Complex Tax Issues

Conor KennedyLaw Library

Property as a means to evaluate and impose taxation.

Window type taxLand taxes, custom and excise duties, stamp

duties, probate and other death dutiesCreates & transfer personal wealth Property investmentUse of trusts

Governments grip on property :Income TaxCorporation TaxValue Added TaxStamp DutyCapital Gains Tax Capital Acquisitions Tax

Commercial viabilityMcGrath CaseS.811 TCA ‘97 to address certain tax

avoidanceConstitutionality

Ownership of assets in a corporate or personal capacity

Common practice for companies to acquire properties

Cost of obtaining funds through salary was unusual

Income Tax rates were in excess of 60%

Lowering of the personal tax ratesS.23 type reliefsHuge appreciation in the value of property Exasperated by double charge to Capital

Gains Tax

Commercial viabilityTax as a factor in structuring investmentsLevel and rate of stamp dutyVATCapital Gains TaxInheritance tax issuesUse of trusts

Double charge to Capital Gains TaxSurcharge on undistributed company profitsDirector’s fees limited to 7.5% - 12.5%Make the investment less marketableNo stamp duty relief Annual costs of servicing a company

Capital allowances on industrial buildingsIncome and wealth enjoyed by individuals

Lower rate of Stamp DutyPersonal guaranteesFor reasons of confidentialityTo protect the property against litigation

Holding CompaniesCGT Exemption

Shares held in EU or treaty countriesMust hold at least 5%Interest held for at least 12 monthsGreater value not derived from land in State

Credit for foreign taxes on dividendsEntitlement to “pool” credits

Company ReorganisationsThree party Swap

Transfer trade to NewcoConsideration = Shares in NewcoSame identity of ownershipSubsequent disposal

Current Structure

Existing Trade.

Husband50%

Wife50%

Commercial PropertyTradeInvestments

New Structure

New Company

Husband50%

Wife50%

Commercial PropertyTrade

Existing Company

Husband50%

Wife50%

Investments

Tax issuesStamp & Capital Duty (S.80 SDCA 1999) Share reorganisation (S.587 TCA 1997) Corporation Tax Relief (S.615 TCA 1997)Income Distribution (S.130 TCA 1997)Tax Neutral

Availability of capital allowancesProperty must be relatively self financingTax breaks shoring up the potential

shortfall

A trade carried on in either a mill factory or similar premises

A dock undertakingThe growing of fruit, vegetables or other

produce in the course of a tradeThe trade of hotel keepingIntensive production of cattle and other

livestockOperation or management of an airport, where

the structure is an airport

Operation or management of a registered nursing home

Operation or management of a convalescent home for the purpose of medical and nursing care

Operation or management of a qualifying hospital

Qualifying sports injury clinicsQualifying mental health centres

Tax incentive areasLeased industrial buildingsClawback of allowances

Expenditure incurred in qualifying periodConstruction, conversion or refurbishment Qualifying areas100 per cent of qualifying expenditure

excluding site costRelief against all rental incomeClawback of relief

Minimising Tax CostsCapital Allowances

Plant & MachineryDefinitionFunctional testSetting in which trade carried on

Minimising Tax CostsS.311 TCA 1997Apportion expenditure on commercial

propertyExtract value from plant & machineryFormula

Plant x Purchase Price – Land Building Cost

Qualifying Type Assets Gas, electrical, cold water and sewage systems. Heating, ventilation and air conditioning systems. Storage systems, display equipment, counters and

cold rooms. Furniture and sanitary ware. Escalators and lifts. Sound insulation. Telecommunications and surveillance systems. Alarms and sprinkler systems. Moveable partition walls. Displays, signs and advertising hoardings. Consultants fees. Carpeting. Blinds and canopys.

Two aspects of the legislationLand dealers and individuals who

purchase land for speculative profits20% rateAny work which does not constitute

constructionConstruction of houses will be liable to

Income Tax at the marginal rate

Dealings with RevenueKinsella v The Revenue CommissionersLegitimate ExpectationsGlencar Exploration

RepresentationIdentifiable person actually affectedExpected to abide

Keogh v Criminal Assets Bureau

Revenue’s Annual Report 2006Tax Receipts €45.5 billion14 tax schemes challengedSpecial Investigations now at €2.28 billionRevenue audits - €691.8 million4,127 comprehensive audits176,064 assurance checks601 tax defaulters published7 convictions for serious tax evasion

Revenue Audit FindingsLarge Cases Division

Residency of CompaniesFilm investmentsProperty based investmentsProperty owned companiesLiquidationsS.806 & EU Treaty

