The Tax Disputes and Litigation Review: Ireland
The Irish tax regime provides opportunities to avoid litigation through various means, including by making voluntary qualifying disclosures, and these ways of rectifying tax issues reduce the incidence of tax litigation. However, tax disputes are common and are likely to increase in the future as the Irish Revenue Commissioners (Revenue) now has access to increased information on taxpayers' international activities and has allocated additional resources to review compliance in areas such as transfer pricing.
The Irish tax appeals system has been significantly reformed and a new tax appeals regime came into operation on 21 March 2016. Substantial changes were introduced, and a new independent Tax Appeals Commission (TAC) was established. There were a number of changes to the tax appeals process; most notably, the opportunity to appeal a decision of the Appeal Commissioners (which the TAC replaced) to the circuit court for a rehearing was removed and appeal hearings are now, by default, held in public. However, in certain specified circumstances or at the appellant's request, the TAC may hold the hearing or part of the hearing in private. A further change is that the TAC is obliged to publish appeal determinations no later than 90 days after notifying the parties of the determination, and there are currently more than 80 determinations available to review on the TAC website. A case management conference procedure was also introduced in a bid to expedite cases. This is where a commissioner directs that a meeting be held to help progress a case.
Where there is a dispute on point of law only (but not on fact) on a TAC's determination, a party can request the TAC to state and sign a case for the opinion of the High Court. The case stated is prepared by the TAC. Further recourse can be made from the High Court to the Court of Appeal. Only in certain circumstances may a case be taken to the Irish Supreme Court. EU matters can be referred to the Court of Justice of the European Union, or indeed an appeal can be made there as part of the litigation process. Constitutional challenges may only be made after other means of litigation have been exhausted.
Litigating through the TAC and courts requires the hiring of specialist tax litigation counsel. This process is typically time-consuming and lengthy, particularly given that there were almost 4,000 outstanding appeals at one point in 2018 and only three Commissioners to hear the appeals. The number of appeals made in 2017 increased to 1,751, which is almost double the number of appeals made in 2016. In 2018 there was a further increase of the number of appeals made to nearly 2,000. The TAC increased recruitment of administrative staff and case managers in 2017, which it is hoped will help to relieve the backlog.
Costs can be substantial, particularly if the case proceeds to the courts system. However, one of the aims of the TAC was to reduce the costs of tax disputes. Unlike the previous tax appeal system, appeals to the TAC can be dealt with without the requirement for a hearing,2 which can have a significant impact on the cost of an appeal. Furthermore, the Finance Act 2018 provides for some amendments to the tax appeals procedure, including removing the requirement to provide certain detailed information at the very early stages of an appeal and clarifying the authority given to the TAC to determine a new appeal on the basis of a previous determination involving a similar or related matter without the need to hold a new hearing which could result in the reductions of costs of tax disputes.
The Revenue has had some success in litigating aggressive domestic tax avoidance under the Irish general anti-avoidance provision previously contained in Section 811 of the Taxes Consolidation Act 1997 (TCA 1997), and more recently has been focusing on specific anti-tax avoidance provisions. However, in the Supreme Court judgment in Revenue Commissioners v. Droog,3 the Supreme Court dismissed the Revenue's appeal of a High Court decision that the opinion was out of time. The case concerned whether a Section 811 opinion was 'out of time' in light of the four-year time limit set out in the TCA 1997, which is the Irish tax code. It should be noted that Section 811 of the TCA 1997 applies to transactions commenced on or before 23 October 2014. Amended general anti-avoidance rules set out in Section 811C of the TCA 1997 apply to transactions commenced after 23 October 2014.
i Initiating tax disputes
Tax disputes could arise from civil law matters or criminal matters. The vast majority of tax disputes relate to civil law matters.
Tax disputes usually start by way of an appeal by the taxpayer against a notice of assessment raised by the Revenue. A welcome change introduced by the new tax appeals process is that a taxpayer who wishes to make an appeal against an assessment raised by the Revenue now does so in writing directly to the TAC and not in the first instance to the Revenue. However, taxpayers are entitled to avail of an internal review facility with the Revenue prior to pursuing an appeal before the TAC. If the taxpayer is not satisfied with the outcome of the internal review, that taxpayer may pursue an appeal to the TAC.
Tax disputes may also arise where a settlement cannot be reached during the course of a Revenue audit. If, during the course of a Revenue audit, the Revenue and the taxpayer cannot reach a settlement and there is a technical dispute, an application can be made to have this referred to the TAC. In a Revenue audit situation, an application for an internal or external review can also be made by the taxpayer if the Revenue issues a notice of opinion in relation to a penalty being imposed and the taxpayer disagrees with the opinion.
