Judgment
Title: | Revenue Commissioners -v- O'Flynn Construction & ors |
Neutral Citation: | [2011] IESC 47 |
Supreme Court Record Number: | 264/06 |
High Court Record Number: | 2005 403 R |
Date of Delivery: | 12/14/2011 |
Court: | Supreme Court |
Composition of Court: | Fennelly J., Macken J., Finnegan J., O'Donnell J., McKechnie J. |
Judgment by: | O'Donnell J. |
Status: | Approved |
Result: | Dismiss |
 | |
| Judgments by | Link to Judgment | Concurring | Dissenting | O'Donnell J. | | Fennelly J., Finnegan J. | McKechnie J. | McKechnie J. | | | | |
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THE SUPREME COURT
Record No.: 264/2006
Fennelly J.
Macken J.
Finnegan J.
O'Donnell J.
McKechnie J.
Between:
O’Flynn Construction Limited,
John O’Flynn and Michael O’Flynn
Appellants
AND
The Revenue Commissioners
Respondents
Judgment of O’Donnell, J. delivered the 14th day of December 2011.
1 This case has its origins in a complex series of transactions which were completed in the short period between the 5th December, 1991, and the 24th January, 1992. However the root of the issue goes back even further.
2 In 1958 the State sought to encourage the manufacture of products for export by introducing an Export Sales Relief Scheme (“ESR Scheme”) whereby profits earned from qualifying exports would be exempt from corporation tax. Furthermore, dividends declared from such profits would also be relieved from income tax in the hands of shareholders. To this basic scheme there was one critical addition. From the outset it was recognised that the incentive in respect of dividends could be significantly devalued where the shares in an exporting company were held in a group structure by other companies. Accordingly, it was part of the scheme to ensure that the tax benefit of the scheme would be capable of being received by the ultimate individual shareholder. Thus, if income was received by way of dividend from an ESR company, a dividend declared in turn from such income would also be entitled to tax relief in the hands of that shareholder and so on until it came into the hands of an individual. The income, it was said, was “franked income” and retained its tax relieving status no matter how many companies it passed through.
3 It is to be presumed that the incentive scheme was successful in promoting exports. Certainly it was common place for companies during that time to set up specific exporting companies to ensure that the profits from such activity were isolated and that there could no dispute about the extent of tax relief available. One such company was Mitchelstown Export Company Ltd. (hereafter “Mitchelstown”), a subsidiary of the Dairygold Group. In late 1991, Mitchelstown had ESR reserved of IR£1.2 million which I understand to mean that it had generated profits from qualifying exports in that amount. However, for reasons which were not explained in these proceedings, Mitchelstown was not in a position to declare a dividend. Therefore, its shareholders or ultimate shareholders could not make use of the export sales relief to receive a tax free dividend. This state of affairs was particularly significant in late 1991 because Export Sales Relief was due to be phased out from the end of January, 1992.
4 While Mitchelstown, for its part, had a difficulty in exploiting its ESR reserves, there were many companies among the two companies at issue in these proceedings, O’Flynn Construction Limited (“OFCL”) the principal shareholders which were the taxpayers in this case, Michael O’Flynn and John O’Flynn, and another company O’Brien and O’Flynn Limited (“OBOFL”) which had profits capable of being distributed as dividends to their shareholder but in circumstances in which tax would become payable on such dividends in the hands of the shareholders. This state of affairs created a form of arbitrage opportunity for any person who could devise a scheme which would allow the export sales relief accumulated by Mitchelstown to take effect and provide tax relief to the distributable profits of companies such as OBOFL and OFCL, to the mutual benefit of the individuals, and sometimes companies. Thus it was that over the period of December, 1991, and January, 1992, three substantial businesses in the Munster region took a number of intricate steps to implement a tax avoidance scheme.
