The Deductibility Of DSTs In Ireland: Some Clarity At Last

• Published date: 25 October 2022
• Subject Matter: Tax, Income Tax, Corporate Tax, Withholding Tax
• Law Firm: Matheson
• Author: Mr Shane Hogan, Tom's Bailey and Trevor Glavey

The delayed implementation of pillar 1 of the OECD's global tax reform deal means many multinational groups will continue to incur digital services taxes ' at least in the short term. Helpfully, Irish Revenue recently published guidance accepting that DSTs may sometimes be deductible for Irish corporation tax purposes.¹

This article explores the legal basis for treating DSTs as deductible expenses for corporation tax purposes, focusing by way of example on the DSTs levied by France and the United Kingdom.

DSTs

Overview

DSTs are generally levied on gross revenues generated from the provision of specific digital services to users in a territory, irrespective of the tax residence of the digital service provider. They present several challenges for taxpayers. For instance, they can be structured differently across jurisdictions, and the introducing jurisdiction will likely argue that its DST is not a covered tax for tax treaty purposes.

U.K. and French Regimes

The table outlines the key features of the DSTs in the United Kingdom and France.

The Legal Basis for Deducting DSTs in Ireland

Overview

For taxpayers operating in Ireland that incur DST costs, the fact that a particular DST might not qualify for relief under a double taxation treaty does not necessarily mean no relief is available for the tax cost incurred. Depending on the taxpayer's circumstances and the DST's structure, the cost incurred may be deductible as a trading expense for corporation tax purposes.²

U.K. and French DSTs

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To qualify as a deductible trading expense, the DST must be incurred wholly and exclusively for the taxpayer's trade and must not be an income tax.³ It also should not be a creditable tax that can be offset against the taxpayer's corporation tax liability under Irish law.

Wholly and Exclusively for the Trade

Case Law

For an expense to be wholly and exclusively incurred for a trade, one U.K. court said it must be incurred "for the purposes of earning the profits" of the trade.⁴ The Irish Supreme Court has upheld that approach. ⁵

In determining whether a tax expense is incurred wholly and exclusively for the trade, courts have tended to draw a distinction between taxes on profits and other taxes.

The House of Lords has held that the U.K. branch of an Irish company was not entitled to deduct Irish income tax as an expense for U.K. income tax purposes.⁶ The court held that the income tax could not be treated as a deductible expense in computing trade profits because it was...