There is specific provision dealing with non-treaty withholding tax in respect of investment income. However, when dealing with trading profits assessable to tax which include dividends that are taxable which have suffered withholding tax for which treaty relief is not available, a taxpayer must first look to section 81 of the Taxes Consolidation Act 1997 (“TCA”) to determine what expenses, including the withholding tax, may or may not be deductible.
While there are a number of expenses specifically disallowed by section 81, such as rent of private accommodation, the central test of deductibility when computing assessable Case I or II profits is whether or not the expense has been “wholly and exclusively laid out or expended for the purposes of the trade or profession”. Overseas tax levied on profits is not usually deductible under section 81.
A recent Tax Appeals Commission judgment in January 2019 (08TACD2019) determined that foreign dividend withholding tax suffered on dividends that were taxable where relief for the tax was not otherwise allowable should be allowable as a deduction under section 81 as a result of an appeal brought by the taxpayer.
The essential difference highlighted in the case between the tax which is not deductible and the tax that is, is that the tax that is not deductible is a charge determined after the profits of the business have been ascertained, while a tax that is deductible is itself a necessary precondition to trading and therefore in the making of the profits.
This case is likely to be of interest to companies who are engaged in a trade involving the receipt of foreign dividends upon which they are taxable from which withholding tax has been deducted and no deduction has heretofore been claimed for this.
The matter at issue was whether the tax withheld on foreign dividends derived by the appellant taxpayer in the course of its trade was a deductible expense for the purposes of calculating profits assessable to corporation tax in accordance with section 81, to the extent that the withholding tax could not be offset as a credit against the taxpayer’s tax liability.
The taxpayer sought a deduction for the foreign withholding tax, relying on the “wholly and exclusively” principle in section 81. The key distinction the taxpayer sought to make was that the taxes in this case were paid “for the purpose of earning ... profits” (which would be deductible) as opposed to as a result of a profit having been earned (which would not be deductible). The taxpayer argued that the dividend withholding taxes was the ‘price’ of carrying out their specific business and that it was not possible to conduct the trade of buying and selling marketable securities without paying dividend withholding taxes.
Irish Revenue argued that in accordance with both Irish and International tax law, foreign withholding taxes deducted from dividends are taxes on income and thus, the taxpayer should be denied a deduction for such taxes. Irish Revenue also argued that the treatment for which the taxpayer sought was at odds with the scheme for double tax relief in the Irish tax code.
The Appeal Commissioners found in favour of the taxpayer and determined that the taxpayer is entitled to claim a deduction pursuant to section 81 in respect of the withholding tax on dividend income on which it was precluded from claiming exemption from corporation tax and also denied a credit for such taxes under the double tax relief provisions of the Irish tax code.
What do you need to do?
If your company has not been taking a tax deduction for withholding tax on foreign dividends, or otherwise getting relief for the tax suffered, you should review this position in light of this determination. A taxpayer is entitled to amend tax returns for a period of up to four years from the end of the year in which the return was filed so this could give rise to significant tax refunds.