The Gazette 1986

GAZETTE

sep

BER 1986

Recent Developments in Tax Avoidance

Part II

Paul McE l h i nne y, B . A . (Mo d ), Solicitor

Dav id Kennedy, Barrister-at-law

(3)

Ireland

(1) Introduction

The new approach to tax avoidance arrangements of

the English courts has not yet been followed by the Irish

courts, and the principles governing the effectiveness of

tax avoidance arrangements are still to be found in the

Duke of Westminister's

case.

However, there is a

growing popular and official criticism (often misguided

and ill-informed) of what is characterised as an

unacceptable level of tax avoidance by artificial

measures on the part of those with sufficient means to

afford the assistance of professional advisers. The

volume of this criticism is increasing in the context of

the current economic recession and the tax burden

borne by PAYE workers, in contrast to what is

perceived as the lesser burden on the farming

community, the self-employed and multinational

companies, for example. This trend has been reflected

in recent Ministerial statements attacking tax avoidance

and threatening the introduction of retrospective

legislation to deal with particular alleged abuses.

(ii)

Legislation

However, despite the broad recommendations of the

Commission on Taxation,

the Revenue Commis-

sioners through annual legislation have contented

themselves with piecemeal measures to strike down

particular tax avoidance arrangements which have

come to their attention by over use or abuse. Thus the

Capital Gains Tax relief on a share for share exchange

in Paragraph 4, Schedule 3, CGTA, 1975 (used in

Furniss)

was rendered ineffective for tax avoidance

purposes by section 63, Finance Act, 1982.

In a similar

fashion, the profusion of stamp duty saving leasehold

schemes have been countered by a recent statutory

instrument together with the use of the "pref trick" and

renounceable letters of allotment on share transfers.

Limited Partnerships, much used for film financing, in

particular RTE/Channel 4 Co-productions, and also to

launch the defunct floating restaurant on the M.V.

Arran, will be rendered ineffective from 22 May, 1985

by the Finance Act, 1986 despite being upheld in the High

Court in the

Metropole

case.

The practice of bond-

washing, or converting taxable income on securities into

non-taxable capital, was legislated against in section 29

Finance Act, 1984. A 3<7o once-off levy, together with a

1 °Io annual levy on certain discretionary trusts has been

introduced to counter their widespread use for tax

avoidance purposes

The practice of tax-based lending

through the use of 'Section 84' loans was confined to

manufacturing and certain service industries by section

41 and 42 FA 1984, and a 12°7o duty on annual interest

will be introduced in the Finance Act, 1986.

(iii)

Case Law

(A)

Interpretation of statutes

This trend has not yet been reflected in the adoption

of the new approach by the Irish courts. HoweveT, while

the courts accept that as a general principle tax

legislation must be construed strictly, and have not yet

exerted themselves to actively strike down tax avoidance

arrangements as the English courts have, there is an

increasingly apparent tendency to look at the reality or

substance of a particular tax avoidance arrangement, or

to decline to interpret legislation in favour of the

taxpayer. Thus, while in the case of

Inspector of Taxes -

Kiernan

Henchy J. in the Supreme Court stated

that loose wording in a tax statute was to be construed

strictly so as to prevent the unfair imposition of a

liability,

in the more recent case of

Kellystown

Company

-v-

Hogan (Inspector of Taxes)*

the same

Judge refused to construe a section literally so as not to

impose a liability, and instead looked at the "purposive

essence" of the section and imposed a liability to tax on

the basis that a literal interpretation would produce an

absurd result. He said:

"I consider the law to be that, where a literal

reading gives a result which is plainly contrary to

the legislative intent, and an alternative reading

consonant with the legislative intent is reasonably

open, it is the latter reading that should prevail."

(B)

Reality of Situation

In a similar fashion the courts have been prepared to

look beyond the question of whether a tax avoidance

arrangement conforms strictly with the letter of the law,

and to have regard to the reality of the situation. Thus,

in the case of

Cronin (Inspector of Taxes)

-v-

Cork &

County Property Co. Ltd.

4<)

an arrangement to

manufacture a loss on the disposal of land utilising the

statutory method of calculation in section 18, Finance

(Miscellaneous Provisions) Act, 1968, was held to be

ineffective by Finlay P. in the High Court. He

concluded that, despite the fact that the scheme fell

within the literal wording of the legislation, the profit

on the transaction should be ascertained in accordance

with

the

ordinary

principles

commercial

accountancy, the operation of which were not excluded

by section 18. A similar scheme failed in

O'Connlain

225