Monthly Archives: January 2015

The Irish GAAR 2015 – Tax Nerd Version

To the world we’re a tax haven.  In fact we have quite onerous anti-avoidance legislation most notably our GAAR, but we’ve traditionally eschewed talking about anti avoidance legislation, especially outside Ireland lest it contradict our intention to be perceived as a friendly tax regime.  I don’t think either Revenue, or the Department of Finance, understand the risk that they are creating for inbound investors in this regard.  I’m actually not so certain that Revenue are unaware.  But the Department of Finance cannot be.

So what does the Irish GAAR actually say?

From the 24th of October 2014 the GAAR says the following.

TCA 1997 s811C(3) states that

“A person shall not be entitled to any tax advantage arising out of or by reason of a tax avoidance transaction to which this section applies”.

In the past a nominated officer had to deny the tax advantage, but now the tax payer cannot self-assess the tax advantage.

Subsection four of that section states

“Where a person submits any return, declaration, statement or account or makes any claim which purports to obtain the benefit of a tax advantage arising out of or by reason of a tax avoidance transaction, a Revenue officer may at any time deny or withdraw the tax advantage.”

I would draw your attention to the phrase “at any time”.  There are no time limits here.

So what is a “tax advantage”?

‘tax advantage’ means—

(i) a reduction, avoidance or deferral of any charge or assessment to tax, including any potential or prospective charge or assessment, or

(ii) a refund of or a payment of an amount of tax, or an increase in an amount of tax, refundable or otherwise payable to a person, including any potential or prospective amount so refundable or payable,

arising out of or by reason of a transaction, including a transaction where another transaction would not have been undertaken or arranged to achieve the results, or any part of the results, achieved or intended to be achieved by the transaction;

As one can see this is a very broad definition of a tax advantage, but this is a General Anti-Avoidance Rule so that point is hardly surprising.

So the last technical definition which we need to consider is what is meant by a “tax avoidance transaction” and this is defined by subsection 2(a) and then 2(b) carves some transactions back out of the scope of the GAAR.

(2) (a) Subject to paragraph (b), for the purposes of this section a transaction shall be a ‘tax avoidance transaction’ if having regard to the following matters—

(i) the form of that transaction,

(ii) the substance of that transaction,

(iii) the substance of any other transaction or transactions which that transaction may reasonably be regarded as being directly or indirectly related to or connected with, and

(iv) the final outcome of that transaction and any combination of those other transactions which are so related or connected,

Okay, so one can look at the form of the transaction, the substance of the transaction, the substance of connected transactions and the final outcome…  At this stage we’re not looking at the taxpayer’s intention.  But the first thing that worries me is the talk of related or connected transactions.  This suggests that one doesn’t look at the totality but that the legislation can hone in one any one step.  A takeover may be commercial and not a tax avoidance transaction, but if it is a public transaction there could certainly be steps included to secure a particular tax outcome, especially if there is a cross border element to it since Irish tax rules relating to tax exempt takeovers assume that they’re being done under Irish company law.

Niggle one, so let’s continue

and having regard to any one or more of the following matters—

(I) the results of the transaction,

(II) its use as a means of achieving those results,

(III) any other means by which the results or any part of the results could have been achieved, it would be reasonable to consider that—

(A) the transaction gives rise to, or but for this section would give rise to, a tax advantage, and

(B) the transaction was not undertaken or arranged primarily for purposes other than to give rise to a tax advantage.

Let’s stop again.  Again we’re looking at the results of the transaction (but which transaction? To use my above example the cross border public to public or the tax planning step interposed to ensure that it fell within the Irish tax rules and negate difficulties caused by foreign corporate law?), its use of achieving those results “it would be reasonable to consider that”.  A couple of issues.

The first is that “reasonable to consider” is a significantly lower burden of proof than a conclusion.  But the larger issue is who is doing the considering?  Is it the tax adviser structuring the transaction?  The tax director in the group? The tax partner on the audit? A Revenue auditor?  The man on the DART heading to a protest about austerity?  There is scope for considerable confusion and differing of opinion here, especially given the different tax risk profiles of advisers, their clients, and indeed Revenue.  Ultimately a court would have to make the determination but the costs of going to court and delays associated with litigation in Ireland make this a very unattractive proposition.  The current climate vilifies companies seen to engage in tax avoidance such that the negative press alone could force directors to take the most conservative position.