The Scheme
5 The scheme in this case was devised with some ingenuity and implemented with a precision which at a technical level is undoubtedly admirable. One of the features of a tax avoidance scheme such as this is that although it is presumably explained in some detail to the participants in order to encourage them to take part, only the mechanics of the transaction are disclosed to the Revenue. When this case made its way before the Appeal Commissioners, the tax payers and their advisors did not go into evidence. Accordingly, it is not always clear what exactly was involved in some of the steps, or why each individual step was taken. However, in sum, more that 40 individual steps were taken over a period of 50 days and the end result, as intended, was that the two companies OBOFL and OFCL, reduced their profit by making capital contributions to other companies (which contributions were later written off), while the shareholders of both companies received tax relieved dividends from other entities. The Dairygold Group, for its part, was, at the end of the transaction, better off by IR£117,668.
6 This case proceeded to some extent on the basis that since what was planned and executed here was a tax avoidance scheme, the only question was whether or not it contravened s.86 of the Finance Act 1989 (“the Act of 1989”), and for that purpose it was said, it was not necessary to understand in any detail how the scheme worked. That course has considerable attraction, but it seems to me that in order to resolve the question of the validity of the scheme by reference to the provisions of s.86, it is necessary to seek to understand the scheme at least in broad detail. Accordingly I have sought to set out in this judgment my understanding of what is a quite intricate scheme. It follows from what has already been observed as to the limited evidence available, that it may be that I have misunderstood some aspects of the scheme. Any observations made by me in relation to the purpose of any particular step are inferences drawn by me, perhaps inaccurately, from the surrounding circumstances, and are not derived from any explanation proffered by the tax payers. Nevertheless it appears useful to set out my understanding of both the mechanics of the scheme and its purpose.
7 As mentioned already, a key component in this scheme, indeed the genesis of the scheme itself, was the fact that although Mitchelstown had ESR reserves, it was not able itself to exploit them. We were informed that this had something to do with the corporate structure of the Dairygold Group. That may well be the case, but a component of the difficulty seems to have been the fact that Mitchelstown did not itself have cash with which to pay any dividend it might declare by reference to the ESR reserves. The first part of the scheme appears therefore to have been designed to provide funds that would permit Mitchelstown to declare and pay a dividend to a company (in this case Twingrove) which could then be isolated from the Dairygold group, and used as a vehicle to permit the payment of the ESR dividend to the ultimate intended beneficiaries.
The First Phase of the Scheme
8 On the 5th December, 1991, a company, Wilcrest Holdings Ltd., issued share capital to Dairygold Co-Operative Society Ltd. and borrowed an unsecured loan from this company in the sum of IR£1,996,467. The logic of this particular figure is not apparent from the information available to this Court. It does appear that it is common case in tax avoidance schemes to avoid round numbers whether from a form of superstition, or to add an air of verisimilitude to the transaction. However, it may be easier to understand the scheme if the figure here is understood as effectively a round figure of IR£2million. On the same day, Wilcrest also established three companies, Twingrove Investments Ltd. (“Twingrove”), Gatesville Investments Ltd. (“Gatesville”) and Dalemount Investments Ltd. (“Dalemount”) for IR£100 each. It may be useful to say at this point that Twingrove is the company into which the Mitchelstown dividend was to be paid and then paid onwards to the ultimate beneficiaries namely the directors of OBOFL and OSCL, and that Gatesville was to be the vehicle through which OBOFL would introduce funds into the transaction, and Dalemount was to perform that function for OFCL.
9 On the 9th December, 1991, Wilcrest agreed to lend IR£665,489 each to Twingrove, Dalemount and Gatesville to finance the acquisition by these companies of share capital in Mitchelstown. Accordingly within a period of four days Wilcrest disposed of the entirety of the money it had borrowed as an unsecured loan from Dairygold lending a third of that sum to each of Twingrove, Dalemount and Gatesville.
10 The following day, the 10th December, 1991, Mitchelstown resolved to issue shares to Twingrove, Dalemount and Gatesville for approximately IR£666,000 each being the amount lent to those companies by Wilcrest. The par value of the shares was IR£6,666 (again approximately) and the shares were thus issued at a premium of IR£99 per share. Pausing at this stage of the transaction, Mitchelstown had IR£2 million in cash and ESR reserves of IR£1.2 million.
