In his Budget speech on 9 December 2009 the then minister for finance, the late Brian Lenihan, said: ‘We must ensure that every wealthy Irish domiciliary who pays little or no income tax makes a contribution to the State, especially during times of economic and fiscal difficulty.’ The subsequent Finance Act 2010 inserted Part 18C into the Taxes Consolidation Act 1997, which contains the legislation for the domicile levy.
The domicile levy applies to every individual (a ‘relevant individual’) who meets all the following conditions:
- is domiciled in Ireland in the tax year
- has worldwide income for the tax year greater than €1m
- has an Irish income tax liability for the tax year less than €200,000
- owns Irish property on 31 December in the tax year with a market value in excess of €5m
Where the levy applies, a flat charge to tax amounting to €200,000 arises for the individual. Irish income tax paid by the individual is allowed as a credit against the levy. Certain shares in trading companies are not regarded as Irish property for the purposes of the levy. In estimating the market value of property for the purposes of the levy, no deduction can be made for debts or encumbrances.
Individuals with valuable assets and a high trading profit before losses or capital allowances are taken into account can find themselves subject to the levy
For the purposes of calculating worldwide income, no deductions can be made for capital allowances or losses. Individuals with valuable assets and a high trading profit before losses or capital allowances are taken into account (eg hoteliers) can find themselves subject to the levy.
The impact of the domicile levy is up for debate, with recent figures indicating that it affects fewer than 15 individuals and raises less than €2.5m each year for the Exchequer.
There has been an increase in Revenue interventions with respect to the levy. This article focuses on two recent Tax Appeal Commission determinations (175TCAD2020 and 176TACD2020) on domicile levy assessments raised by Revenue.
Background
There was no dispute between the parties about the facts in either appeal. Both appellants claimed they were not subject to the domicile levy, as they were not a relevant individual for the purposes of the levy, on the basis that:
- neither had world-wide income in excess of €1m, and
- both had a final Irish income tax liability above €200,000 in the periods under assessment
Both appellants submitted that, under section 381 of the Taxes Consolidation Act 1997, Case I trading losses were deductible against income sources in the periods under assessment and should be taken into account when calculating their worldwide income. Both cases relate to the tax years 2010 and 2011 and pre-date the change to the domicile levy made by Finance Act 2017, which introduced into the legislation an explicit restriction on the deduction of losses and capital allowances for the purposes of calculating worldwide income.
Both appellants also argued that the universal social charge (USC) constituted income tax, and that their USC liabilities should be taken into account in computing the amount of income tax paid in the periods of assessment.
Revenue contended that, for the purposes of the domicile levy, worldwide income comprised the aggregate of the appellants’ income from all sources before amounts deductible in arriving at total income and amounts deductible from total income. On that basis, Revenue maintained that the Case I trading losses were not deductible for the purposes of the definition of worldwide income, and that the statutory wording of the definition of worldwide income contained in section 531AA of the Taxes Consolidation Act 1997 precluded such a view.
Revenue also argued that while USC is a tax on income it is not ‘income tax’, so USC was not reckonable in calculating whether the appellants had an Irish income tax liability for the year of less than €200,000.
Determination
The Appeal Commissioner determined that Case I trading losses could not be taken into account as a deduction when calculating an individual’s worldwide income for the purposes of the domicile levy. Nor did the Commissioner accept the appellants’ submissions that the expression ‘income tax’ should be construed to mean a tax on income.
The Commissioner determined that while both USC and income tax are taxes on income, they are separate and distinct taxes on the basis that:
- income tax is a creation of statute and is contained in the income tax code (section 12 of the Taxes Consolidation Act 1997), and
- USC is a separate tax on income as defined in section 531AB of the 1997 act
On that basis, both appellants were held to be relevant individuals for the purposes of the domicile levy for the periods under assessment and subject to the levy. Both cases have been appealed by the taxpayers to the High Court.
As so few taxpayers are subject to the domicile levy, awareness of the levy has naturally decreased among practitioners. These determinations highlight that Revenue is active in pursuing those liable to the domicile levy and bringing the levy back into focus. They also confirm that for the purposes of the domicile levy:
- USC is not a charge to income tax, and
- Case I losses are not deductible when calculating an individual’s worldwide income.