In the case of an appeal against a notice of assessment, the taxpayer must make written notice of the appeal within 30 days of the date of the notice of assessment.
ii Time limits
In situations where a taxpayer does not file a return (or makes one with which an inspector of taxes is not satisfied), the inspector may make an assessment that in his or her judgement ought to be made. As a general rule, an assessment in respect of a chargeable period cannot be made more than four years after the end of the accounting period in which the tax return in respect of such chargeable period was filed. In respect of the chargeable period prior to 1 January 2013, no time limit applies where the Revenue has reasonable grounds to believe that a tax return made is insufficient owing to fraud or neglect or in cases of tax avoidance transactions. The current law is that no time limit applies in respect of chargeable periods from 1 January 2013, where:
- a taxpayer fails to file a return for a chargeable period;
- the Revenue is not satisfied with the sufficiency of the return;
- the Revenue has reasonable grounds to believe any form of neglect (as defined) or fraud has been committed by or on behalf of the taxpayer; or
- the Revenue is of the opinion that the taxpayer has been involved in a tax avoidance transaction within the meaning of Section 811 or Section 811C of the TCA 1997.
There is no statutory requirement on a taxpayer to disclose any particular information in the course of an appeal to the TAC. However, the TAC can require that the taxpayer and the Revenue submit a written 'statement of case', which would typically contain an outline of the relevant facts, a list and copies of the relevant documents that will be relied upon, details of any witnesses, details of statutory provisions being relied upon and any case law being relied upon. The burden of proof is on the taxpayer (except in cases where the Revenue attempts to raise an assessment outside the statutory time limit of four years). Therefore, it is in the interest of the taxpayer to provide as much evidence as possible in support of the appeal. In addition, the TCA 1997 provides the Revenue with significant powers to request the production of information, books and records from a taxpayer. The Revenue also has the power to call for the production of information in relation to a taxpayer's liability from third parties such as financial institutions.
iv Revenue rulings
There is no practice for the Revenue to provide binding tax rulings. While it is possible to apply to the Revenue for guidance or opinion in relation to certain matters, such opinions are not legally binding. Queries of a technical nature are dealt with by the Revenue's technical service to provide clarity for taxpayers on complex technical issues. Certain Revenue opinions are subject to the exchange of information requirements in respect of tax rulings set out in the Council Directive (EU) 2015/2376 (the EU Directive) and the OECD framework. The EU Directive was implemented in Ireland by the Administrative Cooperation in the Field of Taxation Regulations 2016. It is not confined to intra-EU situations, applies to relevant opinions issued on or after 1 January 2017, and also has a look-back measure whereby information in relation to opinions issued, amended or reviewed since 2014 (regardless of their period of validity), and rulings issued in 2012 and 2013 (that were still valid on 1 January 2014), were to be exchanged. The OECD framework is also in effect, and applies to certain opinions issued on or after 1 April 2016. Similar to the EU Directive, there is a look-back provision whereby relevant opinions issued or modified in the tax years 2010 to 2013 (and in effect on 1 January 2014) and all relevant opinions issued or modified between 1 January 2014 and 31 March 2016 were to be exchanged. Unlike the EU Directive, under the OECD framework relevant opinions must be exchanged only with certain countries.
v Avoiding disputes
There are a number of ways in which a taxpayer can reduce the risk of a tax dispute. Ireland's tax regime is one of self-assessment but there are mechanisms for the taxpayer to rectify errors identified after the tax returns are filed. A 'self-correction' facility permits taxpayers to regularise their tax affairs without incurring a penalty where they detect certain minor errors. This facility has limited application but the voluntary 'qualifying disclosure' regime is more widely available and allows a taxpayer to make a 'prompted qualifying disclosure' or an 'unprompted qualifying disclosure'. The disclosure must be made in writing and be accompanied by payment of tax and interest, but not penalties. To be a 'qualifying' disclosure, the taxpayer must provide complete information and full particulars of all matters giving rise to a tax liability under each tax head. By making a qualifying disclosure in relation to matters giving rise to a tax liability, a taxpayer can avoid prosecution and publication on the periodic list of tax defaulters. A further benefit of making a qualifying disclosure is that the penalties may be mitigated. The level of penalty depends on whether the disclosure was 'unprompted' or 'prompted' (e.g., after notification of a Revenue audit), the category of default (e.g., deliberate behaviour or carelessness) and whether the taxpayer cooperates with the Revenue. There is also a separate disclosure regime for Ireland's general anti-avoidance provision, which in practice has been used only in very isolated and rare occasions.
vi Freedom of information requests
The Freedom of Information Act can be a useful tool for taxpayers as it allows individuals to request access to records, amendments of records or reasons for a decision of a public body, including the Revenue, in respect of information created after 21 April 1998 subject to certain exemptions.