Reminding you again that subsection three says that the taxpayer is not entitled to take the benefit of the tax avoidance transaction, so this issue is one of self-assessment.

But back to the legislation, after para (a) defined a tax avoidance transaction para (b) then contains two kinds of tax avoidance transaction which it carves out of the GAAR

(b) For the purpose of this section, a transaction shall not be a tax avoidance transaction if, having regard to the matters set out in paragraph (a)—

(i) notwithstanding that the purpose or purposes of the transaction could have been achieved by some other transaction which would have given rise to a greater amount of tax being payable by the person, the transaction—

(I) was undertaken or arranged by a person with a view, directly or indirectly, to the realisation of profits in the course of the business activities of a business carried on by the person, and

(II) was not undertaken or arranged primarily to give rise to a tax advantage, or

(ii) the transaction was undertaken or arranged for the purpose of obtaining the benefit of any relief, allowance or other abatement provided by any provision of the Acts and the transaction did not result directly or indirectly in a misuse of the provision or an abuse of the provision having regard to the purposes for which it was provided.”

I must admit to not being able to understand the first carve out in (i) because if we go back into the definition in s811C(2)(a)(III)(B) which defined a tax avoidance transaction it said

(B) the transaction was not undertaken or arranged primarily for purposes other than to give rise to a tax advantage.

So if it was designed primarily for purposes other than to give rise to a tax advantage it was not a tax avoidance transaction to begin with.  If it was undertaken or arranged primarily to give rise to a tax advantage then it is caught by para (a) and can’t possibly escape under para (b)(i)

So then we’re left with s811C(2)(b)(ii) which is the “abuse or misuse provision”.  So using my earlier example of a cross border public to public transaction I would think that any structuring required to ensure that a transaction which holistically fell within a relief did not involve an abuse of that relief because differing legal systems necessitated the interposition of an additional step.

But this position is not clear cut.  If one looks at the O’Flynn decision

74 The idea that any particular scheme can produce a result that the Oireachtas did not intend, is much more easily expressed than applied in practice. The legal intent of the Oireachtas is to be derived from the words used in their context, deploying all the aids to construction which are available, in an attempt to understand what the Oireachtas intended. But in very many cases, the Oireachtas will not have contemplated at all, the elaborate schemes subsequently constructed, which will take as their starting point a faithful compliance with the words of the statute. In some cases it may be that there is a gap that the Oireachtas neglected, or an intended scheme which was not foreseen.  In those cases, the courts are not empowered to disallow a relief or to apply any taxing provision, since to do so would be to exceed the proper function of the courts in the constitutional scheme.

In other cases the provision may be so technical and detailed so that no more broad or general purpose can be detected, or may have its own explicit anti-avoidance provision. In such a case there may be no room for the application of s.86 since it may not be possible to detect a purpose for the provision other than the basic one that the Oireachtas intended that any transaction which met requirements of the section should receive the relief. However, there are some cases of which this is one, where it may be possible to say with some confidence that though there has been compliance with the literal words of the statute, the result is not the sort of relief that the Act intended should result. In such cases, s.86 permits an evaluation of the particular transaction and a consideration as to whether it comes not just within the words, but also within the intended scheme, or is rather, a misuse or abuse of it. The fact that such an evaluation may be difficult and can create some uncertainty, is not a reason to avoid the task. Certainly in tax matters it is difficult to achieve and the desire to provide certainty to those who wish to avoid a taxation regime which applies to others similarly situated to them, is something which ranks low in the objectives which statutory interpretation seeks to achieve. The tax payer could, after all, achieve a high level of certainty, but at the price of paying tax on dividends received.

The confusion inherent in the above statement is that there were no restrictions in the rules on the receipt of tax free dividends out of export sales relief reserves.  The rules simply permitted that profits which were eligible for ESR were tax free, and dividends out of those profits were tax free.  It is easy to see the purpose for exempting the profits in order to make export sales more attractive (before the EU took issue with that tax regime) but it is impossible to fathom the purpose which allowed a dividend out of a listed company which engaged in export sales be tax free in the hands of an Irish taxpayer when a dividend out of a quoted company with domestic sales was not.  There is no direct link between the activity being promoted and the tax free dividend.  The Supreme Court in essence determined that the Oireachtas could not have intended that a construction firm could acquire old reserves and pay a dividend out of them, which falls within what I have artificially created into the first paragraph above, but then determined that in this instance

the result is not the sort of relief that the Act intended should result

Without ever pointing to that intention (an issue raised in the dissenting judgement).

