# Complicated: Calculation of Irish effective rate/Double Taxation Relief



## Gutefrage (4 Nov 2009)

My husband is a proprietary director of a German company and works in Germany for 3 days a week and pays tax there. He lives in Ireland for more than 183 days a year and so is resident in Ireland. Under Double Taxation Agreement he is entitled to double taxation relief. I am self-employed in Ireland. 

In calculating the double taxation relief due, it is my understanding that we calculate the German effective rate - Tax paid in Germany divided by German Income.

We then have to calculate the Irish effective rate. This is done by taking all sources of income - German income, my self-employment income, minus pension contributions and calculating the Irish (provisional) liability and thus the Irish effective rate. The lower of the two rates is taken and the German income figure is regrossed at that lower of the two rates. The double taxation relief is then calculated by multiplying the regrossed German income figure by the lower of effective rates and dividing by 100.

The problem I have is that when calculating the Irish effective rate I am not sure if it is correct to include all our income sources and pension contributions. If I do the calculation with 0 pension contributions, I get a certain figure but if I redo the calculation with for example 20,000 pension contribution I do not end with a corresponding 41% relief on that pension contribution. This is because a high pension contribution brings down the Irish effective rate and upsets the regrossed figure and double taxation relief figure so that we are not coming out with anything like 41% relief on the pension contribution.

I realise that this is a very specialised area but would really appreciate any glimmers of advice. We have gone to a reputable accountant who did not have a clue - we knew more than he did - but he charged us all the same. I also want to know the correct way to do this myself so we can plan pension contributions in advance.


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## DB74 (4 Nov 2009)

You will only get 41% tax relief on your pension contributions to the extent that you are paying tax at that rate.

Eg - if you pay tax on, say, €5,000 of your income @ 41% but have €6,000 pension contributions, then you will not get 41% tax relief on the entire €6,000

Does this make any difference.


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## Gutefrage (4 Nov 2009)

Thanks for you reply. Yes we would be entitled to the 41% relief as we are in the higher tax band.


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## DB74 (4 Nov 2009)

Could you post some theoretical figures


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## Gutefrage (4 Nov 2009)

Good idea - here are sample figures: Sorry in advance that this is so long...!

Husband German income: 80000
German tax paid: 22000
German effective rate: 27.5%

(Provisional) Irish Liability:
Husband income: 80000
Wife income: 50000
Total: 130000
Tax 72800@ 20% = 14,560. 57200 @ 41% = 23,452. Total tax = 38012. Minus married credit of 3,660 = 34,352. Effective Irish rate = 26.42%. Irish effective rate is lower, so German income must be regrossed at lower effective rate.

Regross foreign income: 100 x (Foreign Income Net/(100-26.4))
= 100 x (58000/73.6) = 78804 = regrossed foreign income.

So now do Irish Liability with new regrossed figure:

Husband income: 78804
Wife income: 50000
Total: 128804
Tax 72800@ 20% = 14,560. 56004 @ 41% = 22,961. Total tax = 37521. Calculate double taxation relief: (regrossed income x lower eff. rate)/100 = 20,830. Married credit of 3,660. Tax liability = 37521-3660-20,830 = 13042.

So now to compare, we take same figures but with a pension contribution of 26000 - 14000 for husband and 12000 for wife.

(Provisional) Irish Liability:
Husband income: 80000
Wife income: 50000
Total: 130000. Pension contribution: 26,000. Taxable income: 104,000.
Tax 72800@ 20% = 14,560. 31200 @ 41% = 12,792. Total tax = 27352. Minus married credit of 3,660 = 23,692. Effective Irish rate = 22.78%. Irish effective rate is lower, so German income must be regrossed at lower effective rate.

Regross foreign income: 100 x (Foreign Income Net/(100-22.78)
= 100 x (58000/77.22 = 75110 = regrossed foreign income.

So now do Irish Liability with new regrossed figure:

Husband income: 75110
Wife income: 50000
Total: 125110
Tax 72800@ 20% = 14,560. 26310 @ 41% = 10,787. Total tax = 25,347. Calculate double taxation relief: (regrossed income x lower eff. rate)/100 = 17110. Married credit of 3,660. Tax liability = 25347-3660-17110 = 4,577.

So we have a 13042 tax liability (having already paid 22000 in Germany) with no pension contributions or else a 4577 liability with 26000 in pension contributions. That is a saving of 8465. I would have thought the saving would be (26000 x .41) 10660.

I won't be surprised or upset if no one replies to this as it is so boring and difficult - well I think so anyway. But if there is some one who can see where our mistake is or who knows how come we are not coming out with the correct tax relief on pension contributions I would be very grateful!


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## DB74 (5 Nov 2009)

Hi again.

First-off, I am no expert on the Irish-German tax treaty but, based on the pure mathematics of the calculations, it might be worth your while checking if the calculation of the Effective Irish Rate is definitely _AFTER_ the deduction of pension contributions and not _BEFORE_ as this is where you are losing the €2,195.

The additional tax relief of €8,465 as a result of the pension contributions is broken down as follows:

Tax Relief on pension contributions = €26,000 @ 41% = €10,660
Tax Saved as a result of lower Gross Income = €3,720 @ 41% = €1,525
Tax Credit reduced as a result of lower Gross Income = €3,720

Total Tax relief on pension contributions = €10,660 + €1,525 - €3,720 = €8,465

You should also note that in this scenario that _YOU_ are losing out on tax relief on _YOUR_ pension contributions because of the lower Effective Irish rate which _CANNOT_ be correct as pension contributions for one spouse are not affected by the other spouse's income in a case where both spouses pay tax at the same rate.

This would lead me to think that the correct Effective Irish Rate to use is the one prior to pension contributions.

Can you post a link to where you got the information on how to calculate the Effective Irish Rate?


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## Gutefrage (5 Nov 2009)

Thanks so much for your reply and your effort to help on this. It is very difficult to find any detailed info on this subject. But I did find a link on the calculation of the Irish effective rate some time ago which Iwas guided by. [broken link removed]  - Pages 4, 5 & 6. There is an example on page 6 aswell . Not exactly for the faint-hearted though. (The example also cites computation of a covenant. I'm not sure if this is comparable or relevant). Maybe you can gleam some wisdom from this information. 

Thanks again for your time!


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