General Anti-Avoidance

Specific v General

There are a number of general anti-avoidance provisions in tax legislation.  Much of the anti-avoidance legislation is technical and designed to deal with certain specific issues.  The following deals with the general anti-avoidance provisions and certain of the more general specific anti-avoidance.

The general principle is that a person may lawfully organise his affairs so as to avoid tax.  Tax avoidance is illegal.  Tax evasion is a breach of the tax legislation and is a criminal offence.

There is general anti-avoidance legislation signed by the Revenue to prevent artificial transactions, which, although technically and literally compliant, are for the purpose of tax avoidance.

These provisions were originally controversial as concern was raised that the Revenue would use it in a manner by which the taxpayer could not be certain of his potential liability.

Tax Advantage

The provisions are aimed at tax avoidance transactions.  The Revenue may form the opinion that a transaction is a tax avoidance transaction which gives a tax advantage or that the primary purpose is to give rise to a tax advantage.

A tax advantage is any reduction, avoidance or deferral of tax refund.  It may be a transaction course of plan, conduct, agreements, arrangements, promises, undertakings whether binding or not or a series of combination of circumstances entered into or arranged by persons of other acting together or separately.

Genuine business transactions, even if carried out to minimise tax, are not tax avoidance transactions.  Transactions which take advantage of the benefit of reliefs or allowances in the schemes are not tax avoidance transactions providing that they do not amount to a misuse of the relief. The Revenue is entitled to look at both the substance and form to determine its purpose.

Where the Revenue forms an opinion that a transaction is a tax avoidance transaction, they will give persons concerned a notice in writing setting out their view.  The person may appeal to the Revenue Appeal Commissioners within 30 days.  The matter may be referred to the High Court on a point of law.  Where the Revenue’s opinion becomes final the tax interest and a 10% surcharge will be payable.

Protective Notice

It is possible for a person to make an expression on a wholly without prejudice basis (effectively an expression of doubt) within 90 days of the transaction and obtain protection against interest or surcharge.

Where a protective notice is made, Revenue has two years in which to form an opinion.  Where a full protective notice has not been made, Courts and Revenue Appeal Commissioners must take account of whether the transaction could reasonably be considered a tax avoidance transaction.

It is possible that the taxpayer and Revenue may reach an agreement in which event the Revenue’s original assessment may be withdrawn.  A protective notification is not an expression of doubt but provides similar protection.  It is wholly without prejudice.  In making the assessment, the Revenue must specify the date when they believe the tax would become payable.  2008 surcharge increased to 20%.

Mandatory Reporting by Promoters

There are mandatory reporting obligations on promoters or others who notify the Revenue of tax avoidance transactions.  It covers promoters and certain persons who market such schemes.  A transaction must be disclosed if it enables a person to obtain a tax advantage and the main or one of the main benefits obtained by that person.

The transactions are specified by regulations and include transactions giving rise to advantages which a person would wish to keep confidential from Revenue and others, transactions where the promoter charges a fee for implementing the transaction which is attributable to or contingent on the tax advantage or transaction where the person is required to enter standardised documents as provided by the promoter.

Promoters must provide details of persons to whom they have made disclosable transactions.  Such notification is not a protective notice under the general anti-avoidance transactions.

Where the promoter is outside the State, persons who take advantage of the transactions must notify certain evidence to the Revenue.  Revenue has the power to make further enquiries.  There are penalties for failure to comply with the obligations.  An application can be made to the Court to determine whether there has been a failure to comply with the obligations.

Transferring Assets Offshore

There is general anti-avoidance legislation where a person who is resident or ordinarily resident in the state transfers assets directly or indirectly to persons resident or domiciled outside the state.  Where the person concerned still has the power to enjoy the income of concern either immediately or in the future, the income may still be deemed to be chargeable to him.

The broad purpose is to prevent the transfer by resident persons of assets to offshore trusts, which would be outside the scope of Irish income tax.  The legislation is in very general terms and attempts to cover all kinds of indirect schemes by which the transferor may continue to benefit.

Where a person receives a capital sum either before or after such a transfer in connection with the transfer, the capital sum is income. Exemptions may be claimed if it can be shown to the Revenue that the purpose is not that of avoiding tax.

Offshore Investment Vehicles

There is general anti-avoidance legislation where assets are put in offshore collective investment vehicles.  In the absence of the legislation income inside the fund would accrue so that the only liability would be capital gains tax at the person’s marginal rate once the investment is disposed of.  The income of the investment within the fund is not directly taxable on the taxpayer at its highest rate.

Irish residents must report interest in offshore funds.  Institutions and intermediaries are also obliged to report.

Unless the fund distributes 85% of its profits, it is deemed non-qualifying.  When Irish individuals acquire an interest in an offshore fund, they must include it in their tax returns.  The profit on the investment in the fund is 26%.

However, this only applies where the payment is included in a tax return, provided it is a regulated fund.  This is effectively an arms length collective investment scheme usually regulated.  If the fund is, in fact, not such a fund but is, in effect, a personal investment vehicle, the tax applicable is the standard rate plus 26%.