Many Irish tax rules have no overt evidence of an intention, or at least an intention which can be clearly determined for Irish taxpayers to have sufficient certainty to plan.  The participation exemption is so widely drafted that it seeks to exempt many disposals yet before the EU took issue with it over State Aid it wanted to exempt only disposals of foreign subsidiaries.

The Dichotomy Inherent in the Irish Tax System

Many Irish tax provisions are begrudgingly extended to Irish situations for this reason, but the core intention was to make Ireland more attractive to inbound investors.

The “Irish solution to an Irish problem” then is to include in many of the relieving provisions a clause which disapplies the relief if the seeking of the relief was one of the main purposes!

But this is where the recent Revenue e-brief on an “Avoidance Disclosure Facility” is worrying.

In Appendix 1 they list planning which falls into two categories.  The first list are a number of “the transaction was undertaken for commercial reasons and the main purpose or one of the main purposes was not to secure a tax advantage” clauses within relieving sections, while the second list are specific anti-avoidance rules.

The first list is what concerns me, and one particular provision on that list being TCA s291A(7)(c).  This is the provision which allows the amortization and interest associated with the acquisition of specified intangible assets to erode 100% of the profits generated by those intangibles.

The purpose of the legislation is clearly to facilitate those groups with a double Irish structure to transfer their IP onshore into Ireland to protect against BEPS or unilateral action like the UK’s Diverted Profits Tax while maintaining a very competitive tax rate (of potentially 0%).  The legislation dispplies the relief from assets already within the charge to Irish tax unless CGT is paid on the acquisition of those assets, and so is clearly designed to facilitate tax planning by foreign groups transfering their IP into Ireland, and yet it contains a clause in s291A(7)(c) which states that

(c) that is not made wholly and exclusively for bona fide commercial reasons and that was incurred as part of a scheme or arrangement of which the main purpose or one of the main purposes is the avoidance of, or reduction in, liability to tax.

If a tax advantage is required to take into account a tax advantage outside Ireland (not the case presently but with the Duty to Co-Operate under EU law watch this space) then almost every transaction giving rise to the relief will be for the purposes of reducing a liability to tax.  Indeed if you’re collapsing your Double Irish into your Irish resident by selling the IP in then you may be seeking to reduce your liability to Irish tax.

Even assuming that your subjective intention of that step was not a tax avoidance motive, Revenue (or you, or your auditor, or an acquirer in diligence, or the man on the street) could then reassess the entire transaction, or any subset of transactions based on the GAAR which is only invoked if a Specific Anti Avoidance Rule (SAAR) hasn’t already applied to disallow the relief claimed.

Yet the IDA and other Governmental Departments are actively promoting this, based one assumes on the historic assumption that Revenue know that anti-avoidance rules are really only supposed to apply to “our own taxpayers especially HNWs” and not to, predominantly US, “inbound investors”.  Many of the provisions on the list in Annex one apply equally to inbound investors, and those provisions contain anti-avoidance clauses which were never applied, because to apply them in an inbound context could render the reliefs almost impossible to claim.

But with the D-G Competition looking over our shoulder Revenue can no longer simply refuse to apply the law to one category of taxpayers.  Yet with these clauses appearing in so many relieving provisions how can one possibly be certain that there is no abuse or misuse (indeed how can one be certain that the relief is available under first principals even without the GAAR applying)?

Consequences of the GAAR applying

If the GAAR applies and the transaction was not notified to Revenue under a protective notification then tax geared penalties of up to 30% can apply along with a reasonably penal rate of interest at any time.

If, rather than a GAAR applying, a SAAR applies then Revenue could argue that the claiming of a relief which was not available resulted in a materially incorrect return being filed which again results in no time limits being applicable.