11 On the 16th December, 1991, Mitchelstown resolved to pay a dividend of the shares issued to Twingrove alone in the sum of IR£1.2 million and a cheque issued to Twingrove on that date. Two days later on the 18th December, 1991, at an EGM of Mitchelstown, it was resolved to redeem the shares issued to both Gatesville and Dalemount at par and to redeem the shares issued to Twingrove at a premium of IR£99 per share. The shares were redeemed on this date. At this point in the transaction Twingrove had IR£1.2 million in ESR dividends and the IR£666,000 (odd) by way of redemption of the share capital. It also owed IR£666,000 to Wilcrest. It no longer owns shares in Mitchelstown; its period as a shareholder in that company lasting eight short, but extremely profitable days. Gatesville and Dalemount however, have fared rather worse. They owe IR£666,000 to Wilcrest, no longer have shares in Mitchelstown, and only have the sum of IR£6,666 by way of redemption of the share capital in Mitchelstown.
12 On the 18th December, 1991, Twingrove agreed to make interest free loans of €658,834 to both Dalemount and Gatesville. The effect of this is to put both those companies in funds which together with the IR£6,666 repaid for the redemption of the shares in Mitchelstown, will allow those companies to repay their debt to Wilcrest of IR£666,000 approximately, respectively.
13 On the same day it was resolved by Twingrove that it would repay IR£547,821 of its outstanding loan to Wilcrest Holdings Limited. This left a shortfall of IR£117,668 owing by Twingrove to Wilcrest. Twingrove now has no cash at all, owes Wilcrest £117,668 but has ESR reserves of IR£1.2million and the debts due by Gatesville and Dalemount.
14 On receipt of the loans from Twingrove, both Gatesville and Dalemount resolved to pay their outstanding loans to Wilcrest Holdings Ltd. Those companies now owe approximately IR£658,834 each to Twingrove.
15 On the 19th December, 1991, following a board resolution passed on that date, Wilcrest Holdings resolved to repay the sum of IR£1,878,799 to Dairygold Cooperative Society Ltd. This leaves a shortfall owing to Dairygold of IR£117,668, which mirrors the IR£117,668 retained by Mitchelstown.
16 This concluded the first phase of the transaction which occurred wholly within the Dairygold Group. By the end of 1991, therefore, the position is that Dairygold had engaged in loan transactions which had been almost fully repaid but leaving a balance of IR£117,668 due to Dairygold. This sum would in due course be paid by monies provided by the beneficiaries of the scheme. Mitchelstown, for its part, no longer had its ESR reserves, but has just less than one tenth of that figure in cash i.e. IR£117,668. Wilcrest owes Dairygold IR£117,668. Twingrove owes that sum to Wilcrest, has no cash, but now holds IR£1.2 million in ESR reserves. Gatesville and Dalemount owe effectively IR£666,000 to Twingrove.
17 The major object of this phase of the transaction appears to have been to put Mitchelstown in funds to pay an ESR dividend to a company, Twingrove, which could then be isolated and used to pay the dividend on to the intended ultimate beneficiaries. By the introduction of the cash lent by Dairygold to Wilcrest, the dividends have been flushed out of Mitchelstown and into Twingrove. By the mechanism of redeeming the Wilcrest and Gatesville shares at par, the redemption of the Twingrove shares at a premium, and the payment of the dividend to Twingrove, and a subsequent loan by Twingrove to Dalemount and Gatesville, a debt has been created, owed by both companies, the repayment of which will create a route to allow the introduction of cash from OBOFL and OFCL, which can fund the payment of the dividend by Twingrove.
Phase Two
18 The second phase of the transaction involved procuring the payment of dividends to three shareholders in OBOFL. This part of the transaction is not itself the subject matter of these proceedings. It is necessary however to briefly sketch the steps taken because they established the trail ultimately followed in the case of OFCL and by the tax payers Michael O’Flynn and John O’Flynn.
19 On the 15th January, 1992, the three shareholders in OBOFL applied for and were allotted 1,000 shares in a new company Camril Ltd.