The courts and tribunals
i The courts
An appeal of a notice of assessment is determined by the TAC. The right to have an appeal reheard by a circuit court judge has been abolished.
Either party may declare its dissatisfaction with the determination as being 'erroneous in point of law', and may within 21 days of the determination of the TAC require the TAC, by notice in writing, to state a case for the opinion of the High Court. The decision of the High Court can be appealed to the Court of Appeal. A decision of the Court of Appeal may only be appealed to the Supreme Court where the Supreme Court is satisfied that the decision involves a matter of general public importance or that the appeal is necessary in the interests of justice. A direct appeal from the High Court to the Supreme Court is only possible where the Supreme Court is satisfied that there are exceptional circumstances warranting an appeal to it. A precondition to the Supreme Court being so satisfied is that the decision involves a matter of general public importance or that the appeal is necessary in the interests of justice.
In an audit situation, where there is no agreement on the liability to a penalty or where the agreed penalty is not paid, the penalty will be determined by a relevant court on the request of the Revenue. The relevant court will be the district court, the circuit court or the high court, depending upon the level of penalty in question. The jurisdictional limits of each court as and from 3 February 2014 are as follows:
- district court: amounts up to €15,000;
- circuit court: amounts up to €75,000; and
- high court: amounts in excess of €75,000.
Tax disputes arising from criminal matters commence in the district court, which could then send the case to a higher court depending on a number of factors. A conviction or a sentence delivered by the district court can be appealed to the Circuit Criminal Court.
ii Judicial review
Where a person claims that the Revenue's procedures are unjust and contravene natural justice, or disagrees with a tax or duty statute (e.g., there is no disagreement with the interpretation of the statute, but rather with the statute itself), that person may seek, in the High Court, a judicial review of the particular infringement. There is a strict time limit to seek a judicial review.
iii Non-court procedures
A taxpayer can use the Revenue's complaint and review procedure to review Revenue decisions. The first procedural step is for the taxpayer to make a formal complaint to its local tax office. If the complaint cannot be resolved, or if the taxpayer is unhappy with the response, it can request a local review, which is normally carried out by the manager of the local tax office, although the taxpayer can request to have the local review carried out by a manager in the regional or divisional office. Where a taxpayer is dissatisfied with the local review, a request can be made to have the case reviewed by an independent internal or external reviewer, who will make a final decision. A request for an internal or external review should be submitted within 30 working days of the date of the local review decision. Adjudication on points of law is generally a matter for the TAC and the courts, and a reviewer will only intervene where it is satisfied that the Revenue opinion is clearly incorrect. Disputes with regard to civil penalties applicable to audit and investigation matters, enforcement proceedings and settlements involving publication will not be dealt with under the complaint and review procedure.
A taxpayer can also submit a complaint to the Office of the Ombudsman, which examines complaints about the administrative actions of government departments and offices, including the Office of the Revenue Commissioners.
Penalties and remedies
Various provisions in Irish tax legislation impose different levels of fixed penalties depending on the tax default. Fixed penalties typically arise where a taxpayer fails to comply with provisions of the TCA 1997 or any other applicable tax legislation but a liability to tax may not necessarily arise (e.g., failure to file particular returns).
Tax-geared penalties also apply in situations where the tax default gives rise to a tax liability. The tax-geared penalty varies in accordance with the category of tax default, whether the taxpayer made a qualifying disclosure (prompted or unprompted), and whether the taxpayer cooperated with the Revenue. The highest penalty is 100 per cent of the underpaid tax, and this arises in cases of deliberate default on the part of the taxpayer where there was no qualifying disclosure and the taxpayer did not cooperate with the Revenue. As set out in Section II, the disclosure regime provides for the mitigation of penalties where a qualifying disclosure is made to the Revenue. The level of mitigation is reduced for a second or subsequent qualifying disclosure.
Criminal penalties may arise where a person commits a 'revenue offence'. On summary conviction, a person may be liable to a penalty of €5,000 or a term of imprisonment of up to 12 months, or both. On conviction on indictment, a person may be liable to a fine of €126,970 or a term of imprisonment of up to five years, or both.
Where an offence is committed by a body corporate, any person who was a director, manager, secretary or other officer, or a member of the committee of management or other controlling authority of the body at the time of the offence, can in certain circumstances be deemed to be personally guilty of the offence and proceeded against accordingly. This can happen where the offence was committed with the consent or connivance of the person concerned, or where the offence is attributable to any recklessness on the part of the person.
