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Wednesday, 24th April 2024 |
| “In extreme cases, exploiting legal loopholes is not very different from a guilty man walking free because of a legal technicality” - the speaker is the chairman of the Revenue Commissioners. In recent times the Revenue Commissioners have attacked tax avoidance. Politicians have made unfavourable noises about it. Comments on the topic of tax avoidance is becoming reminiscent of the McCarthy era. And yet, is there anybody potentially liable to tax who does not seek to avoid tax, asks Brian Daly |
Attacks on tax avoidance
It is instructive to review some recent comments from the Revenue Commissioners on the topic of tax avoidance. The Chairman of the Revenue Commissioners is quoted in The Irish Times, Friday 12 December 2003 as having said before the Public Accounts Committee of Dail Eireann “In extreme cases, exploiting legal loopholes is not very different from a guilty man walking free because of a legal technicality”.
What is tax avoidance? Generally tax avoidance is taking steps to minimise your taxation liability within the law. You can approach this in many ways. One way is to simply not earn income or realise gains. Becoming unemployed might be an extreme form of tax avoidance and unlikely to be adopted!
It may also involve carrying out a commercial transaction in a way which does not attract tax, whereas the same transaction, carried out in a different fashion, might attract tax.
Tax avoidance can also involve carrying out a transaction largely in order to obtain a tax benefit. We have a long history of the taxation system being used to induce people to enter into transactions that, without a tax incentive, would not appear to make economic sense to the individual.
Tax avoidance can also involve the careful scrutiny of tax law prior to making a tax return, to determine whether there are arguable interpretations of tax law that would yield a lower reportable income or gain for tax purposes, than other possible interpretations of the same tax law.
Tax avoidance is about paying as little tax as you possibly can, within the law. Put that way, it is evident that a person who does not engage in tax avoidance is a person who deliberately chooses to pay more tax than they need to pay. That is generous of them, but it would be reasonable to suspect that there are few people in that category, and that those who are may be there due to ignorance, or laziness, as much as public spiritedness.
Tax avoidance is public policy
The attack on tax avoidance is all the more surprising since the Irish economy has, to no small extent, been developed on the back of facilitating international tax avoidance. We have made our tax system as attractive as possible to multinationals in the hope that they would seek to minimise their worldwide tax liabilities by setting up here. A company which has the choice of setting up in the UK where it will pay a 30p.c. rate of corporation tax, will instead, we hope, set up in Ireland where we will offer it a 12.5p.c., or 10p.c., rate of corporation tax.
Surely any objective commentator would agree that tax avoidance is a natural course of action for any individual or company and in no way reprehensible or undesirable.
Shock! Tax incentives reduce tax!
The debate on tax avoidance is not even as clear-cut as a possible distinction between incentives intended by those who draft legislation, and tax reliefs provided by legislation which those who drafted it did not realise were being provided. Take for example, capital allowances on various forms of buildings such as hotels, urban renewal developments etc. Annually there is a furore in the Dail and in the media when the Revenue Commissioners reveal that many high-income individuals reduce their tax liabilities to very low figures by availing of these incentives.
In other words, these taxpayers make investments in bricks and mortar, and claim the tax reliefs which are provided to people who invest in such bricks and mortar. When the Dail enacted such incentives it fully understood what it was doing. It intended that precisely such investors should get precisely such tax reliefs. Why the shock and horror?
Are we to take it that it did not occur to the Dail that those who have the means to invest in hotels etc are persons with high incomes as opposed to those not even in the tax net due to low income? Did it not occur to anyone when drafting or enacting the incentives to ask whether they wished to place a limit on the extent to which any one investor could avail of them?
Tax incentives are designed to induce people to reduce their tax liabilities by entering into economic transactions that they might otherwise consider imprudent. To express surprise that those who enter into those transactions do succeed in reducing their tax liabilities is a bit disingenuous.
This point was made by Mr Michael O’Grady, Revenue Commissioner, in a talk to the KPMG tax conference in November 2003. He said “Such reliefs, whether you agree with them or not, are intended to incentivise particular activities, and since tax reliefs depend on the taxable capacity of claimants, it can’t come as any surprise that high income individuals will use their increased capacity to absorb available reliefs”.
The tone of political and media comment on the use of tax incentives has been less measured. There is a risk that populist comment by politicians can undermine the confidence of investors and entrepreneurs. Tax loopholes may be a beneficial part of our tax system. Measures which started in life as tax loopholes have in the past come to be approved as tax incentives. An example was so called "Section 84 finance" which was an anti-avoidance measure that tax advisers stood on its head and the State was later happy to use as an incentive to attract inward investment. It can also be argued that when misguided governments imposed personal tax rates as high as 65p.c., we retained an economy in part due to the exploitation of loopholes to ensure that effective tax rates were lower in most cases.
The loophole
It might of course be argued that there is tax avoidance, and tax avoidance. Tax avoidance which consists of the use of tax incentives intended by the Oireachtas might be said to be a “good thing” whereas “exploiting legal loopholes” might be seen as, in the words of the Chairman of the Revenue Commissioners “not very different from a guilty man walking free because of a legal technicality”.
That might seem a valid distinction until you ask what constitutes a “legal loophole”. All taxation liabilities are created by statutes passed by Dail Eireann. The liability imposed is precisely the liability set out in the statute, and nothing else. In that context, how do you distinguish between a tax incentive and a loophole?
The answer appears to be that a tax incentive is a reduction of tax liability that the Revenue Commissioners understood would result from the legislation that they draft for the government. A “legal loophole” appears to be a reduction in tax liability provided by a statute, where the reduction was not foreseen by the Revenue Commissioners when they drafted the relevant piece of legislation.
Put another way, the distinction between an incentive and a loophole lies in whether the Revenue Commissioners knew what they were doing.
When a loophole is exploited, is it not a bit rich for the Revenue to berate the taxpayer? Who drafted the legislation? Who enacted it? And if the legislation has consequences which were not foreseen, whose responsibility was it to foresee them? Certainly not that of the taxpayer.
Root of the problem
If a particular piece of legislation results in individuals or companies paying less tax than was foreseen when it was enacted, it is quite understandable that those who drafted it and those who enacted it regard that as an unsatisfactory outcome. Unfortunately, at the present time, the focus tends to be on blaming the taxpayer who availed of a lawfully enacted relief. That is not where the problem lies. The taxpayer did what any sensible taxpayer would do which is avail of a relief if the law offers it to him. The problem surely lies in the failure to foresee the consequences of some tax laws, at the time they are being drafted and enacted.
We probably have too much tax law to enable all of it to be prudently considered by draftsmen and by the Dail. Our particular method of enacting tax law, with a “high drama” short season between budget day in early December and passing of the Finance Bill in late February is almost designed to ensure that the Dail will enact tax laws whose consequences they do not foresee. Is it not time that those who object to taxpayers taking benefit of unintended consequences of tax laws, to look away from the taxpayer and look instead to the system which led to the tax laws in question being drafted and passed? The only detailed legislative scrutiny that tax law receives is a three-day sitting of the Dail Finance Committee, and a one-day session in the Senate. Such discussion as occurs in either place on a Finance Act is at best superficial. Many provisions are not even discussed due to the strict timetable that is imposed on discussions. |
Brian Daly, Partner, KPMG Financial Services
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| Article appeared in the January 2004 issue.
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