Ireland, and to an extent, Irish advisers seem happy to continue as always was.  We sell the Department of Finance version of Ireland as a happy tax haven, we don’t mention the anti-avoidance rules and we assume that Revenue simply won’t apply them.  But this assumption seems shortsighted in the current climate meaning that the dichotomy must finally stop.

If Ireland really wants to actively engage in tax competition we must accept that our own taxpayers should be eligible for the same reliefs as inbound investors and make this obvious by removing the anti-avoidance rules.  Otherwise we must determine to follow a different path which doesn’t champion tax avoidance as a victimless crime and applies anti-avoidance legislation across the board.

But is unfathomable that a US MNC could be convinced to transfer their IP into Ireland to avail of a relief which either the European Commission via a State Aid action, or the Revenue Commissioners via the GAAR or SAAR could withdraw at any time.  Indeed a relief which the taxpayer may not even be entitled to claim on their return.

Ireland, a nation where we talk about tax, we talk about tax competition, but we don’t talk about the fact that in many instances we leave taxpayers living with unacceptable levels of tax risk because we don’t want our “own taxpayers” relying on the rules we bring in for “other people’s taxpayers”.

A Brief History of Anti Avoidance in Ireland

A Brief History of General Anti Avoidance in Ireland

This blog is intentionally general with no case references or legislative citations to give a history of anti avoidance in Ireland.  Additional Blog posts may be more technical in nature but this one was requested by a non tax person and may be interesting background reading for non Irish tax people trying to understand where Ireland is now in terms of taxpayer certainty.

“It is a truth universally acknowledged, that a single man in possession of a good fortune, must be in want of a wife.”

It must be almost as universally acknowledged that in times of economic contraction income tax rates tend to increase and the incentive to engage in tax planning increases correspondingly.  In such times there tends to be a greater level of sympathy for tax authorities from the Courts.  This is the situation which arose in the UK in the late ’70s and ’80s and resulted in what was understood at the time to be a judicial GAAR referred to as the “Ramsay doctrine”.

We now understand that “doctrine” to be no more than a more nuanced approach to statutory interpretation.

In 1989 in the case of McGrath v McDermott (Inspector of Taxes) the Revenue Commissioners failed to convince the Irish Supreme Court to follow the UK jurisprudence.  The Supreme Court felt that, as understood at the time, a judicial GAAR required judicial legislation in the sphere of taxation which is precluded under the Irish constitution.

Unsurprisingly in the Finance Act 1989 a GAAR was introduced into Irish law.  The GAAR required that a nominated officer (of which there has generally been one) make a determination that the GAAR applied to the transaction in order to cancel the tax advantage sought.

But the wheels of justice move slowly in Ireland.  At the end of 1991 and beginning of 1992 the O’Flynn Construction group engaged in a series of transactions designed to allow a tax free dividend to its shareholders via the acquisition of exempt “export sales relief” reserves from the Dairygold group.  In August 1997 Revenue informed the taxpayer that they were applying the GAAR to the transaction.  The taxpayer appealed to the Appeal Commissioners who upheld the taxpayers’ objections.

In 2006 Revenue’s appeal to the High Court was determined in their favour, and in December 2011 the Supreme Court split three two in favour of Revenue.

To date this has been the only substantive litigation in a court of record on the GAAR.

However, flushed with their High Court victory in 2006, that year’s Finance Act saw the introduction of “protective notifications”.  If a taxpayer or their adviser notified Revenue that a transaction potentially fell within the GAAR then Revenue had a reduced two year time limit in which to apply the GAAR.  If a transaction was not notified, and the GAAR either applied, or it was not unreasonable for Revenue to allege that the GAAR applied, a penalty of 20% of the tax advantage sought applied.  Introducing a tax geared penalty for tax determined by the courts not to be due was a whole new departure!

We know that from the debates on the Finance Bill 2014 since its introduction in 2006 Revenue have received 518 protective notifications in total.  75 of those cases are now closed.  But more interestingly, 427 of the open notifications relate to one tax scheme with 19 notifications in relation to that scheme being made in 2010, 40 in 2011, 129 in 2012, 136 in 2013 and 104 in 2014.  So it would appear that one scheme promoter is taking the PN rules seriously while for the most part the rest of the profession are ignoring the rule, generally on the basis that they expect the Courts to strike it down as an unjust attack on property rights if Revenue ever try to rely on it.

