CTA Tax Advisor

Deduction for Digital Services Taxes

 

 

On 5th August 2022 the Irish Revenue Commissioners issued a new Tax and Duty Manual Part 04-06-03, which provides guidance on the tax deductibility of Digital Services Taxes (DSTs).

 

For full information, please click: https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-04/04-06-03.pdf

 

The guidance provides that certain Digital Services Taxes (DSTs) incurred wholly and exclusively for the purposes of a trade (taxable under Case I and Case II Schedule D) are deductible in calculating the income of that trade for the purposes of computing Irish corporation tax.

 

The Revenue’s position is that Digital Services Taxes are a turnover tax.

 

They are levied on revenues associated with the provision of digital services and advertising and not on the profits.

 

The guidance provides that, in circumstances where the following DSTs have been incurred wholly and exclusively for the purposes of a trade, the Irish Revenue Commissioners will accept that they are deductible expenses in calculating the income of that trade:

  • France’s Digital Services Tax;
  • Italy’s Digital Services Tax;
  • Turkey’s Digital Services Tax;
  • United Kingdom’s Digital Services Tax; and
  • India’s Equalisation Levy.

 

 

The Guidance material doesn’t distinguish between the two forms of equalisation levy under the Indian regime. At this time there is no clear guidance available however, it would be expected that that since both types of levy are so similar that both should be covered. If this situation applies to you, it is advisable to contact the Irish Revenue Commissioners to seek clarification via MyEnquiries.

 

This Guidance should be interpreted as an initial list.  According to The Revenue Commissioners “The list of DSTs above may be updated as required.”

 

New Code of Practice for Revenue Compliance Interventions

 

The Revenue Commissioners published a new Code of Practice for Revenue Compliance Interventions today which will be effective from 1st May 2022 and will apply to all compliance interventions notified on/after that date.  The revised Code applies to all taxes and duties, with the exception of Customs.

 

The revised Code reflects Revenue’s new Compliance Intervention Framework and the key changes include:

  1. A three tier designation of Revenue Interventions and

  2. The introduction of Risk Review categories of Intervention.

 

 

Level 1

Level 1 Interventions are aimed at assisting taxpayers to bring their tax affairs in order voluntarily.  They are designed to support compliance by reminding taxpayers of their obligations. They also provide them with the opportunity to correct errors without the need for a more in-depth Revenue intervention. These include the following:

  1. Self-reviews

  2. Profile interviews

  3. Bulk issue non-filer reminders

  4. Actions that fall under the Co-operative Compliance Framework.

 

 

The expected outcomes of Level 1 Interventions:

  1. Liability under relevant tax head(s).

  2. Statutory Interest

  3. Reduced penalties. In situations where self correction is an option, no penalties should arise.

  4. No Prosecution.

  5. No Publication.

 

 

 

In Summary:

  • Level 1 interventions can only occur where the Revenue Commissioners have not already engaged in any detailed examination, review, audit or investigation of the matters under consideration.

  • Examples include VAT verification check letters requesting backup documentation to support refund claims, reminder notifications in relation to outstanding tax returns, questionnaires for R&D Tax Credit claims, requests to self-review on specific issues, etc.

  • A Level 1 Intervention allows for an unprompted qualifying disclosure.

  • Unprompted qualifying disclosures cannot be made at any level other than Level 1.

  • The definition of a Profile Interview has changed in the new Code. A Profile Interview will now be used by Revenue to familiarise itself with a specific taxpayer.  Previously it was used to assess a set of taxpayer risks to ascertain whether or not a Revenue audit was required.

  • If the Revenue Commissioners identify a compliance risk during a Profile Interview, they may initiate a Level 2 or Level 3 intervention.

  • A Level 1 Compliance Intervention allows for (i) self corrections and (ii) unprompted qualifying disclosure.

