Certain provisions of Irish tax legislation and Irish tax treaties grant credit against Irish tax on the same income, subject to segregation on a country-by-country basis in certain cases. The non-Irish income from which the withholding has been deducted, is usually “grossed up” by the withholding tax. 

Where there are insufficient profits in Ireland against which the withholding tax can be credited, the issue has been whether the income should still be “grossed up” by the withholding tax and, if so, whether the uncreditable withholding tax should be deductible so that the Irish taxpayer is not taxed on income it never actually receives. The Irish Revenue’s perspective seems to be that the non-Irish income should be grossed up, i.e., the uncreditable non-Irish withholding tax should be taxable income. The taxpayer’s perspective is that a taxpayer should not be taxed on income it never receives and for which it cannot get any benefit. 

The Tax Appeals Commission has reached different views in two determinations, 02TACD2018 and 08TACD2019. However, in those cases it is arguable that the issue was not fully aired and each case is fact specific. 

The issue was examined more recently in an unpublished determination of the Tax Appeals Commission. The Commissioner, held for the taxpayer (represented by Arthur Cox) and confirmed that uncreditable royalty withholding tax is deductible under normal trading principles because it meets the “wholly and exclusively” test in Section 81 of the Taxes Consolidation Act 1997 as well as the tests in other case law. Accordingly, the carried forward losses of the taxpayer were increased which are eligible to be utilised in future years. The economic effect is that the taxpayer in question is taxed at an effective tax rate close to 12.5% which we consider to be the correct Irish policy outcome. 

We note that there was a change in law in Finance Act 2020 which applies to periods that were not subject to appeal, but that change in law may not have practical impact.

We were particularly pleased to have won another case in front of the Tax Appeals Commission as our success rate over the past few years in this forum is 100%. 

The determination will be published in due course.  If you have any questions in relation to this or any other Irish tax issue feel free to contact your usual Arthur Cox tax contact.