The Gazette 1986

GAZETTE

sep T em BER 1986

Recent Developments in Tax Avoidance Part II

by Paul McE l h i nne y, B . A . (Mo d ), Solicitor Dav id Kennedy, Barrister-at-law

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 - v- Kiernan 42 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, 43 in the more recent case of Kellystown Company -v- Hogan (Inspector of Taxes)* 4 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: 45 "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 of commercial accountancy, the operation of which were not excluded by section 18. A similar scheme failed in O'Connlain

(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. 15 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. 36 (ii) Legislation However, despite the broad recommendations of the Commission on Taxation, 37 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. 38 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. 39 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. 40 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 41 The practice of tax-based lending through the use of 'Section 84' loans was confined to

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