20 On the same date (15th January, 1992) Camril offered to acquire the shareholding in Wilcrest Holdings from Dairygold Cooperative Society for IR£1,000 and in addition undertook to put Wilcrest Holdings in funds to the sum of £IR£117,668 to enable it to repay the outstanding loan to Dairygold Cooperation Society Ltd. This allowed Dairygold to exit from the transaction.
21 On the 17th January, 1992, a loan of that sum (IR£117,668) was advanced by the three shareholders in OBOFL who by now were also shareholders in Camril, to that company. On the same day Camril advanced a loan of IR£117,668 to Wilcrest which then discharged the outstanding loan to Dairygold.
22 Accordingly on the 17th January, 1992, the Dairygold end of the transaction was almost complete. Dairygold had been fully paid all the sums it had lent, and Mitchelstown was better off to the tune of IR£117,668. The Mitchelstown ESR had now been used by the payment of the dividend to Twingrove. In effect the Dairygold Group had “sold” the ESR reserves of IR£1.2 million for close to IR£120,000 in cash. In due course the shareholders in OBOFL/Camril would be reimbursed as to 50% of that amount by OFCL. The next step would be to secure the introduction of funds into the structure which had been established, which would allow the payment of the dividend from Twingrove up to Wilcrest and on to Camril and out to the shareholders in Camril who were also the shareholders in OBOFL.
23 On the 15th January, 1992, the three shareholders in OBOFL had been appointed to the boards of Gatesville, Dalemount, Twingrove and Wilcrest Holdings. On the following day at a board meeting of OBOFL Ltd. it was resolved to offer to Wilcrest holdings IR£100 for the share capital in Gatesville Ltd. It was also resolved, should the offer be accepted, to make an immediate capital contribution of IR€658,834 to Gatesville. Because this part of the transaction is not the subject matter of this appeal, it is not clear what occurs in respect of this money. However, in the subsequent transaction involving OFCL, that capital contribution was ultimately written off by the company OFCL, and it is to be assumed that the same occurred in the case of OBOFL.
24 On the 16th January, Gatesville agreed to repay its outstanding loan of IR£658,834 to Twingrove Investments Ltd. This had the effect of repaying the loan to Twingrove and putting Twingrove in funds to pay a dividend of IR£600,000 (being one half of the ESR reserves) and also to allow repayment of the sum of IR£58,834 (which appears to be one half of the IR£117,668 received by the Dairygold Group). In due course this same route was to be followed by the OFCL money so that the shareholders in OBOFL will be reimbursed to the tune of IR£58,834 and thus the cost of the IR£117,668 benefit obtained by Mitchelstown will then have been shared equally between the OFCL and OBOFL interests.
25 Accordingly, on the 17th January, 1992, Twingrove resolved to repay the sum of IR£58,834 to Wilcrest Holdings Ltd. and to pay a dividend of IR£6,000 per share to Wilcrest Holding Ltd. On the same day Wilcrest resolved to repay the IR£58,834 it had just received to Camril Ltd. Again on the same day the 17th January, 1992, Wilcrest declared a dividend of IR£600 per share. It might be recalled that the shareholder in Wilcrest is now Camril, a vehicle for the shareholders in OBOFL. At a board meeting of Camril held on the same day the loan of IR£58,834 received from Wilcrest, was repaid to the three shareholders and on the same day a dividend of IR£590.59 per share was declared resulting in a dividend payment of IR£19,667 to each of the shareholders. The balance of IR£10,000 was paid to OBOFL to cover administrative expenses.
26 This concludes the second phase of the scheme. At this stage Twingrove now has IR£600,000 in ESR reserves left. It has no cash, but it is owed IR£658,834 by Dalemount. OBOFL is worse off to the tune of IR£658,834 being the cost of its written off capital contribution to Gatesville. For their part the three shareholders in OBOFL have received almost IR£200,000 each in tax relieved dividends paid by Camril.
Phase Three
27 The third phase of the transaction follows what is by now a familiar route. On the 22nd January, 1992, Michael O’Flynn and John O’Flynn, the principals in OFCL, replaced the shareholders of OBOFL as directors of Dalemount, Twingrove and Wilcrest respectively. It is no longer necessary to be a shareholder in Gatesville which has served it purpose. On the same day a new company, Magmac International Ltd., a company controlled by Michael O’Flynn and John O’Flynn offered Camril IR£1,000 for its shareholding in Wilcrest Holdings Limited. In addition it undertook to put Wilcrest in funds to discharge the outstanding loan of IR£58,834 owed to Camril.
