Cian O'Callaghan (Dublin Bay North, Social Democrats)
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237. To ask the Minister for Finance further to Parliamentary Question No. 204 of 1 December 2020, if his attention has been drawn to the fact that the OECD Model Treaty upon which section 127B of the Taxes Consolidation Act 1997 is based, was amended in 2017 to say that airline crew should be taxed where they are resident only, therefore this legislation is no longer in accordance with international tax principles; and if he will make a statement on the matter. [42767/20]

Paschal Donohoe (Dublin Central, Fine Gael)
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I would like to advise the Deputy that the suggestion that section 127B of the Taxes Consolidation Act (TCA), 1997 is not in compliance with international law or international tax principles is inaccurate and appears to be based on a misunderstanding of a number of matters including Ireland’s sovereign right to tax activity in domestic legislation, how relief may be given under Double Taxation Agreements (DTAs) to alleviate double taxation that may arise as a result of domestic legislation being applied in more than one country on the same income, as well as a misunderstanding of the the status of model treaties, including the OECD Model Tax Convention on Income and Capital (MTC). 

As I advised last week, section 127B TCA, 1997 provides that income arising to an individual from an employment exercised aboard an aircraft that is operated in international traffic shall be chargeable to tax in Ireland where the aircraft is operated by an enterprise that has its place of effective management in the State. 

The domestic provision contained in section 127B needs to be understood in the context of the international tax regime and in particular the network of DTAs that have been concluded between States, including by Ireland, over the past years and decades.  DTAs are bilateral agreements entered into by two sovereign States which govern how their tax systems interact.  DTAs are designed to provide specific relief with a view to alleviating double taxation that may arise as a result of domestic legislation being applied in more than one country on the same income.  DTAs provide relief from double taxation in particular by granting exclusive taxing rights, thus ensuring either that the income or gain should be taxed in one jurisdiction only; or by agreeing primary and secondary taxing rights, providing that the country with secondary taxing rights should offer relief against the tax payable in that country for the tax suffered in the other country with primary taxing rights. 

If there is a charge to income tax in Ireland arising from the operation of Section 127B and a charge to tax on the same income in another jurisdiction then the exact arrangement in relation to the taxation of flight crew depends on the wording of the relevant DTA.  For example, Article 14(3) of the Ireland-Netherlands DTA grants sole taxing rights to the country in which the employee is resident in respect of remuneration from an employment exercised aboard an aircraft in international traffic. 

It is therefore important to note that the operation of the relevant DTA does not undermine or invalidate the domestic charge to tax, and that, whilst DTAs provide relief from double taxation, they cannot themselves form the basis for a charge to tax, nor do they purport to do so. 

The OECD MTC is one of a number of model treaties which States may choose to adopt (whether in whole or in part) in concluding and/or amending their DTAs.  The model treaties are non-binding instruments which aim to provide guidance to countries in designing and negotiating double tax treaties, as well as in applying and interpreting them.  The OECD MTC, as interpreted by the Commentaries thereon, constitute guidance for OECD contracting states when concluding or revising bilateral DTAs and there is no legal obligation, as a matter of international, EU or domestic law, to incorporate the OECD MTC into existing DTAs or those yet to be negotiated, or domestic tax legislation.

Ireland’s DTAs reflect, to a greater or lesser extent depending on the tax policies of each of the two contracting states, the OECD MTC in the version published when those DTAs were concluded.   In the case of the DTAs concluded by Ireland with other EU Member States, such DTAs were concluded before November 2017, i.e at a date when the following version of Article 15(3) of the OECD MTC applied:

“Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic ... may be taxed in the Contracting State in which the place of effective management of the enterprise is situated.”

Model treaties may be amended from time to time, and when the OECD MTC is amended this has no impact on Ireland’s existing DTAs unless and until the relevant DTA is amended or replaced through subsequent bilateral negotiations, or its operation is modified through the ratification of a multilateral instrument, such as the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.   

In any event, no conflict arises between existing DTAs and the 2017 update to the OECD MTC, as the Commentaries therein confirm that, in considering which aspects of that MTC to draw on when negotiating and concluding a DTA, Contracting States may validly prefer to tax the remuneration of international aircrew in the State of the enterprise operating the aircraft, notwithstanding the amendment to Article 15.3 by the 2017 OECD MTC.

Ireland is a fully committed OECD member and the approach adopted by Ireland in concluding or revising DTAs has been, and continues to be, fully consistent with that commitment.