document does not propose any changes to the status quo for qualifying intermediaries and withholding agents. However, it should be recognised in the design of the new process that publicly listed companies (PLCs), qualifying intermediaries and withholding agents have huge numbers of shareholders to deal with. Sensible implementation timelines will need to be put in place to ensure that PLCs, qualifying intermediaries and withholding agents have sufficient time to communicate with shareholders. In addition, consideration should be given to how real-time DWT rates will be applied for such entities in particular. For example, if DWT rates are ascertained today and a dividend is paid tomorrow, what happens if the DWT rate applying to that individual has changed overnight? This could arise where an individual has submitted information to Revenue about a change in their circumstances.

In terms of the process of transition to the new system we would request that a phase-in period of some sort is established. If the objective is to improve the accuracy of DWT, the phase-in process and the implementation date should naturally flow once it is established that the Revenue and those involved are fully equipped for the new system. A similar approach was applied to the introduction of PAYE Modernisation. It is also worth noting that unlike PAYE Modernisation, this will represent a significant change as;

1. Companies and intermediaries may not run “off the shelf” software packages such as SAP, Sage or Payroll software packages (as was the case for PAYE Modernisation) so a phase in-period would assist with this transition
2. The software packages that these companies run would not have previously interacted or had the ability to interact with ROS (for example prior to PAYE Modernisation companies did have the ability to upload tax credits from ROS into their software package)

Consideration should be given to the additional administrative burden and cost that will arise to companies and intermediaries in complying with any new regime. It should also be taken into account that many intermediaries are based outside of Ireland.

We would recommend a phase-in process of one year. During this phase in period, we would request that fixed penalties and tax geared penalties should be suspended or at least reduced in recognition that errors are likely to arise as the new system is bedded down. It is not appropriate to have the same level of severity of penalties as included in section 987 TCA 1997 for DWT real-time reporting.

In addition, we note that a significant number of Irish shares are held through CREST which is being replaced by EUROCLEAR in March 2021. Under Revenue’s current proposed timeline, many companies and intermediaries will have to deal with a new DWT regime at the same time as a number of complex issues relating to the migration to EUROCLEAR. In this context, consideration should be given to whether 1 January 2021 is an appropriate time to fundamentally change the operation of DWT.

We would further recommend that the “default” rate of DWT that is applied, where for example an individual does not have a PPSN is maintained at 25 percent, at least for a defined “soft-landing period” in conjunction with our suggested approach to penalties described above.

Regardless of what the eventual default rate may be in the future, given the sensitivity around the use of personal data and the potential cost and administrative burden for some companies / administrators in applying the new system relative to the DWT in question, consideration could be given to allowing shareholders / companies or administrators the choice to apply the default rate.

Revenue resources must be able to deal with the system. They must be able to answer questions and provide support and direct contact to minimise costs. We accept that an online system is in keeping with modern times and offers the opportunity to make the DWT process more convenient. However, taxation is complex and the DWT system must be able to cater for unusual situations. It is inevitable that any new system will place an additional compliance burden on divided payers.

Revenue support to our members

It is also critical the Revenue put a well-equipped support team in place to deal with queries from taxpayers to facilitate ease of use of the system. CCAB-I, via the TALC forum, has already highlighted the difficulties our members face when dealing with Revenue via My Enquiries and the Revenue telephone service, where the customer service can be at times less than adequate. This proposed new system should not result in additional burdens being placed on the taxpayers without an improvement in Revenue’s customer service.

Members of CCAB-I continuously highlight problems in communicating with Revenue on behalf of clients. MyEnquiries as an online channel for communicating with Revenue and the customer service standards have not improved with the advent of recent modernisation of on-line facilities, such as PAYE Modernisation and the new Debt Management System. We do not want the development of the DWT real-time reporting project to come at a cost for improvements to MyEnquires and customer service standards.

Revenue’s annual report highlights its success every year in the collection of taxes. However, much of this success is attributable to accountants who advise taxpayers and take them step by step through the process of fulfilling their tax obligations. In contemplation of DWT real-time reporting we request that adequate resources are put in place by Revenue to deal with the additional queries arising both before and while the new DWT system goes live. A fully informed support team must be in place within Revenue.

Conclusion

A fundamental principle of any DWT system is the need for accuracy. We do support a modernised system to achieve this and CCAB-I is fully supportive of the ongoing process to modernise communications methods with Revenue via online channels. However, we do have concerns about the potential costs to payers. We also have concerns on whether Revenue’s systems are sufficiently robust and accurate to implement a new system without passing costs on to the ultimate payer operating the new system. We call for the launch of dedicated helplines resourced with trained Revenue staff to support the change.

Key to the success of the process will be Revenue’s ability to react to the information provided. Revenue should be able to use the information in ‘real time’ and should be sufficiently resourced to do so. This use of information has the added benefit of Revenue being able to fix any errors quickly and efficiently.

Finally, we suggest that Revenue continues to consult with stakeholders throughout 2020 in order to ensure that the transition to the new regime operates a smoothly as possible and the new regime does not have any unintended consequences.

Source: Chartered Accountants Ireland.

25 We understand from discussions with Revenue that non-Irish tax resident shareholders will not be required to obtain an Irish PPSN.