There have been two other procedural skirmishes in relation to the GAAR worth mentioning.  In Droog in 2011 the High Court held that the general times limits in the Taxes Acts apply to a challenge under the GAAR when Revenue had argued that the GAAR was not subject to any time limits.  Unsurprisingly while Revenue are appealing this decision they acted in seeking an amendment to the GAAR expressly stating that the normal time limit provisions are inapplicable to a transaction to which the GAAR applied.  Since Revenue believe that Droog was incorrectly decided the change in 2012 applies retroactively (if Droog was correctly decided).

The other skirmish involved a failed attempt by a taxpayer to judicially review Revenue’s decision to determine that the GAAR applied, and the taxpayer Ronan McNamee failed in this challenge in 2012.

However, since its introduction there has been much consternation as to whether the GAAR is in fact constitutional on two grounds.

The first is whether the GAAR is allowing Revenue to legislate which is reserved for the Oireachtas under the constitution.  In McGrath the Supreme Court held that to follow the English Courts in purposefully interpreting taxing statutes would involve judicial legislation which they are precluded from engaging in under the constitution.  If the Ramsay doctrine (as it was understood at the time) involved judicial legislation then surely a statutory equivalent allowed for Revenue legislation?

The second is whether the GAAR constitutes an unjust attack on property rights and to this end the point will be determined on its proportionality.

Over 25 years since its introduction the constitutional challenge to the GAAR is expected to materialise in the High Court in 2015.

But what about VAT?

During the property boom in Ireland VAT on property was a significant issue and an area of aggressive tax planning.  When Revenue were aware that HMRC in the UK were seeking to deny a tax advantage based on the doctrine of abuse of law they decided to follow suit.  After the Advocat General’s decision in Halifax but before the decision of the Court of Justice the Appeals Commissioners heard the case of Cussens v Brosnan and determined it in Revenue’s favour.  The taxpayer sought to have the case re-heard at the circuit court where they lost.  On appeal to the High Court in 2008 the following was determined.

  1. A lease which was a critical feature of the planning at issue was void having been made without the consent of the mortgagor as required by Irish law.  The planning thus suffered from an implementation failure.
  2. If the planning had worked then Halifax would have applied to negate the tax advantage.
  3. No evidence was offered on the point that a 10% interest rate on underpaid VAT is penal and thus precluded by para 93 of the Halifax decision.  The taxpayer argued this point but absent expert testimony the High Court refused to determine it.  The taxpayer can not have argued the point well since Ireland imposes a higher interest rate on underpaid fiduciary taxes than other taxes precisely to penalise their collection without a corresponding remittance!

It is believed that the Supreme Court has heard the appeal in Cussens but the judgement is still pending.  What will be interesting to see is whether the Supreme Court upholds the validity issue and whether Revenue can then seek penalties based on the return being submitted carelessly.  Penalties cannot be invoked under Halifax, but they can if the planning fails.  An additional point to note is that in any case where Revenue challenge tax planning as being based on an implementation failure they can allege that the return was materially incorrect and thus normal tax time limits for Revenue investigations do not apply which is a point forgotten by many.  In practice Revenue are unlikely to take it other than with a taxpayer who they view as being high risk given their limited resources.

Budget 2015 Changes

In the Finance Act 2014 Revenue changed the GAAR.  The removed the requirement for a nominated officer to make a determination that the transaction was a tax avoidance transaction.  In essence the GAAR is now self-assessment.  Any officer, at any time, can form the view that the GAAR applies but this calls into question whether tax payers can now expect to benefit from any transaction to which the GAAR could apply.

The rules on protective notifications were also changed, such that a protective notification no longer gives the taxpayer certainty after two years, but only after the normal fiveish years.  There are now a range of penalties reduced to 0% where the taxpayer notifies the tax authority in advance or voluntarily informs the tax authority after the event but before an investigation is opened.  The penalty is extended to a number of specific anti avoidance provisions in addition to the GAAR, and the top rate is extended from 20% to 30% but restricted to cases where the tax is determined to be due.

The Disclosure Facility

A more subtle change was introduced to create a “disclosure facility” operating from January 2015 through to 30th of June of this year.  Where a taxpayer has engaged in an avoidance scheme and settles with Revenue before the 30th of June a discount of 20% on the interest liability will apply and Revenue will not seek penalties.