The Irish Companies Act 2014 came into effect on 1 June 2015. This puts a requirement on directors of all public limited companies and large private limited companies with a balance sheet total of greater that €12.5 million and a turnover of greater than €25 million to include an annual compliance statement on a company's Irish tax affairs. This statement should include a confirmation by the directors that the company has in place appropriate structures or arrangements that are, in the opinion of the directors, designed to secure material compliance with its relevant obligations under company and tax law. Failure to comply with this statement could attract penalties or imprisonment.
The Revenue has indicated in its Code of Practice that the following tax offences are most likely to be prosecuted:
- deliberate omissions from tax returns;
- false claims for repayment;
- use of forged or falsified documents;
- facilitating fraudulent evasion of tax;
- systematic schemes to evade tax;
- use of offshore bank accounts to evade tax;
- insidious schemes of tax evasion; and
- failure to remit fiduciary taxes (as distinct from minor delays in such remittance).
A hard line has been taken by the courts in relation to the prosecution of tax offences in recent years. Prosecutions have resulted in a number of high-profile convictions and the imposition of terms of imprisonment, heavy fines, or both.
The rate of interest on a late payment of tax is currently 0.0219 per cent or 0.0274 per cent (depending on the tax) per day on the unpaid tax.
i Recovering overpaid tax
Overpaid tax should be refunded on a valid claim being made by a taxpayer. Such a claim will usually be made automatically on the filing of the appropriate tax return evidencing the actual tax liability of the taxpayer compared with the tax paid. As a general rule, a claim for a repayment of tax must be made within four years of the end of the chargeable period to which the claim relates.
Where the repayment due arises from a mistaken interpretation by the Revenue in the application of the law, interest will be paid from the end of the chargeable period or, if later, when the tax was paid, until the repayment is made. Interest will not apply, however, for any period where the repayment is withheld as a result of tax returns not being filed.
In the case of all other repayments, interest at the rate of 0.011 per cent per day or part of a day will be paid from 93 days after a claim becomes a valid claim until the repayment is made. Interest will not apply, however, for any period where the repayment is withheld as a result of tax returns not being filed.
Prior to making a refund of any overpaid tax, the Revenue is permitted to offset an overpayment against any other tax liability (under any tax head).
ii Challenging administrative decisions
In Ireland, it is generally accepted that to succeed in a claim based on a failure of a public body to respect a legitimate expectation, three matters as set out in the Supreme Court decision of Glencar Exploration v. Mayo County Council4 need to be established:
- the public authority must have made a statement or adopted a position amounting to a promise or representation, express or implied, as to how it will act in respect of an identifiable area of its activity (the 'representation');
- the representation must be addressed or conveyed, either directly or indirectly, to an identifiable person or group of persons affected annually or potentially in such a way that it forms part of a transaction definitively entered into or a relationship between that person or group and the public authority, or that the person or group has acted on the faith of the representation; and
- the representation must be such as to create an expectation reasonably entertained by the person or group that the public body will abide by the representation to the extent that it would be unjust to permit the public authority to resile from it.
In the 2012 High Court McNamee v. The Revenue Commissioners case,5 the taxpayer in question had been issued with an opinion under Section 811 of the Taxes Consolidation Act 1997 (Ireland's general anti-avoidance provision, discussed further in Section VIII), and claimed that the Revenue was obliged, but failed, to issue notices under Section 811 'immediately' after it decided the transactions involved a tax advantage. The transactions in question involved a form of financial straddles using government gilts and foreign currency, which allegedly gave rise to artificial capital losses that were used to shelter capital gains. The High Court found in favour of the Revenue, holding that the relevant officer of the Revenue had to consider all the relevant criteria set out in Section 811 before issuing the notice, and that it had accordingly issued the notice of opinion 'immediately' after the Revenue officer formed the opinion that the transactions were tax avoidance transactions.
Constitutionality of decisions
It is quite difficult for taxpayers to succeed in arguments that decisions of the Revenue are unconstitutional. This is usually seen as a last resort where all other avenues have been exhausted.
Revenue's complaint and review procedure/Ombudsman
In cases where the dispute relates to allegations of unfairness towards a particular taxpayer as distinct from the actual imposition of tax, it is most likely that the Revenue's complaint procedure should be followed or that the Ombudsman be consulted.
As noted in Section II, Revenue opinions are not legally binding. The Revenue's guidance notes on providing technical assistance provide that an opinion given by the Revenue is based on the specific facts relevant to that case and its particular circumstances only. Any material change in the facts or circumstances could affect an opinion, and any such changes should be brought to the notice of the office that gave the opinion or interpretation so that the case can be reviewed. Further, it should be noted that an opinion given in relation to a specific case should not be relied on in any other case. Some opinions will arise from a unique set of circumstances. An opinion will be given on the basis of the legislation as it exists at the time of the request. If this changes in advance of the completion of the transaction, then the opinion may no longer be valid. Redacted forms of opinions issued can be obtained through a freedom of information request. As noted in Section II, these opinions may also now fall within the new exchange of information arrangements in respect of tax rulings.
