ATO Interpretative Decision

ATO ID 2012/2

Income Tax

Issue

Is the Universal Social Charge imposed by the Government of Ireland a 'substantially similar' tax to the existing taxes in Ireland under Article 2(2) of the Agreement between the Government of Australia and the Government of Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains [1983] ATS 25 (the Irish Agreement)?

Decision

Yes. The Universal Social Charge imposed by the Government of Ireland is a 'substantially similar' tax to the existing taxes in Ireland under Article 2(2) of the Irish Agreement.

Facts

Universal Social Charge (USC)

The USC was introduced by the Government of Ireland through amendments under the Finance Act 2011 to the Taxes Consolidation Act 1997 (TCA).

Subsection 531AM(1) of the TCA imposes the USC with effect from 1 January 2011.

Generally, resident individuals of Ireland are liable to pay the USC if their gross income exceeds a certain threshold. Non resident individuals of Ireland are also liable to pay the USC on income sourced from Ireland.

The USC is generally calculated based on the gross income of the individual by applying the progressive rates after any relief for certain losses and capital allowances, but before pension contributions.

The USC is payable by an individual taxpayer as part of their annual tax assessment in addition to Irish 'income tax'.

The USC is a separate charge to income tax and there are no deductions or credits due against it. Excess or unused tax credits cannot be used to reduce an individual's liability to the USC.

Subsections 531AS(1) and 531AT(1) of the TCA provides that the USC payable is due and payable in all respects as if it were an amount of income tax due and payable under the Income Tax Acts.

Subsections 531AS(3) and 531AT(2) of the TCA have the effect that the USC may be stated in one sum with the amount of income tax contained in any computation of, or any assessment to, income tax made by or on such individual.

Irish Income Tax

The Irish income tax is imposed by the Government of Ireland under the TCA.

All individuals who are resident in Ireland for tax purposes are liable to pay Irish income tax on their total world-wide income. Non resident individuals who are not ordinarily resident and domiciled in Ireland are liable to income tax on their Irish sourced income.

There is no statutory definition of the word 'income' under the Irish income tax legislation. Under the Irish income tax law, the tax payable by an individual for an income tax year requires the ascertainment of the individual's 'total income' for the year. The term 'total income' is defined in subsection 3(1) of the TCA as 'total income from all sources as estimated in accordance with the Income Tax Acts'.

The individual's 'taxable income' is determined by deducting certain allowances or reliefs from the total income. The Irish income tax payable for the year is then calculated by applying the appropriate income tax rates to the 'taxable income' of the individual taxpayer.

Reasons for Decision

Article 2(1)(b) of the Irish Agreement states that the existing taxes to which the Irish Agreement applies in the case of Ireland are:

(i)

the income tax

(ii)

the corporations tax; and

(iii)

the capital gains tax.

Article 2(2) of the Irish Agreement provides that the Irish Agreement also applies to any identical or 'substantially similar' taxes imposed after the date the Irish Agreement was signed in addition to, or in place of the existing taxes.

The term 'substantially similar' is not defined in the Irish Agreement. Article 3(3) of the Irish Agreement provides that unless the context otherwise requires, any term not defined in the Agreement shall have the meaning which it has under the law of the State relating to the taxes to which the Agreement applies.

Taxation Ruling TR 2001/13 'Income tax: Interpreting Australia's Double Tax Agreements' states in paragraph 72 that when a term in a tax treaty is not defined in the tax treaty, reference is therefore to be made to the meaning of the term for the purposes of the domestic tax laws of the country applying the tax treaty, unless the context otherwise requires.

Further, paragraph 64 of TR 2001/13 states that in interpreting undefined terms in a tax treaty, the domestic law meaning for this purpose may, for Australia, be the statute-defined meaning, or where there is no relevant statutory definition, the 'common law' meaning of the term.

As 'substantially similar' is not defined in Australia's domestic tax law provisions, guidance may be drawn from the ordinary meaning of the term.

The Macquarie Dictionary defines the word 'similar' as:

having likeness or resemblance, especially in a general way.

The meanings in the Macquarie Dictionary of the adjective 'substantial' of which 'substantially' is the adverb include the following:

1.

of a corporeal or material nature; real or actual.

2.

of ample or considerable amount, quantity, size, etc.: a substantial sum of money.

...

4.

being such with respect to essentials: two stories in substantial agreement.

...

7.

relating to the substance, matter, or material of a thing.

...

8.

of or relating to the essence of a thing, essential, material, or important.

...

In the present context, the Commissioner considers the meaning of the term 'substantially similar' is that the relevant tax has a material likeness or resemblance to the taxes listed in Article 2 taking into account the essential elements of the taxes such as the base upon which it is imposed and manner of computation.

