An Irish-registered tech firm has won a €5 million corporation tax battle with the Revenue Commissioners in a dispute relating to royalty withholding tax (RWT).
The Tax Appeals Commission (TAC) upheld the firm’s appeal against the Revenue Commissioners’ assessment for the years 2010 to 2016.
The unnamed firm treated €27.8 million in certain foreign RWT incurred during the course of business in several overseas jurisdictions as a deductive expense on its corporation tax bill.
However, a Revenue assessment disallowed it as a deductible expense resulting in a €4.98 million corporation tax bill.
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The appellant firm is an Irish-registered and tax resident company that licenses technology solutions to licensees resident in overseas territories.
After a two-day oral hearing in the case at the TAC, commissioner Clare O’Driscoll found the RWT could be used as a deductible expense for tax for the years from 2010 to 2016 and the tax assessment was incorrect.
Ms O’Driscoll found in favour of the firm after concluding it was entitled to treat RWT as a final cost of doing business in those jurisdictions, as the tax is calculated before the ascertainment of profit.
She also found the tax was calculated irrespective of whether the appellant firm makes a profit or a loss and there is a nexus between the expense of RWT and the earning of profits for deductibility.
The company’s finance director told the TAC that RWT is one of the costs of doing business which the firm encounters on selling licenses to their customers resident in certain countries where RWT is applied. It sells products in a wide range of countries in Europe and the Asia-Pacific region.
During the period, the firm paid no corporation tax as its liability was fully offset by research and development (R&D) tax credits and the firm’s taxable profits were fully sheltered by relevant trade charges and/or R&D.
At the TAC, Revenue argued that all RWT deducted by a source state is tax on income.
Revenue submitted it fundamentally disagreed with the proposition that RWT deducted in the source state from royalty income is an expense laid out wholly and exclusively for the purposes of the trade.
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