Only the party who files a tax return can bring a claim against the Revenue. In the case of a person who suffers unlawful tax (e.g., VAT), recovering such unlawfully imposed tax would generally be a matter of contract law between the parties. An aggrieved person would not have any recourse to the Revenue.
In group scenarios, except in the case of VAT, all parties file their own tax returns. It is generally a matter of contract law between the parties how they treat reliefs surrendered, and tax liabilities arising or reduced as a result of the use of group relief. Only the taxpayer filing the return can claim a refund of tax due to it.
In the case of a hearing before the Tax Appeal Commissions, each side bears its own costs. The awarding of costs in tax cases before the courts follows the general rule that an order for costs to proceedings shall be at the discretion of the courts. In normal circumstances, costs are awarded on the basis of costs following the event, namely, the successful party is entitled to its costs. There is no specific category of cases that fall outside the general rule of costs. The courts may use their discretion, however, to award costs to the unsuccessful party where the matter at issue is one of 'public interest' and the interests of justice require the courts to do so.
Alternative dispute resolution
Although currently the use of the alternative dispute resolution mechanism in Ireland is rare, this is expected to change in the future. Directive 2017/1852 on Tax Dispute Resolution Mechanisms in the European Union (the Directive) was published on 10 October 2018 and applies to claims submitted after 1 July 2019 in respect of tax years commencing on or after 1 January 2018. The Directive must be implemented by Ireland by 30 June 2019. Under the Directive, tax authorities would be required to resolve multi-jurisdictional tax disputes through a mutual agreement procedure (MAP), failing which such disputes would be resolved through binding arbitration.
On 7 June 2017, Ireland along with almost 70 other countries signed the OECD's Multilateral Instrument (MLI), which, when it comes into force, will incorporate certain recommendations made under the OECD's BEPS project into many of Ireland's double taxation treaties. The MLI provides that mandatory binding arbitration will apply in cases where a dispute cannot be resolved through the MAP currently provided for in the Model OECD Tax Treaty. Ireland has opted to adopt this provision of the MLI and this new dispute resolution mechanism will amend the double taxation treaties that Ireland has signed with other countries provided the other countries have also opted to adopt this provision of the MLI.
Ireland's general anti-avoidance legislation is provided for in Section 811 of the TCA 1997 in respect of transactions commenced on or before 23 October 2014 and in Section 811C of the TCA in respect of transactions commenced after 23 October 2014. Section 811 of the TCA enables the Revenue to form the opinion that a transaction gives rise to a tax advantage, and that the transaction was not undertaken or arranged primarily for any reason other than to give rise to a tax advantage, and in such circumstances the transaction is known as a 'tax avoidance transaction'. The Revenue is empowered to determine the tax consequences of the tax avoidance transaction, which may involve making any adjustment required to withdraw the tax advantage. There are two important exclusions provided for in Section 811. The first exclusion applies where a transaction was undertaken to realise profits in the course of the business activities of the person, and was not undertaken or arranged primarily to give rise to a tax advantage. The second exclusion arises where the transaction was undertaken or arranged for the purpose of benefiting from any relief, allowance or abatement provided by tax legislation, where the transaction would not result, directly or indirectly, in a misuse of the provision or an abuse of the provision having regard to the purpose for which it was provided.
On 14 December 2011, the Supreme Court issued its seminal decision in O'Flynn.6 This was the first decision of the Supreme Court concerning Ireland's general anti-avoidance legislation, and the Supreme Court found in favour of the Revenue.
O'Flynn concerned a relief from corporation tax that was available to companies on profits earned from qualifying exports (export sales relief, which had long since been abolished). In addition, dividends received from an export sales relief company were also relieved from income tax in the hands of individual shareholders. O'Flynn involved a series of 40 individual steps undertaken over 50 days that resulted in two companies reducing their profits by making capital contributions to other companies (which were later written off), while the shareholders of both companies received dividends from other entities that were relieved from tax under the export sales relief scheme. In essence, the series of transactions involved shareholders of a company that did not benefit from export sales relief receiving dividends from another company – one that did benefit from export sales relief – so that the dividends received by the shareholders of the first company were not subject to tax.