  • When making an unprompted qualifying disclosure, it is essential to disclose the tax defaults for the tax heads and the tax periods which are the subject of the disclosure. To be completely compliant, the taxpayer must also include all previously undisclosed tax defaults in the ‘deliberate default’ category under any tax head and/or any tax period.

 

 

Important Change

According to the new Code, self-corrections can continue to be made the taxpayer is within the relevant time limits

From 1st May 2022 any such self-corrections must be made in writing.

The submission of an amended return on ROS will no be longer sufficient to qualify as a written notification.

Therefore, to qualify as a self correction, a written notification must be provided as well as any amendment made on ROS.

 

 

 

 

Level 2

One of the more fundamental changes to the revised Code is the introduction of the ‘Risk Review’ as a Level 2 Intervention. Level 2 interventions are used by Revenue to confront compliance risks ranging from the examination of a single issue within a Tax Return to a full and comprehensive Revenue Audit.  An ‘unprompted qualifying disclosure’ will not be available to a taxpayer who receives notification of a Risk Review in respect of the specified tax head and tax period.  Taxpayers will, however, have the option to make a prompted qualifying disclosure when notified of a Level 2 intervention.

There are two types of Level 2 Interventions:

  1. Risk Reviews

  2. Audits

 

 

 

 

Level 2 Interventions – Risk Review

  • A Risk Review is generally a desk based intervention which focuses on a particular issue or issues contained in a tax return or a risk identified by Revenue’s own system.

  • Unlike level 1 interventions, there is no option for a taxpayer to make a self-correction or an unpromoted qualifying disclosure once they have been notified of a level 2 compliance intervention.

  • A written notification will be issued to the taxpayer.

  • The notice will specify the scope of the tax review, outlining which information is to be provided within a twenty eight day period.

  • The notification will also clarify whether the intervention is a risk review or an audit.

  • The review will take place twenty eight days from the date of the notification.

  • Generally, Risk Reviews will be carried out by correspondence.

  • Taxpayers will have twenty one days in which to notify Revenue if they intend to make a prompted qualifying disclosure.

  • A prompted qualifying disclosure can be made within twenty eight days of a notification of a level 2 intervention, with the possibility of requesting an additional sixty days.

  • In circumstances where a prompted qualifying disclosure is made, it must be made along with the relevant tax and statutory interest paid, before the expiry of the twenty eight day period.

  • The prompted qualifying disclosure must include all underpayments in respect of that particular tax head for the period in question and not just the particular issue which is the subject of the Risk Review. If the taxpayer fails to disclose any underpayments at this point then it is likely that higher penalties could ensue along with an increased risk of publication on Revenue’s Tax Defaulters List.

  • A prompted qualifying disclosure may allow the taxpayer the opportunity to mitigate penalties, avoid prosecution and/or avoid publication on the tax defaulters’ list.

  • Failure to respond to the Risk Review Notification may result in an on-site visit by Revenue or a full Revenue Audit.

 

 

 

Level 2 Interventions – Revenue Audit

A “Revenue Audit” is an examination of the compliance of a taxpayer.  It focuses on the accuracy of specific tax returns, statements, claims, declarations, etc. Broadly speaking, the operation of a Revenue Audit will remain the same under the revised Code.  An audit will be initiated where there is a greater level of perceived risk.  Also, please keep in mind that an audit may be extended to include additional tax risks depending on information discovered by Revenue during the audit process.

The main stages in a typical Revenue audit are unchanged under the new Code and can be summarised as follows:

  1. The taxpayer receives a Notification Letter which confirms the type of compliance intervention to be undertaken as well as the tax head(s) and period(s) covered. The notice also contains the audit commencement date and location in addition to the books and records to be made available for inspection.

  2. The audit will commence twenty eight days after the date of the notification.

  3. It is possible for businesses to request an alternative date in circumstances where the commencement date is not feasible for them.

  4. A pre-audit meeting can be carried out, where necessary, to ascertain the nature and availability of electronic records.

