Under Irish tax law, credit is generally available for
foreign tax withheld on royalty payments (regardless of whether
the payment is received from a tax treaty partner jurisdiction
or otherwise). However, the credit available is capped at the
Irish tax that would be paid on the profit (calculated under
Irish rules) attributable to the foreign royalty. This approach
can often result in part of the foreign tax being unrelieved.
The Appeal Commissioners in this case considered whether a
general trading deduction was available to an Irish taxpayer
for the excess unrelieved foreign tax.
The facts of the case
In this case, the taxpayer incurred foreign tax on a royalty
received from a treaty partner jurisdiction. A tax credit was
available under Irish law for part of the foreign tax incurred.
The taxpayer sought to deduct the excess unrelieved foreign tax
on the basis that the tax was part of the cost of doing
business in the foreign country.
Revenue denied the deduction, arguing:
- The withholding tax was in the nature of a
tax on income and therefore could not be deducted; and
- The tax was not "laid out or expended for
the purposes of the trade", a basic requirement for trading
deductions to be permitted under Irish law.
The taxpayer appealed the decision of Revenue to the Appeal
Commissioners. By way of background, the Appeal Commissioners
is an independent statutory body whose main task is hearing,
determining and disposing of appeals against assessments and
decisions of Revenue. Most Irish appeals on tax matters are
first heard by the Appeal Commissioners.
Taxes in the nature of income tax not deductible
The analysis included in the decision of the Appeal
Commissioner on this point is not entirely clear. There is some
old case law in Ireland and the UK that concludes that foreign
taxes on profits (or 'income taxes') are not deductible when
calculating taxable profits. The taxpayer argued that as the
foreign tax withheld from the royalty was calculated on the
gross amount, it was not a tax on profits (or an 'income tax')
and therefore that older case law did not apply.
The Appeal Commissioner rejected this position pointing to
the claim for partial relief under the credit system as an
acceptance by the taxpayer that the foreign tax was in the
nature of an income tax. In addition, the Appeal Commissioner
referred to a UK case that confirmed that a Venezuelan turnover
tax could be regarded as a tax on profits even though the tax
was applied by the Venezuelan authorities on a gross basis.
The Appeal Commissioner's analysis on the nature of the tax
(which is critical to the outcome of the case) is somewhat
opaque and it is hoped that when the case is considered by the
High Court an in-depth review of this point will be included in
Not laid out or expended for the purposes of the trade
In determining whether the withholding tax was 'laid out or
expended for the purposes of the trade', the Appeal
Commissioner had regard to Harrods (Buenos Aires) v Gooby
(HM Inspector of Taxes)  41 TC 450. That case
concerned an Argentinean tax on the capital of a UK business
operating in Argentina. The tax was held to be deductible.
Failure to pay the tax could have resulted in the taxpayer
being precluded from carrying on business in Argentina.
The Appeal Commissioner distinguished the Harrods
case noting that the foreign withholding tax in the instant
case did not "constitute a mandatory pre-condition to carrying
out business in the source state the way the capital tax did in
Harrods; it is simply a consequence of having carried
out business in the source state". Overall, this appears to be
a very high threshold to meet in order for any foreign tax to
be treated as deductible and it will be interesting to see the
High Court's position on the point.
High Court appeal
No date has yet been set for the High Court appeal. However,
it is likely to be a case that will be closely watched by many
corporate taxpayers operating in Ireland.
Brian Doohan (firstname.lastname@example.org)
and Olivia Long (email@example.com)
Tel: +353 1 232 2000