The decision of the Supreme Court centred on whether the transactions involved constituted a misuse or abuse of a relieving provision (the export sales relief). The judgments (both majority and minority) provide a useful summary on statutory interpretation in Ireland and how it applies to taxing statutes. O'Donnell J, in the majority, held that Section 811 expressly requires the utilisation of a purposive approach to statutory interpretation. He noted that legislation in the form of Section 811 was specifically required to overcome the rejection by the Irish courts of a 'substance over form' approach to statutory interpretation. The Revenue, in forming its opinion under Section 811, is expressly required to consider the form and substance of the transaction. In addition, in considering whether there has been misuse or abuse of a relieving provision, this must be determined having regard to the purpose for which that relieving provision was provided. He noted that '[t]he function of the Revenue Commissioners, and on appeal the Appeal Commissioners, and the courts, is to seek to discern the intention of the Oireachtas7 and to faithfully apply it to the individual case'.
He went on to note that, in this case, 'the form of the transaction was highly artificial and contrived', and held that 'a scheme which allows the shareholders in a non-exporting company to benefit from export sales relief on the profits of the non-exporting company, is surely a misuse or abuse of the scheme having regard to the purpose for which the provision is provided'.
In considering whether the second exclusion from Section 811 applies, there is no distinction between misuse or abuse, but 'what is important is that full effect is given to the intention of the Section that only appropriate uses of the provisions get the benefit of the tax relief'.
Section 811C of the TCA 1997 amends the general anti-avoidance rules in respect of transactions commenced after 23 October 2014 and tries to address some of the deficiencies of Section 811 of the TCA 1997. The definition of a 'tax avoidance transaction' is amended so that additional matters such as the form and substance of the transaction are considered when determining whether a transaction is a tax avoidance transaction. In addition, the Revenue is not required to form an opinion that a transaction is a tax avoidance transaction (as under Section 811 of the TCA 1997) but when having regard to the relevant matters, 'it would be reasonable to consider' that a transaction is a tax avoidance transaction. These amendments lower the threshold for a transaction to be a tax avoidance transaction, but they also make it unclear whose responsibility it is to reasonably consider whether a transaction is a tax avoidance transaction. Section 811C of the TCA 1997 provides for the same exclusions as Section 811 of the TCA 1997, which are discussed above.
Double taxation treaties
The MAP article in double taxation treaties is the way in which disputes between tax authorities in relation to the application of double tax treaties are addressed. As noted above, the MAP in Ireland's treaties will amended by the MLI when it comes into force.
There have been very few cases before the Irish courts involving double taxation treaties. One case, from 2007, concerned the tax residence of an individual who argued that she was resident in Italy for the purposes of the Irish–Italian double taxation treaty (Kinsella v. The Revenue Commissioners).8 The Revenue sought to argue that the treaty did not apply to Irish capital gains tax. The High Court found, however, that the treaty did apply to Irish capital gains tax, and that the individual had been resident in Italy in the year in question under the terms of the treaty.
Another Irish case is the High Court case of O'Brien v. Quigley,9 which concerned the existence of a 'permanent home' for the purposes of the tiebreaker provisions of the double taxation treaty (DTA) between Ireland and Portugal. The Revenue tried to claim taxing rights for the tax year 2000–2001 while the taxpayer was resident in Ireland as well as Portugal. Therefore, the taxing rights had to be determined in accordance with 'tie break' provisions of the DTA, which provide that that an individual shall be deemed to be a tax resident where he or she has a permanent home available to him or her. The High Court held that for a permanent home to exist there must be an element of personal link between the taxpayer and the accommodation and the taxpayer must intend to use the premises or keep it available for his or her permanent use. On that basis, the court held that the taxpayer did not have a permanent home in Ireland.
As regards the interpretation of tax treaties, Ireland acceded to the Vienna Convention on the Law of Treaties with effect from 6 September 2006. In Kinsella, the Court noted that even before this, it was clear from the decision of Barrington J in McGimpsey v. Ireland10 that, in interpreting an international treaty, a court ought to have regard to the general principles of international law, and in particular the rules of interpretation of such treaties as set out in Articles 31 and 32 of the Vienna Convention. These articles require that a court interprets a treaty in good faith in accordance with the ordinary meaning to be given to its terms in their context, and in the light of the treaty's object and purpose. Where such an interpretation leaves the meaning of the treaty ambiguous or obscure, or leads to a manifestly absurd or unreasonable result, then recourse can be made to supplementary means of interpretation.
Avoiding litigation is the preferable route for taxpayers and the Revenue alike. Therefore, in cross-border transactions, it is possible for taxpayers to enter into an advance pricing agreement (APA), agreeing with the Revenue the arm's-length price for arrangements with related parties outside Ireland. The Revenue will engage with taxpayers and negotiate bilateral APAs with countries with which Ireland has double taxation treaties. The conclusion of an APA will provide the taxpayer with certainty that its transfer pricing arrangements agreed thereunder are in compliance with Ireland's transfer pricing rules, and thereby result in fewer disputes.