  5. It is possible to make a prompted qualifying disclosure before the start of the Audit. In order to make such a disclosure, tax and statutory interest must be paid in full.  A penalty does not need to be included.  The taxpayer must sign a declaration that the disclosure is complete and correct.

  6. Taxpayers may request an additional sixty days in order to prepare a prompted qualifying disclosure. This must be done within twenty one days of the date of the Audit Notification.

  7. Opening meeting – At the start of this meeting, the Auditor explains the purpose of the audit and indicates how long it should take. At this point, the Taxpayer has the opportunity to make a prompted qualifying disclosure.  This meeting provides the taxpayer with the opportunity to demonstrate to Revenue the tax controls in place. The Revenue auditor will examine the books and records as well as the prompted qualifying disclosure, raise queries and interview the taxpayer.  The information and explanations provided by the taxpayer will define the focus areas of the audit as well as influencing its outcome.

  8. Revenue will meet the Taxpayer to outline the audit findings.

  9. If the tax return is correct, the taxpayer will be informed as soon as there is certainty. If, however, the return requires amendment, the Auditor will discuss this with the Taxpayer and provide written clarification.

  10. At the close of the audit there will be a final meeting to agree on the total settlement when the taxpayer should pay the required amount to the Auditor.

  11. Following on from the audit, assessments may be raised or actions carried out to recover additional or disputed tax liabilities, where necessary.

 

 

Level 3 Intervention

Level 3 interventions take the form of investigations. These would generally be focused on suspected tax fraud and evasion.  A ‘Revenue Investigation’ is an examination of a taxpayer’s affairs where Revenue believes that serious tax or duty evasion may have occurred.  As the Revenue investigation may lead to a criminal prosecution, it is always recommended to seek expert professional advice and assistance in such situations.

A taxpayer is not entitled to make a qualifying disclosure from the date of commencement of the investigation, however, a taxpayer can seek to mitigate penalties by cooperating fully with a level 3 intervention.

Taxpayers will generally be notified of a Level 3 intervention in writing.  However, in certain cases Revenue may carry out an unannounced visit or may carry out investigations without notifying the taxpayer in writing.

Just to reiterate, once an investigation is initiated, the taxpayer cannot make a qualifying disclosure in relation to the matters under investigation.

 

 

 

 

FINAL POINTS

The main changes in the new Code of Practice for Revenue Compliance Interventions are:

  1. The new Risk Review which is classed in the same category as a Revenue Audit. Once a taxpayer is notified of a Risk Review, the option of making an unprompted qualifying disclosure is removed.  This means the taxpayer will be subject to increased penalties and possible publication on the Revenue’s Tax Defaulters’ list.

  2. A Risk Review generally requires clarification of a specific tax related issue, however, in order for a prompted disclosure to qualify, the disclosure must cover all tax defaults in relation to that particular tax head and the period(s) outlined in the notification. If, however, the default is considered to be in the deliberate default category, the disclosure must cover all tax heads and all tax periods.

  3. There is a 28 day period between the date of the Notification and the commencement of the Risk Review or Audit.

  4. Under the new Code, where the tax underpayment or an incorrectly claimed refund is less than €50,000, publication on the Revenue’s Tax Defaulters’ list will not arise. This increased threshold relates to the tax liability only and does not include interest and/or penalties.

  5. Under the new Code, the exclusion from mitigation of penalties in relation to disclosures pertaining to offshore matters has been removed. This means the taxpayer can now include tax defaults relating to offshore matters in qualifying disclosures and benefit from mitigated penalties.

 

 

 

For full information, please click: https://www.revenue.ie/en/tax-professionals/documents/code-of-practice-revenue-compliance-interventions.pdf

 

 

 

 

To book an appointment to discuss any Revenue correspondence you may have received in relation to a Level 1, Level 2 or Level 3 Intervention, please email us at queries@accountsadvicecentre.ie