Tax on foreign investments

I am writing in relation to tax liabilities that would be incurred in offshore accounts/investments. Say I, as an Irish citizen and resident, invest in an English five-year stock-market bond.

The English financial institution will deduct a notional tax of 23 per cent on behalf of the British Inland Revenue. What I want to know is whether tax is payable to both the Irish and British tax authorities or is the English tax revocable against the payment due to the Irish Revenue Commissioners? I am currently paying tax at the higher rate.

Mr P.O'R., Dublin.

As usual in tax matters, the answer is rarely simple. It depends on the type of investment you are considering.

In this particular case, the Office of the Revenue Commissioners will charge you the full 46 per cent rate of tax on income from foreign investments, given that you are resident in the Republic.

It works on the assumption that you will apply to the British authorities for the return of the money they have deducted at source in tax on your investment. This should be done as soon as possible, allowing time to complete the transaction before the Revenue looks for its money in your end-of-year tax return.

If, for any reason, you cannot retrieve the money from the British tax authorities - and, as I say, the Revenue here sees no reason why you should have a problem - the provisions of the double taxation agreement between the UK and the Republic will kick in. In this scenario, the Revenue Commissioners will only charge you tax at the rate of 23 per cent to make up the balance of what it is owed.

After all, the whole purpose of the agreement is to ensure that people are not unfairly taxed twice on the same investment in two separate jurisdictions.

The importance of sorting things out as early as possible with the British authorities is that the Revenue here will assume you are liable for the full tax charge unless you have information to the contrary from Britain at the time of your end-of-year return.

Investing in PIPs and PEPs

I opened a Personal Equity Plan with the EBS Building Society last November, saving on a monthly basis, and have now been informed by the EBS that, due to changes in tax, the Special PEP is to be closed in January 2000. The EBS has invited me to open a Personal Investment Plan, which is invested in the EBS Summit Balanced Fund. I would like your advice on opening a new investment plan. I am considering the EBS, Eagle Star and the Norwich Union at the moment. Which of these would you recommend as the best investment, or would you recommend a different financial institution?

Mr D.C.M., Limerick.

You were somewhat unfortunate in the timing of the opening of your Personal Equity Plan (PEP) with the EBS. The plans, which offered a special tax rate to investors of 10 per cent, were somewhat restrictive in that they committed investors to putting 55 per cent of their funds into Irish equities, including 10 per cent of the fund which, specifically, had to be invested in small capitalisation stocks - those with a market capitalisation of less than £200 million (€254).

These restrictions, while onerous, were considered worthwhile when the tax rate was only 10 per cent. As it happened PEPs have performed very well over their lifetime on the back of a bull market.

Unfortunately, for you, the Minister for Finance, Mr McCreevy, raised the rate of taxation on PEPs to 20 per cent in his last Budget. At the same time, he did nothing to ease the restrictions inherent in PEP investments.

In the light of that move, EBS has decided the product is no longer a worthwhile investment for its customers. The difference in tax between PEPs (20 per cent) and Personal Investment Plans or PIPs (24 per cent) was, in the view of the building society, not wide enough to justify the restrictions in place on PEPs. In fact, PIPs became more attractive with the lowering of the basic rate of taxation from 26 per cent to 24 per cent, as it is this basic income tax rate which applies to PIPs. The fact that the Irish market has underperformed this year would hardly have helped matters.

With PIPs, there are wider options on investment, both in the range of products and the geographic spread as well as greater flexibility in apportioning the fund between investments.

It is into this sort of fund that EBS is looking to transfer your money. The full current value of your investment will be transferred. In addition, EBS has said it is doing away with the bid/ offer spread - the difference in unit prices depending on whether those units are being bought or sold. This amounted to a 5 per cent charge on investment as units were bought at a higher price than they would be sold, all other things being equal.

Instead, it has instituted a flat £2 administration charge per payment. Payments can be made monthly as you do at present or by lump sum. Either way, the charges will be lower than with rivals using the bid/offer spreads.

However, when it comes to recommending one company or fund over another, you move beyond the realms of this column. Put simply, there are strict guidelines surrounding the issuing of advice on such matters and the rules are there to protect you, the consumer, from poor advice. We are not licensed to give such advice.

The alternatives are to consult a financial adviser - preferably one who operates on an independent basis and charges fees rather than receiving payment from you through commissions - or assess the different funds yourself.

Examine the medium and long-term performance of various financial institutions offering the product in which you are interested. That means at least five years and preferably longer if the products you require have been around for enough time. Short-term performance is never a good indicator of future progress, although it needs to be emphasised that there are no guarantees as to future performance. That is especially so at the moment where low interest rates and equity markets coming to the end of a prolonged bull run make maximising investment returns a trickier operation for fund managers.

The best you can do is to go with someone who seems best able to produce returns regardless of the environment, assuming their charging structure is competitive.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 11-15 D'Olier Street, Dublin 2, or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.