The Irish courts' interpretation of the Treaty on the Functioning of the European Union and the EEA will follow the interpretation rules for other international treaties (i.e., as set out in the Vienna Convention).
Specifically, in relation to VAT, there have been a number of cases where the European Commission has taken cases against Ireland for its failure to comply with the Sixth VAT Directive.11 These cases have resulted in legislative amendments in Ireland. For example, the Commission took a case against Ireland challenging the VAT treatment of public authorities, which, under Irish law, were not obliged to charge VAT on the provision of certain services. This was seen as giving rise to a distortion of competition.
Again in relation to VAT, there may be discrepancies between the Sixth VAT Directive and how it is transposed into domestic Irish legislation. Many Member States offer detailed guidance on the interpretation of the Directive. For example, in the case of the management of regulated funds, a service that is exempt from VAT, many Member States have clarified the meaning of 'management', whereas Ireland has not. In practice, it is understood that the Revenue follows the approach of other Member States.
Areas of focus
It is expected that the Revenue will continue to focus on artificial tax avoidance schemes, and seek to challenge these under Section 811 or Section 811C of the TCA 1997 and more specific anti-avoidance provisions.
As exit tax came into effect in Ireland on 1 January 2019, it is expected that the Revenue will focus on companies exiting Ireland as well as companies in liquidation and companies that have sold their trade apparatus.
Transfer pricing is a relatively new concept in Ireland, but various changes to the Irish transfer pricing rules are currently under consideration such as the extension of transfer pricing rules to non-trading income and small and medium-sized enterprises. Changes to the current transfer pricing rules are expected to be introduced as early as 1 January 2020. It is expected that compliance with the transfer pricing rules will also be an area of focus for the Revenue in the immediate future.
There has been an increase in the number of Revenue audits of research and development tax credit claims over the past few years. These audits involve a comprehensive review of research and development tax credit claims from both a scientific or technological perspective (by a Revenue-appointed expert) and a financial or tax technical perspective (by a Revenue Inspector). A significant proportion of the Revenue reviews of the research and development (R&D) credit claims have found material non-compliance with the terms of the relief and have yielded settlement payments which are often due to overstatement of R&D expenses and failure to provide sufficient documentation in support of the R&D credit claim. Owing to the amount of the R&D credit claims made and the success of Revenue interventions, it is expected that the Revenue will continue to focus on this area.
The status of independent contractors for tax purposes has also been an area of recent focus for the Revenue. This may in turn lead to cases where an individual's status as an independent contractor is brought into question and employee status alleged. The Department of Finance ran a consultation process in 2016 on the use of intermediary-type employment structures and self-employment arrangements but no legislative change has resulted from the consultation as yet.
The European Union Directive 2018/822 (the Directive) came into force on 25 June 2018 and it must be transposed into Irish law by 31 December 2019. Under the provisions of the Directive, EU-based tax advisers, accountants, lawyers, banks, financial advisers, other intermediaries and, in some cases, taxpayers will be obliged to report to their local tax authorities all cross-border arrangements that have particular characteristics concerning taxes imposed by an EU Member State. The reporting obligation will not commence until August 2020, but arrangements occurring after 25 June 2018 must be reported. The information reported to the Revenue will be exchanged with other EU Member States quarterly, with the first exchange occurring on 31 October 2020.
On 21 June 2016, the Council of the European Union agreed on the Anti-Tax Avoidance Directive (ATAD), which sets out anti-avoidance rules across five specific areas: controlled foreign corporation (CFC) rules, deductibility of interest, exit taxation, hybrid mismatches and a general anti-avoidance rule (GAAR). Further to this, on 29 May 2017, the Council of the European Union adopted a Directive amending the ATAD. This Directive, known as the ATAD 2, extends the scope of the ATAD to hybrid mismatches involving third countries (i.e., non-EU countries) and targets other types of mismatches not covered by the ATAD. The deadline for implementation of the ATAD 2 by EU Member States is 1 January 2020 (however, the deadline for the implementation of provisions regarding reverse hybrid mismatches is 1 January 2022).
Some of the ATAD measures have already been transposed into Irish law. The Finance Act 2018 introduced an exit tax and a CFC regime with effect from 1 January 2019. A consultation is being undertaken before the introduction of the interest limitation and anti-hybrid rules required under the ATAD. Ireland's GAAR is likely to require little change to comply with the ATAD.
