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Saturday, 20th April 2024 |
| A busy time for tax matters in the Courts |
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| The Superior Courts in the last months have delivered themselves of more judgements in tax matters than Ireland normally produces in an entire year. Whereas tax litigation is voluminous in the UK and before the European Court of Justice, it is a rare matter in Ireland. |
The Keleghan case:
The Supreme Court judgement in the Keleghan case dealt with two issues. The first issue was whether capital gains tax arose on the disposal of certain loan notes which Mr Keleghan had obtained in exchange for shares which he sold to the Siucre Eireann group of companies.
Capital gains tax had not arisen on the disposal of the shares as there is a specific relief granted for a ‘paper for paper’ exchange where certain conditions are met, as they were in this case. What was at issue was whether the subsequent redemption of the loan notes gave rise to a charge to capital gains tax.
A loan note is a debt. Debts are not normally subject to capital gains tax but certain debts, which are ‘debts on a security’ are subject to capital gains tax. The expression ‘debts on a security’ is undefined in the Act. Irish case law suggests that a debt is a debt on a security (and therefore a debt liable to capital gains tax on disposal) if it has features which potentially would enable it to be disposed of at a profit.
The Supreme Court confirmed this basic test. They further held that the Keleghan loan notes were not debts on a security as they lacked any feature which would cause the debt to be worth more than the capital sum available on repayment of the debt. Principally this was due to the fact that the rate of interest was linked to Dibor and was rather ungenerous, and the limited conversion rights to shares were rights to secure shares at open market value and therefore not in themselves significant.
The Supreme Court concluded that Mr Keleghan was free of capital gains tax. The particular opportunity to avoid capital gains tax, which proved so beneficial to Mr Keleghan, is no longer available. The law has since been amended to provide that any loan note obtained on a ‘paper for paper’ exchange is to be regarded as being a debt on a security, regardless of its commercial features.
The second issue is likely to prove of greater long term significance. The contract for the disposal of Mr Keleghan’s shares noted that part of the price (payable in loan notes) was being paid in return for his undertaking to become an employee or director of the Siucre Eireann group of companies. Mr Keleghan was already (and remained for a period) a director of the company which Siucre Eireann acquired on foot of this agreement. He did not take up any new employment with other Siucre Eireann companies nor did he become a director.
The Appeal Commissioners and the High Court had held that Mr Keleghan could not be charged to income tax on the share proceeds in question as being a profit from an employment because he did not take up the employment that he was paid to take up. The Supreme Court decided that Mr Keleghan was chargeable to income tax on this part of the proceeds on the basis that his remaining in employment with the company Siucre Eireann acquired seemed to have been regarded by Siucre Eireann as satisfying Mr Keleghan’s contractual obligation to take up employment with the group and that accordingly it was a profit from his existing employment with the company which Siucre Eireann acquired.
It is not unusual in a takeover situation that major shareholders would be required to remain directors of the target company for a period, and indeed that the final consideration of the shares may be related to subsequent performance. The judgement in the Keleghan case needs to be borne in mind in such circumstances.
Ringmahon case:
The Supreme Court confirmed a High Court decision in the Ringmahon case, that interest on borrowings used to repay preference share capital were deductible as a trade expense.
On the face of it the proposition might seem a surprising one. However, the logic of the High Court (which appears to have been followed by the Supreme Court), was that the preference share capital had been raised for the purpose of the trade and was used to finance the trade. The borrowings had replaced that share capital and served the same function ie they were used to finance the trade. Therefore the interest cost that related to it was a cost wholly and exclusively incurred in earning the profits of the trade and was a deductible expense.
The courts held that the question of whether interest is deductible as a trade expense had to be decided separately for each accounting period. For each accounting period you look at the use to which the borrowed moneys were put in that accounting period. This implies that a loan whose interest might originally not be tax deductible because it is not being used for trade purposes might later become a loan whose interest is tax deductible, if the money subsequently becomes used for trade purposes, and vice versa.
There is a statutory prohibition on the deduction of interest where moneys are borrowed to repay capital and certain other circumstances exist. This section was not referred to by either the High Court or Supreme Court presumably on the basis that the facts of the case did not attract the application of the section. It remains however an unexplored and unexplained aspect of the case.
Tara Mines:
The High Court in the Tara Mines case held that the activities of extracting ore from the ground, and processing it so as to produce relatively pure minerals from the ore, could, taken as a whole, be regarded as mining operations. In consequence they were excluded from export sales relief (remember it?) but entitled the company to certain capital allowances which are exclusive to mining operations.
The decision of the Appeal Commissioners had been that the company was entitled to export sales relief but was not entitled to the mining capital allowances on the machinery used to process the ore after it was extracted from the ground. That decision could be correct only if they regarded the processes of treating the ore after it was removed from the ground as not being within the meaning of ‘mining operations’.
But they had not explicitly stated that they had found that to be a fact. They had earlier in their decision found that the word ‘mining’ had a potentially wide meaning and in some contexts could be regarded as including the processing activities subsequent to the extraction of the ore from the ground. The High Court said that since they had not found that the potentially wider meaning of mining did not apply in this case and stated that explicitly, their decision on the tax point was at odds with the findings they had made ie that ‘mining’ had a wide potential meaning. Accordingly their decision was reversed.
It is difficult to avoid the conclusion that this case turned on a procedural point rather than on true substance of the tax legislation and the taxpayer’s operations. |
Pat McDaid is a Partner in KPMG.
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| Article appeared in the June 2001 issue.
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