This view accords with the approach taken by Klaus Vogel in his book on Klaus Vogel et al, Klaus Vogel on Double Taxation Conventions 3rd ed., Kluwer law International, 1997 at 157 (also quoted with approval by Kelly J of the Irish High Court in Kinsella v Revenue Commissioners [2007] IEHC 250):

'What is necessary is a comprehensive comparison of the tax laws' constituent elements. In such a comparison, the new tax under review, rather than being compared merely with a solitary older one (to which it will always be similar in some respects and different in others), should be considered with reference to all types of taxes historically developed within the State in question - and of States with related legal systems - in order to determine which of such traditional taxes comes closest to the new tax (Vogel/Walter, supra m.no.1, Rdnr. 102-106). Whether a tax is 'substantially similar' to another can, consequently, not be decided otherwise than against the background of the entire tax system.

This is consistent with the approach taken by Edmonds J in Virgin Holdings SA v. Federal Commissioner of Taxation [2008] FCA 1503; 2008 ATC 20-051; (2008) 70 ATR 478 (Virgin Holdings SA). In establishing whether the capital gains tax introduced under Part IIIA of the Income Tax Assessment Act 1936 (ITAA 1936) after the signing of Australia's tax treaty with Switzerland (the Swiss Agreement) is a 'substantially similar' tax to the Australian income tax for the purposes of Article 2(2) of the Swiss Agreement, Edmonds J stated:

Where a tax on capital gains is effected, as it has been in this country, by the inclusion of the capital gains, or some figure computed there from, in the tax base upon which income tax is imposed on an annual basis, I have great difficulty in comprehending why the tax on the capital gain is not substantially similar, if not identical, to the income tax on the tax base not including the capital gain or the figure computed there from...

Second, if the tax with respect to which the tax on capital gains is being compared for similarity, also taxes capital gains, albeit depending on circumstances (s 25A) and time (s 26AAA) of acquisition, the more readily will a conclusion of substantial similarity be reached...

In essence Edmonds J:

•

examined certain operative provisions in the ITAA 1936 referred to in the applicant's submissions and enacted before Australia entered into the Swiss Agreement relevant to taxing amounts that were not ordinary income; and

•

compared these provisions with the operative provisions in the regime for taxing capital gains under Part IIIA of the ITAA 1936. References were also made to the operative provisions in Part 3-1 of the Income Tax Assessment Act 1997.

In considering the same question as that stated above in Virgin Holdings SA in the context of Article 1(2) of the 1967 tax treaty between Australia and the United Kingdom, Lindgren J in Undershaft No 1 v. Federal Commissioner of Taxation [2009] FCA 41; 2009 ATC 20-091 concluded:

131. In my view, the only assumption to be made for the purposes of Art 1(2) is that the Pt IIIA regime tax is not within the expressions "the Commonwealth income tax" and I am not to go further and make any assumptions as to the reason. The Pt IIIA regime tax can then be seen to be substantially similar to the remaining tax for which the ITAA 1936 provided, if for no other reason than because other kinds of capital gains remain included in a taxpayer's assessable income.

Following the approach used in the above cases, a comparison of the essential elements of the USC with the existing income tax regime show that:

•

The USC is a tax on the income derived by individual taxpayers. The Irish income tax is also a tax on the income derived by individual taxpayers.

•

The USC is calculated by applying the progressive rates on the income of the taxpayer. The Irish income tax is calculated by applying the relevant income tax rate to the taxable income of the taxpayer.

•

The USC is due and payable in all respects as if it was an amount of income tax due and payable under the Income Tax Acts.

Although there are certain differences between the Irish income tax and the USC, including the applicable tax rates, the available deductions and exemptions, the Commissioner considers that the USC is 'substantially similar' to the Irish income tax as both are taxes imposed by the Government of Ireland, under the TCA, in respect of income derived by individuals.

Accordingly, the Commissioner considers that the USC imposed by the Government of Ireland is a 'substantially similar' tax to the existing taxes in Ireland for the purposes of Article 2(2) of the Irish Agreement.

Year of income:  Year ending 30 June 2012

Case References:
Virgin Holdings SA v Federal Commissioner of Taxation
   [2008] FCA 1503
   2008 ATC 20-051
   (2008) 70 ATR 478

Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/13

Related ATO Interpretative Decisions
ATO ID 2010/24

Other References:
Irish Agreement [1983] ATS 25
Article 2
Article 2(1)
Article 2(2)
Finance Act 2011 (Ireland)
Taxes Consolidation Act 1997 (Ireland)
The Macquarie Dictionary, 2009, 5th edition, Macquarie Dictionary Publishers Pty Ltd.

Keywords
Double tax agreements
International tax
Treaties
Republic of Ireland

Siebel/TDMS Reference Number:  1-3MSKLFH

Business Line:  Public Groups and International

Date of publication:  6 January 2012

ISSN: 1445-2782