Measures introduced in the Finance Act 2016 were intended to tackle offshore structures used to avoid paying tax and deny 'offshore defaulters' the opportunity to use the voluntary disclosure regime with effect from 1 May 2017. A new strict liability criminal offence to facilitate the prosecution of serious cases of offshore tax evasion was introduced along with investment in systems and equipment to assist the Revenue in its investigations. The EU and OECD exchange of information resources should further assist the Revenue in this regard.
In Ireland, the Revenue takes on the role of the competent authority in resolving international tax disputes and ensuring the correct allocation of taxable profits to Ireland. Further to a BEPS consultation process in 2014, initiated by the Department of Finance, the need for the Revenue to devote additional resources to the competent authority function was highlighted. In recent years, the competent authority team has been increased significantly. The role of the competent authority is increasingly important due to the ever-changing dynamics of international trade.
On 7 June 2017, Ireland along with almost 70 other countries signed the OECD's Multilateral Instrument (MLI), which incorporates certain recommendations made under the OECD's BEPS project into many of Ireland's double taxation treaties. The focus of the MLI is on the BEPS recommendations on the treatment of hybrid structures, treaty abuse, permanent establishment status and dispute resolution. Increased information sharing at an EU and OECD level is expected to lead to more cross-border tax disputes. The MLI is intended to provide better dispute resolution mechanisms for cross-border tax disputes. Ireland, like most countries, has opted into the default option of final offer or 'baseball' arbitration. This is where each tax authority submits a proposal to address the issues to an arbitration panel, which selects one of the proposals. Ireland is also one of 25 countries that have opted into mandatory binding arbitration in certain cases. Ireland's double taxation treaty with another country will be modified by the MLI where both treaty partners have respectively ratified the MLI. Ireland has ratified the MLI but the ratification has not yet been deposited with the OECD. It is expected that the ratification process will be completed in due course.
Finally, the European Commission's announcement of its decision that Ireland granted illegal state aid to two companies in the Apple group in an amount of up to €13 billion plus interest focused international interest on Ireland's tax regime. However, the Commission did state that the decision does not call into question the general Irish tax system or its tax rate, and it is important to note that the Apple case can be limited to its facts, as they apply to the tax regime that was then in existence.
Outlook and conclusions
The implementations of the ATAD, the ATAD 2 and the OECD BEPS strategy will continue to change the Irish tax landscape as well as the international landscape.
Ireland's relatively low corporate tax rate of 12.5 per cent on trading income, a limited withholding tax regime, the 'knowledge development box' and various other incentives particularly for R&D activities means that Ireland is still a focal point for international tax strategies. The introduction of the CFC rules is not expected to adversely affect Ireland's attractiveness as a tax location considering the broad exemptions to the CFC rules that are provided for in the legislation. Multinational corporations' tax charges on profits are increasingly being analysed. To avoid and protect against non-Irish tax challenges to Irish structures, groups with operations in Ireland need to review existing arrangements to ensure the underlying intra-group written agreements and other legal documentation appropriately reflect the substance of that which occurs in Ireland. If the underlying legal structures are simply boilerplate intra-group agreements, the Irish taxpaying corporate should anticipate foreign tax authority challenges.
In addition, a recent UK tax court decision on company tax residence12 has highlighted the importance of Irish incorporated companies with foreign (including US) parents, ensuring that their corporate governance regime provides that boards of Irish companies are appropriately staffed and conduct functions in Ireland reflecting the duties of the Irish directors. While this is a UK case, it has persuasive authority in Ireland, and where there is a group relationship, company directors need to ensure that where board meetings are convened to make decisions that have a group-wide effect, the commercial realities of each transaction are discussed at the relevant board meeting and the benefit of the transaction to that particular company also needs to be considered. The board of directors should apply discretion and not justify their decisions with respect to the wider group structure but have the ability to account for their decisions for the company pursuant to their duties and obligations as directors of that company.
The increased cooperation and automatic exchange of information between the tax authorities will increase the scrutiny on international tax structures and it is expected that it will lead to an increase in disputes with the Revenue as well as disputes over taxing rights with foreign tax authorities.
1 Niamh Keogh is head of tax at Mason Hayes & Curran. Maura Dineen and John Gulliver have now left Mason Hayes & Curran. The information in this chapter was accurate as at February 2019.
2 The TAC has the authority under Section 949U of the Taxes Consolidation Act 1997 to adjudicate on an appeal without a hearing, where it considers it appropriate.
3  IESC 55.
4  IR, 84.
5  IEHC 500.
6 O'Flynn Construction Limited & Others v. The Revenue Commissioners  IESC 47.
7 The Irish legislative body.
8  IEHC 250.
9  IEHC 398.
10  IR 567.
11 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, which repealed and replaced Directive 67/227/EEC and Directive 77/388/EEC.
12 Development Securities (No 9) Limited and others  UKFTT 565 (TC).