At first glance this does not appear to be much of an opportunity but it must be considered in context.

If Revenue decide to litigate a case that litigation can take any where up to 20 years costing potentially hundreds of thousands in legal fees once the case hits the Superior Courts.  The cost of litigation is no disincentive to Revenue.

In addition, appeals to the Appeals Commissioners (where the majority of tax appeals end) are currently held in Camera in Ireland.  If the taxpayer loses they can apply to have the case reheard at the circuit court (if Revenue lose they must appeal to the High Court directly).  While Circuit Court proceedings are not in camera, they are rarely reported in the mainstream press, especially is the case involves something as dry as a tax assessment.

Legislation is about to be introduced to overhaul the tax appeals process in Ireland and the new legislation envisages the removal of both the in camera rule, but also the ability to have the case reheard at the circuit court.

Against this back drop the taxpayer must now be prepared to have their tax affairs in the public domain from the time they appeal, and be prepared to incur High Court costs if they are dissatisfied with the decision of the Appeals Commissioners.

This is the stick behind the current “disclosure opportunity”, and from the statistics offered in the debates on the changes the “leveraged financial trading scheme” to which 427 of the protective notification applied the total tax advantage sought was €30m meaning that the average taxpayer in that scheme sought to save a little more than €70k in tax.  That amount surely cannot warrant significant litigation risk given the absence of group litigation in Ireland and thus Revenue’s ability to force each taxpayer to fight their case.  Since this is a scheme it is likely that the promoter is representing all of the taxpayers and one wonders if they should, at this stage, be taking independent tax advice to determine whether they should be taking this opportunity to settle.

By contrast in O’Flynn the amount was close to £300,000 back in 1991, in McNamee the amount was €6m but the scheme participants in total sought to save €110m, and in Cussens the VAT at stake is €3m but as a test case it is likely that significant additional VAT could rest on the outcome.

The disclosure facility is not limited to schemes to which the GAAR could apply, but also to schemes which may fall foul of a number of specific and targeted anti-avoidance rules.  It remains to be seen whether many tax payers avail of it.

Other Budgetary Changes in 2015

In Budget 2015 Ireland significantly reformed the Mandatory Reporting rules.  These rules allow for penalties to be applied to tax advisers and other promoters (and their clients) who sell tax planning with certain characteristics without informing Revenue of the detail of the planning.

While the original rules were introduced in the Finance Act 2010 and loosely modelled on the UK rules anecdotal evidence suggests that there were very few disclosures made relative to the UK.  This years changes significantly tighten the rules and bring planning involving discretionary trusts into the rules.

Additionally this year rules were introduced (again loosely modelled on recent UK changes) allowing Revenue issue Payment Notices to other scheme users once they have defeated one scheme user at the Appeals Commissioners.  This will require scheme users to pay the tax which can be recovered with interest only in the event that the case is finally resolved in the taxpayers’ favour.

One final point to note is that the major outrage expressed by the profession in relation to all of the changes in Budget 2015 is that the profession were given no advance notice or opportunity to consult.  This is a marked departure by Revenue evidencing the level of their frustration with the profession.

What is clear is that there is a dichotomy between the tax haven Ireland which the world perceives and the Department of Finance wish to project, and the world inhabited by Irish advisers and Revenue.  While the GAAR was generally considered to be a risk for HNW individuals it is broader in its application than that.

With Revenue under pressure to collect taxes and the European Commission looking over their shoulder to ensure that they do their job fairly and without providing selective treatment to US MNCs, it is less uncommon for GAAR notices to be issued to large corporates than it once was.

While one can see why Revenue have felt the need to seek the legislative powers which they now have, those powers now mean that there is little certainty in the world of taxation in Ireland.  Unfortunately many tax advisers and their clients still don’t recognise this.

I’ll close this post with a worrying quote from the majority judgement of the Supreme Court in O’Flynn where O’Donnell J stated

“Certainly in tax matters it is difficult to achieve and the desire to provide certainty to those who wish to avoid a taxation regime which applies to others similarly situated to them, is something which ranks low in the objectives which statutory interpretation seeks to achieve. The tax payer could, after all, achieve a high level of certainty, but at the price of paying tax on dividends received.”