With governments seeking to raise additional tax revenues to plug budget deficits, tax authorities are seeking to introduce and apply general anti-avoidance (GAA) legislation. Robert Henson and David Burke of Mason Hayes & Curran explain why a recent Irish Supreme Court decision has implications for multinational corporates doing business in and through Ireland.
Ireland's GAA legislation has been in force for more than 20 years, however, it has remained largely untested until December 2011 when the majority of Ireland's highest court ruled (3:2) in favour of Revenue in the case of Revenue v O'Flynn Construction Company Limited (the OFCL case).
The judgments delivered by the majority (Justice O'Donnell) and the minority (Justice McKechnie) in the Supreme Court are landmark. Central to the OFCL case was whether a series of about 40 complicated steps over about 50 days could be regarded as a "misuse or abuse of the provision [Export Sales Relief] having regard to the purposes for which it [Export Sales Relief] was provided".
Background to Ireland's GAA legislation
In the OFCL case, Justice O'Donnell acknowledged that Ireland's introduction of GAA legislation through section 86 of Finance Act 1989 (now contained in section 811 Taxes Consolidation Act (TCA) 1997) (section 86) followed the decision by the Irish Supreme Court in McGrath v McDermott.
In McGrath, the Irish courts were invited by Revenue to adopt a similar approach to the English courts in relation to Ramsay and Furniss v Dawson in respect of avoidance. The Irish Supreme Court declined to do so. In the Supreme Court, Chief Justice Finlay noted;
"The function of the Courts in interpreting a statute of the Oireachtas [Irish Parliament] is, however, strictly confined to ascertaining the true meaning of each statutory provision, resorting in cases of doubt or ambiguity to a consideration of the purpose and intention of the legislature to be inferred from other provisions of the statute involved, or even of the other statutes expressed to be construed with it. The courts have not got a function to add to or delete from express statutory provisions so as to achieve objectives which to the court appear desirable..."
Irish GAA legislation was introduced through section 86 of Finance Act (FA) 1989 as an attempt by the Irish authorities to tackle complex transactions which had little or no commercial purpose and whose primary purpose was the avoidance of tax. Subject to certain provisions, the GAA legislation introduced by FA 1989 bore close resemblance to GAA legislation introduced in other jurisdictions namely, Canada and Australia. The main charging provision in section 86(2) FA1989 provided that a transaction would be a tax avoidance transaction where Revenue, having regard to any one or more of the following;
- The results of the transaction;
- Its use as a means of achieving those results; and
- Any other means by which the results or any part of the results could have been achieved.
And from the opinion that: it gives rise to, or, but for the section, would give rise to a tax advantage; and the transaction was under¬taken or arranged primarily to give rise to a tax advantage.
Importantly, the GAA legislation provides that Revenue could not regard the transaction as a tax avoidance transaction if Revenuewere satisfied that, having regard to the form, substance of the transaction and any other connected or related transaction and the final outcome and result of that transaction (including related or connected transactions);
- The transaction was undertaken or arranged with a view to the realisation of profits (directly or indirectly) in the course of the business carried on by the person; and not undertaken or primarily arranged to give rise to a tax advantage (notwithstanding that the purpose(s) of the transaction could have been achieved by some other transaction which would have yielded a greater amount of tax being payable); or
- The transaction was undertaken or arranged for the purpose of obtaining the benefit of any relief, allowance or other abatement provided by tax provision which would not result directly or indirectly in a misuse or an abuse of the provision having regarded to the purposes for which it [the relief, allowance or abatement] was provided.
The facts to be decided in the OFCL case
Turning to the OFCL case, the main issue for the Irish Supreme Court to consider was whether the transaction in question was a misuse or abuse of the tax relieving measures afforded by the Exports Sales Relief (ESR) provisions having regard to the purpose for which the ESR provisions were provided.
By way of background, the ESR provisions allowed profits earned by qualifying exporting companies to be exempt from corporation tax and, furthermore, dividends declared on such profits to be exempt from income tax in the hands of the shareholders.
At its simplest, the OFCL case was an attempt to re-categorise the profits of a construction company as being those of a qualifying exporting company with the qualifying ESR reserves effectively, through a series of around 40 steps, being sold to the construction company, the ultimate recipients of which were the individual shareholders of OFCL.
Salient conclusions reached in judgments
The majority and minority judgments both concluded that the transaction was a tax avoidance transaction within the meaning of section 86, however the judgments differed on whether the transaction was a "misuse or abuse of the ESR provisions".
