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”.