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Supreme Court and bananas Back  
A recent judgment of the Supreme Court may have long term significance for taxpayers. It appears to be confined to the narrow issue of manufacturing services in the ripening of bananas but may have a wider significance.
The law
The case in question is that of Inspector of Taxes v Fyffes Banana Processing Limited. To understand the significance of the case it is necessary to delve a little into the history of manufacturing relief (the 10 per cent rate of corporation tax).

Manufacturing relief was available on a number of distinct bases.
• It was available to companies who sold goods which they had manufactured in Ireland.
• It was available to companies who sold goods manufactured in Ireland by another company holding at least 90 per cent of their share capital.
• It was available to a company which applied in Ireland a process of manufacture to raw materials owned by a third party.
• It was available to companies carrying on a variety of trades (including financial services in the IFSC for example) whose trading income was specifically deemed to be income from the manufacture of goods for the purpose of the relief.

The bananas
Bananas start life hanging from a tree. However typically before reaching the consumer they will have undergone a process of artificial ripening involving sophisticated and capital intensive processes. It had already been held by the Irish courts that a person who applied those processes to the green banana, and on-sold the resulting ripened banana, was selling goods manufactured by them and was entitled to the relief.

In 1990 the manufacturing relief legislation was amended to provide that goods were not to be regarded as manufactured if they resulted from certain processes. Among the listed processes were methods of maturation applied to foodstuffs. From that it seemed to follow that if a company sold foodstuffs where the principal change it had brought about in the foodstuff was to apply to it a process of maturation, it would not be regarded as selling goods manufactured by it. It would not be entitled to manufacturing relief in respect of the sale.

However, as noted at the outset, only two of the four bases referred to above involve taxpayers being entitled to the relief on the basis that they sell goods which they claim they or their parent company manufactured in Ireland. In particular, somebody who merely provides a service of manufacturing to an owner of raw material does not sell any goods and does not claim relief on the basis that they do sell any goods, manufactured or otherwise.

It was therefore widely argued that the 1990 restrictions did not deny relief to a taxpayer whose activities consisted of the provision of manufacturing services, even where those services consisted of a process of maturation.

The case
Fyffes Banana Processing Limited was such a company which provided a manufacturing service, but did not sell bananas or any other goods. The Revenue challenged the entitlement of the company to manufacturing relief on the basis that the 1990 restrictions, although apparently concerned only with what did and did not constitute ‘goods’ were effective to deny them relief. The Appeal Commissioners and the High Court agreed with the taxpayer.

The Supreme Court over-ruled the High Court and the Appeal Commissioners.

The remarkable decision
The Supreme Court took the view that it was highly unlikely that the D?il, in passing the 1990 legislation, had in mind to deny manufacturing relief to a company which matures and sells bananas, but to allow it to a company which provides the services of maturation. But it conceded that the words used (described as inapt) appeared to do just that.

The court noted that in deciding what the intention of the D?il was, it was its duty to look at the words used in the context in which they are used. Not surprisingly, the Supreme Court was unable to hold against the taxpayer by adopting that approach.

Instead, the court increased the taxpayer’s liability to tax on the basis that the matter was uncertain! And since the uncertainty was concerned with the availability of a tax relief, any uncertainty should be decided against the taxpayer.

That the taxpayer was entitled to the relief prior to the Finance Act 1990 was not in question. The Supreme Court was unable to satisfy itself that the 1990 legislation was intended to deny the relief then available. Yet in this extraordinary decision they felt that their failure should lead them inevitably to refusing the relief!

The basic principle that uncertainty relating to the availability of a relief should be decided against a taxpayer is a long established principle. What is startling is that the Supreme Court could have found the ordinary rules of construction of a statute, referred to above as being an examination of the plain words used, insufficient to resolve the doubt.

No case is ever likely to reach the courts unless there is doubt in somebody’s mind. If the Supreme Court in the future experiences similar difficulty in successfully resolving doubts, the outlook is bleak for taxpayers seeking relief they appear to be entitled to, on the plain meaning of words used, in the laws passed by the D?il.

Shaun Murphy is a Partner in KPMG.

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