| Intelligence gathering or intimidation? |
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| The UK has followed USA example by requiring notification to the Revenue of certain tax planning. Is this a legitimate collection of information or is it part of a wider campaign to vilify and intimidate larger taxpayers? Is there evidence of a similar campaign in Ireland? |
Registration of tax plans
The UK 2004 Finance Act has imposed an obligation on taxpayers and on tax advisers to notify the UK Revenue authorities of tax planning where it involves certain specified features. The USA have had a broadly similar obligation for a number of years.
In the UK the obligation to notify the Revenue is primarily placed on the tax adviser, where the tax
adviser is located in the UK. Where the tax adviser is not obliged (eg by reason of being located outside the UK) to register planning advice, the obligation falls on the taxpayer who implements it.
However even where the adviser has the obligation to notify the plan to the Revenue authorities, a taxpayer who implements the plan is obliged to include a reference number for the notification in their tax return.
The UK reporting obligations have features that suggest that the scheme is not solely designed to provide the Revenue authorities with sufficient information to identify possibly erroneous interpretations of tax law, or to advise the Government on the possible need to revise tax law.
Instead, there are indications that the more immediate purpose of the reporting regime may be intimidation of tax advisers and of taxpayers.
The obligation on a tax advisor to report the provision of tax advice which falls within the reportable category arises within five days of the provision of that tax advice! The time limit is so unreasonable and unrelated to any legitimate requirement for timely information, that it exposes what the new law is all about.
It would be nice but ingenuous to believe that the purpose of requiring a taxpayer to identify the fact that he has used a particular tax plan is to ensure that the Revenue can identify the need to correct his return, if they believe that such planning is ineffective. It seems more likely that the obligation on the taxpayer to identify the fact that he has used certain tax plans will serve to place such a taxpayer under threat of punitive Revenue auditing including in areas unrelated to the tax plan.
Should tax planning be discouraged?
There are no free State services. Everything which is consumed comes at a price and somebody pays for it. It is a political decision as to whether particular goods or services should be paid for by the consumer or by the taxpayer (via the State). Taxation arises from the need to pay for those goods and services that we have decided, through the political process, should be paid for by the taxpayer and not by the consumer.
There is no natural or inherent right on the part of the State to take part of any individual’s income or wealth. Taxation is a creature of law and the obligation to pay is limited to the obligation imposed by the law. Tax planning involves organising a person’s affairs so as to minimise their exposure to an obligation to pay tax in accordance with the law. It is not only legitimate, it is natural and sensible.
As a partner in another accounting firm recently remarked, the function of the Revenue Commissioners is to collect taxes, and not to extract gifts.
Against that perspective on tax planning, should it be discouraged? A person has a natural right to minimise exposure to taxation. If the political process determines that the exposure of a person to taxation should be greater or should be lesser, then the correct response is to amend the law so as to adjust their exposure. Such amendments of the law are subject to proper democratic debate and occur within constitutional limits.
It seems neither democratic nor constitutional to instead intimidate taxpayers so as to prevent them from minimising their exposure to taxation in accordance with the law.
The Irish viewpoint
The introduction of requirements to register tax plans is against the background in both the UK and in the USA of strong public hostility to tax planning generally, and in particular to businesses moving abroad to lower tax territories. In the USA this debate has gone so far that tax planning issues can become mixed up with a debate on “patriotism”!
Ireland is a low tax territory and does seek to attract inward investment on a low tax basis amongst others. It would not make much sense for Ireland to join in the international witch-hunt against legitimate tax planning.
In the past Ireland has marketed itself internationally not only as a low tax territory, but also as a business-friendly jurisdiction. There are already fears that our reputation in that regard may be damaged by the new and comparatively onerous obligations imposed on directors. If Ireland followed the UK and USA example with regard to registration of tax planning, it could send the wrong message internationally and also add further to the administrative and compliance cost of doing business in Ireland.
Any attempt to focus such a registration requirement solely on tax plans that impact the Irish exchequer, and without regard to tax planning which may impact the exchequers of our EU fellow members might well fall foul of EU law. There is a slippery slope here which could lead to an unacceptable situation where the Irish Revenue might have to notify foreign Revenues of tax planning advice given to companies located in other EU member states, which might lead to those companies setting up in Ireland.
Ireland does have problems with tax collection but it does not lie in the area of legitimate tax planning. As the results of recent tribunals and investigations have suggested, Ireland’s problems in the past have lain in the area of evasion, and not avoidance. Revenue resources are scarce and will be best employed dealing with the real problem that exists, rather than tackling something that is not legitimately a problem at all.
Could it happen here?
Could the Revenue Commissioners be tempted to raise taxes from intimidation rather than legislation? The temptation is ever present. It is much easier to issue a loosely worded press release and generate a bit of hysteria, than it is to more carefully design our tax laws. But in fairness, the Revenue Commissioners have not so far gone down this road to any great extent.
In an address at the KPMG Tax Conference in November 2003, Revenue Commissioner O’Grady made specific reference to the possibility of introducing in Ireland tax planning reporting obligations similar to those in the USA. He emphasised that his comment was speculative and that any policy decision would lie with the government.
There is a risk that demonisation by elements of the media of the successful in society, confusion of avoidance and evasion in debate, the use of Revenue powers for purposes for which they were not designed or enacted, could become a threat to civil liberties and the attractiveness of Ireland as a location for inward investment and strong economic activity if not closely watched. |
Brian Daly, Editor
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| Article appeared in the October 2004 issue.
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