In his minority judgement, Justice McKechnie noted that "it is necessary to consider the purposes for which such [ESR] provisions were enacted... and it therefore becomes necessary to refer to the history of such [ESR] relief". In this regard, Justice McKechnie considered whether the Oireachtas had deemed it necessary, to serve the purpose of ESR relief as properly intended, to prescribe conditions or impose restrictions on the shareholders who could benefit from tax-free dividends on ESR sourced reserves. To this end, Justice McKechnie concluded that, despite a number of amendments being made to the ESR provisions over its 35-year tenure, no attempt had been made to regulate the tax status of such dividends to ultimate shareholder recipients such as the temporal relationship between profits earned, distributed and acquisition of shareholding was cited as an example of a restriction which was never implemented. Accordingly, Justice McKechnie was at pains to move away from the approach previously adopted in the McGrath case and held that there was no misuse or abuse of the ESR provisions.
Justice O'Donnell reached a very different conclusion in considering whether the provisions related to the misuse or abuse of the ESR provisions. The learned judge noted that the statutory phrase "misuse...or an abuse of the provision having regard to the purpose for which it was provided' was to be read as one comprehensive indication and "the object of the subsection is to ensure that reliefs and benefits are only available to transactions which can be regarded as proper and intended use of the provision..... what is important is that full effect is given to the intention of the section that only appropriate uses of the provision get the benefit of the tax relief'.
Furthermore, Justice O'Donnell held that, in considering what constitutes a misuse or abuse of the scheme, Revenue are to have regard to those indicators which are identified in section 86 as going towards ascertaining the existence of a tax avoidance transaction as in: the form; substance; whether it was undertaken for the realisation of a profit in the course of business; and whether it was undertaken primarily for purposes other than to give rise to a tax advantage.
Justice O'Donnell acknowledged that specific anti-avoidance takes precedence over general anti-avoidance where he noted that "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 section 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 meets the requirements of the section should receive the relief'.
However, Justice O'Donnell noted that there are some cases, of which the OFCL was 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 was not the sort of relief that the legislature intended should result. In such cases, section 86 permitted an evaluation of the transaction and 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.
Both the majority and minority judgments noted that while the decisions of the Canadian Superior Courts are often of considerable assistance, caution must be exercised in any direct application of Canadian law to cases presented to the Irish courts (as there are significant differences between the provisions of Canadian and Irish GAA legislation and approaches to the interpretation of statutes).
Justice O'Donnell helpfully also concluded that transactions entered into in the normal course of business and not primarily directed to achieving a tax advantage do not fall with section 86.
Implications for multinationals
With international tax directors increasingly under pressure to reduce effective tax rates, tax is often seen as another cost of doing business. The Irish tax code contains many provisions that provide relief from tax for multinational corporations, especially those with a parent company resident in the EEA or a state that has a double tax treaty with Ireland. For example, Irish resident companies with say, a foreign treaty resident parent, may migrate residence without an exit charge. Dividend withholding tax can be avoided for certain Irish companies ultimately owned by a treaty resident parent. Similarly, capital gains participation privilege exists for certain EU or treaty-favoured subsidiaries of an Irish holding company.
After the OFCL case, taxpayers need to be mindful of Irish GAA legislation and whether their tax avoidance/mitigation strategy could be subject to tax authority challenge. From the OFCL Supreme Court judgment, it can be deduced that:
- Taxpayers engaged in tax planning as part of bona fide commercial transactions should generally not fall within the remit of the GAA legislation;
- Group reorganisations conducted purely for Irish tax avoidance purposes with little or no commercial rationale are likely to come under the microscope of Revenue and be looked upon unfavourably;
- Where there has been a misuse or abuse of a tax provision, Irish courts will now adopt a more purposive approach rather than a literal reading of a tax provision as in the commerciality of each step in a transaction may now be considered in determining whether, as a whole, a transaction is a tax avoidance transaction;
- Where multinational companies use Ireland as part of their cross-border tax planning strategy, the greater the company builds its tax plan around substantive operations in Ireland and availing of reliefs introduced to attract and retain foreign direct investment, the less likely Revenue can assert that there has been a misuse or abuse of a provision; and
- Careful drafting of documentation continues to be imperative to demonstrate that the primary purpose of the transaction was not the misuse or abuse of a relevant provision.
For multinationals structuring business in or through Ireland, the GAA/section 811 implications need to be considered and independently opined upon.
This is article was previously published by International Tax Review. © Copyright International Tax Review.
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