Tech firm wins decision on €5m charge from Revenue over deductible expenses

This follows the Tax Appeals Commission (TAC) upholding the firm’s appeal against the Revenue assessment for the years covering 2010 to 2016.

The firm treated €27.82m in certain foreign royalty withholding tax incurred during the course of business in several overseas jurisdictions as a deductive expense on its corporation tax bill.

However, Revenue disallowed the €27.82m as a deductible expense, resulting in the €4.98m corporation tax bill for the company.

The appellant firm is an Irish registered and tax-resident company. It licensed technology solutions to licensees resident in overseas territories.

After a two-day oral hearing, the TAC found that the RWHT could be used as a deductible expense for tax for the years from 2010 to 2016 and that Revenue was incorrect to issue its assessment for €4.98m.

The TAC highlighted that RWHT is incurred irrespective of whether the firm earns any profits, and withholding tax is calculated on the gross income and not the profits.

It found in favour of the firm after concluding that it is entitled to treat RWHT as a final cost of doing business in those jurisdictions, as the tax is calculated prior to the ascertainment of profit.

It also said the tax is calculated irrespective of whether the appellant firm makes a profit or a loss, and found a nexus between the expense of RWHT and the earning of profits for deductibility.

The finance director of the company told the TAC that RWHT is one of the costs of doing business which the firm encounters on selling licenses to their customers resident in certain countries where RWHT is applied.

He said that the firm sells its products to distributors, of which there are less than 100 internationally, and then onwards to a network of resellers which are based in various countries.

The firm sells its products internationally to a wide range of countries in Europe and the Asia-Pacific region.

The finance director stated that the firm had no choice but to incur the cost of RWHT in the countries where it is levied, and so it said RWHT is ultimately a cost of doing business in those jurisdictions.

During the period, the appellant firm paid no corporation tax as its corporation tax liability was fully offset by R&D tax credits and the firm’s taxable profits being fully sheltered by relevant trade charges and/or R&D.

At the TAC, Revenue argued that all RWHTs deducted by a source state – regardless of whether that state is one with which Ireland does or does not have a double tax treaty – are taxes on income.

Revenue submitted that it fundamentally disagrees with the proposition that RWHT deducted in the source state from royalty income is an expense, laid out wholly and exclusively for the purposes of the trade.

Revenue also contended that foreign withholding taxes on royalties are by their nature taxes on income, and the fact that foreign withholding tax on royalties may be calculated as a percentage of the gross royalty does not mean that the tax is not in the nature of a tax on income profits.

The dispute may ultimately be decided by the High Court as the TAC decision confirms that it has been requested to sign a case for the opinion of the High Court in respect of the determination.