General Audit IssuesPubsIrish Independent article

Compliance issues in 50% of Dublin pubsNew methodology

Unfounded AllegationsLicence agreements

Finance Act 2007S.4(5) VATA 1972S.10(3) VATA 1972

Licence AgreementsExample 

Build cost €275 per sq ft Apartment 1,000 sq ft Cost €275,000 Sale Price €475,000 Land Price €175,000 VAT liability €20,815 per apartment Unforeseen cost to the landowner

Internal ReviewWhat is it?Jurisdiction

“Revenue’s handling of his or her tax or customs affairs or decisions made by a Revenue official …”

Publication DiscriminationProportionalityAppeal CommissionersHuman Rights issues

Revenue’s Lifestyle Profile  2001   2002   2003   2004   2005

 €  € € €  €  € € €  €  €

Income per tax return   100,000 125,000   156,250 195,313   244,141

               

Total Income   100,000 125,000   156,250 195,313   244,141

Outgoings (est) 40,000   45,000 50,000   55,000 60,000  

Income Tax Due 34,000 74,000 42,500 87,500 53,125 103,125 66,406 121,406 83,008 143,008

Estimated Balance   26,000 37,500   53,125 73,906   101,133

  € €   € €   €

Estimated opening cash   0 26,000   63,500 116,625   190,531

Estimated cash surplus for year

  26,000 37,500   53,125 73,906   101,133

Estimated closing balance   26,000   63,500   116,625   190,531   291,664

Revenue’s Asset Reconciliation €

Estimated Funds 2005 291,664

Estimated Return @ say 3% 8,750

Where is it?

Risk AnalysisLate filingScreening

RiskEvaluationAnalysisProfiling

Enormous databaseCrestVRTRental Stamp dutyCGT

Risk AnalysisScreening 3 - 4 times a yearIn-depth profileBehavioural profilingSubstitution effectRCT issues

Double dip (treble)EU Savings Directive – 1st tranche of

informationAll tax head audit

Seek adjournment

Public Accounts CommitteeComptroller & Auditor General Report

Extending Tax Information ExchangesMutual Assistance

Information exchanged Automatic Spontaneous

Capital gains risksCorrelation with stamp duty informationSubstitution effectStamp duty clawbackMiscellaneous

Constituents of a BusinessDefinition ?Trade or Business

American LeafKoreanNoddy Subsidiary RightsCadbury Ireland

RelevanceS.600 TCA 1997S.97 CATA 2003VATReconstructions

TradeBadges12.5% CT RateSubstitution Effect

Finance Act 2007CGT – Sale of business assets/ shares in

family trading companiesBES ImprovementsVAT – Waiver of exemptionOffshore fundsRevenue Powers

Professional NegligenceDuty of careBreach of dutyPlaintiff suffered lossDamage caused by that breach

Professional NegligenceCompetency of the practitionerHurlingham Estates v Wilde & PartnersLetters of engagement

Sample Letter 1 – Tax AdvisorSample Letter 2 – AccountantSample Letter 3 – SolicitorInformation omitted

Agent MistakeRowland v HM Revenue & Customs

Reasonable ExcuseRelied on agentVicarious liability

Employer main beneficiary Better position

Implement safer practices Absorb losses

Offers better protection to claimant

Revenue Penalties The ‘Code of Practice for Revenue Auditors’ 9.1 provides that:

A tax return prepared and delivered on behalf of a taxpayer by some other person acting on his or her behalf is treated in all respects as if it had been made by the taxpayer. The taxpayer’s statutory responsibility to complete and file a correct return cannot be devolved to his or her agent.

9.5 provides

… the taxpayer cannot devolve the responsibility of making the correct return to an agent. If all relevant matters have not been brought to the attention of the agent, the taxpayer has not taken due care.

Finance Act 2005S.142 amends S.1078 TCA 1997Revenue Offences – 3rd party implications

“knowingly concerned in the fraudulent evasion of tax”

“ … is reckless as to whether or not the person is concerned in facilitating the fraudulent evasion of tax ….”

Revenue’s Annual Report 2007Tax Receipts €47.2 billionTax schemes challengedSpecial Investigations now at €2.414 billionRevenue audits - €736 million3,900 comprehensive audits237,000 assurance checks14 convictions for serious tax evasion

•New VAT on Property Regime• Property leases exempt from tax• Option to tax• New Buildings• Old Buildings• Capital Goods Scheme

•More Tax Avoidance Schemes challenged•New Commission of Taxation•Refinement of profiling