Empty Link Skip to Content

TAC Again Confirms Deductibility of Foreign Withholding Tax

AUTHORs: Brian Doohan co-author(s): Colm Brussels Services: Tax DATE: 02/04/2024

On 12 March 2024, the Tax Appeals Commission ("TAC") issued a decision of Commissioner Clare O'Driscoll (47TAC2024) confirming that withholding tax ("WHT") imposed on royalties received by an Irish taxpayer should be deductible under section 81 of the Taxes Consolidation Act 1997 ("TCA"). This is a welcome decision given there are a number of similar appeals making their way through the tax appeals system.

This is the third determination issued by TAC on the deductibility of foreign WHT on royalties (see also 02TACD2018 and 128TACD2023) and is the second to be found in favour of the taxpayer.  Another case on the deductibility of foreign WHT on dividends was also determined in favour of the taxpayer (08TACD2019).  Other taxpayers with similar cases under appeal will take comfort from the pattern that is developing at TAC in these determinations.

It should be noted that the determination is being appealed by the Revenue Commissioners ("Revenue") to the High Court (as is the previous determination that was found in favour of the taxpayer).


During the tax years 2010 to 2016, the taxpayer received royalties from customers resident in a number of foreign jurisdictions from which foreign WHT was withheld.  The taxpayer was in a loss-making position for those tax years and rather than claiming credit for the foreign taxes incurred, opted to deduct the foreign WHT incurred as an expense. Revenue disallowed over €27 million of those deductions and issued amended assessments to the taxpayer.  The taxpayer appealed those assessments to TAC.

WHT as a tax on income

Revenue argued that the WHT should not be deductible as it was a tax on income and therefore, could not be regarded as an expense incurred for the purpose of earning profits.  The Commissioner agreed that the WHT incurred was a tax on income, but disagreed that such categorisation automatically excluded it from being deductible for the years under assessment. 

It should be noted that the law on the deductibility of taxes on income has changed following the introduction of section 81(2)(p) TCA under the Finance Act 2019.  That provision now expressly provides that with effect from 1 January 2020 taxes on income are not deductible in calculating taxable profits.  The years under assessment in this case pre-dated that change.

One further point to note, in their oral submissions, Revenue argued that the WHT applied by Argentina was not applied to the gross income but was applied on an assumed profit of 60% of revenue.  Although no evidence was provided by Revenue to support the assertion made in respect of the Argentinian tax, the Commissioner determined that the taxpayer had not established that the WHT applied to royalties received from Argentina was applied on gross royalties.  It appears from the determination that the taxpayer did not refute this position and it was not argued that the Argentinian tax was calculated in reference to a notional "profit" but ultimately suffered on the gross income, which must necessarily have been the case as the taxpayer in this appeal was loss making.  The taxpayer therefore lost the case with respect to Argentinian taxes imposed on royalties received on that point.

Wholly and exclusively test

Having held that there was no bar on deducting taxes on income for the years under assessment, the Commissioner went on to consider whether the WHT could be regarded as an expense "wholly and exclusively laid out or expended for the purposes of the trade" as required by section 81 TCA.

Revenue argued that the WHT could not be deductible as it was not incurred for the purpose of earning the royalties that contributed to the profits of the trade.  Further, Revenue relied on the decision in Allen v Farquharson Bros & Co 17 TC 59 to argue that some element of volition was required in order to satisfy the 'wholly and exclusively' test.  The Commissioner was clear that the absence of volition was not, in her view, relevant to considering the question of deductibility under section 81 TCA. She thought that the correct test to apply was that described by Lord Davey in Strong & Co 5 TC 215 which had also been endorsed by the Irish Supreme Court in MacAonghusa v Ringmahon [2001] 2 IR 507:

"It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade, or is made out of the profits of the trade.  It must be made for the purpose of earning profits."

Revenue also relied on the decision in Yates (Inspector of Taxes) v CGA International Limited [1991] STC 157, a decision of the Chancery division of England and Wales, which held that a Venezuelan tax which was levied at 10% on the gross receipts of non-Venezuelan residents could correspond to UK income tax or corporation tax.  The Commissioner considered that the decision was of little persuasive value for the purposes of her determination on the basis that the issue under consideration in Yates was whether the Venezuelan tax had the same function as UK income tax or corporation tax.

The Commissioner also considered the prior decision of TAC which held in favour of Revenue on the same issue and treated the foreign WHT on royalties as non-deductible (02TACD2018 (the "2018 Determination")).  In the 2018 Determination, Revenue's argument that the timing of when the WHT was incurred (the WHT could only be applied once the receipts were earned) precluded it from being regarded as an expense incurred to earn those receipts found favour with TAC.  The Commissioner in current case had reservations on why that conclusion was reached in the 2018 Determination given the absence of case law to support that reasoning.

The Commissioner held that the foreign royalty WHT (save for that imposed by Argentina) should be deductible under section 81 TCA as it was a final cost of doing business in the jurisdictions.  She was satisfied that the WHT was calculated prior to the ascertainment of profit; that it was calculated irrespective of whether the taxpayer made a profit or a loss; that there was a nexus between the expense of WHT and the earning of profits in that the taxpayer suffered the WHT for the purpose of enabling it to earn profits in the trade; and that the sequencing or the timing of when the liability is incurred was irrelevant, as was the absence of volition, to the test for deductibility under section 81 TCA.

Revenue will appeal the decision to the High Court.