28 On the 23rd January, 1992, a loan of IR£58,834 was advanced by OFCL to Wilcrest Holdings Ltd. On the same day Wilcrest discharged its outstanding loan to Camril Ltd. This has the effect of paying the OFCL a fifty percent share of the IR£117,668. Again, on the 23rd January, OFCL offered Wilcrest IR£100 for its shareholding in Dalemount Investment Ltd. On the same day a board resolution was passed by OFCL that the company would make a capital contribution of IR£658,834 in Dalemount Ltd. should its offer be accepted. The following day, on the 24th January, Dalemount Investments received a capital contribution of IR£658,834 from OFCL.
29 On the same day, the 24th January, 1992, Dalemount repaid the outstanding amount of IR£658,834 to Twingrove Investments Ltd. Twingrove held a board meeting on the same day and repaid the outstanding loan of IR£58,834 owed to Wilcrest Ltd. On the same day Wilcrest repaid the outstanding loan owed to OFCL. Again, on the same day, Twingrove resolved to pay a dividend of IR£6,000 per share. The only shareholder in Twingrove and beneficiary of the dividend was Wilcrest which same day resolved to pay a dividend of IR£600 per share to its shareholder now Magmac International Ltd. in succession to Camril (the OBOF vehicle) and Dairygold. On the same day, the 24th January, 1992, Magmac resolved to pay a dividend of IR£596 per share to its shareholders, being John and Michael O’Flynn, who are also, and not coincidentally, the shareholders in OFCL. In addition, Magmac made a payment of IR£4,000 to cover the administrative expenses of OFCL.
30 By this stage, the 24th January, 1992, the shareholders in OFCL who were also shareholders in Magmac International Ltd, had received a dividend of almost IR£300,000 each. The documents disclosed in Court do not record when they became shareholders in Magmac, but the shareholders in OBOFL had become shareholders in Camril only on the 15th January, 1992, and it seems unlikely that the O’Flynns were shareholders in Magmac for any longer period. By contrast OFCL had paid out €658,834. Of that, €58,834 represented one half of the IR£117,668 which was in effect Mitchelstown’s fee for sale of its ESR reserve. The accounts of OFCL record the fate of that capital contribution as follows (Document reference no.: 1039271): -
“The company acquired the issued share capital of Dalemount Investments Limited being 100 shares of £1 each. The company also made a capital contribution to Dalemount Investments Limited of £658, 834. That company used these funds to repay other debts which it had. At year end, the capital contribution to Dalemount Investments Limited had diminished in value. The Directors, therefore, have taken the prudent step of writing off a large portion of the contribution.”
31 In the event therefore, IR£658,000 was written off. As it happened the 1992 accounts also record the further history of the dividend monies. It was recorded that both Michael and John O’Flynn were in receipt of a dividend from Magmac International Ltd. which they lent to the company as they had no immediate needs for the funds and the company was able to use the funds to reduce its banking requirements. Accordingly, each dividend of IR£298,000 appears in the accounts as a director’s loan in that sum by each of the directors to the company. Accordingly, the money itself came back to the company, but in the period of three days it had changed character from being profits of the company distributable to its shareholders, to a debt owed by the company to its directors which could in due course be paid without attracting tax.
32 This is quite a complex transaction carried out over a short period of time. If the contributions to pay the sum of IR£117,668 are ignored, and we focus solely on the payment of a dividend to Magmac, then the transaction can be simplified somewhat. Dairygold used funds to move the ESR dividend from Mitchelstown into a vehicle, Twingrove, and in doing so also created a debt due by another company Gatesville to Twingrove. A further company Wilcrest becomes a shareholder in Twingrove and thus entitled to receive a dividend from it. Then a company is created or acquired (Magmac), the shareholding in which is held by the two shareholders in the OFCL. OFCL then lends almost IR£600,000 to Gatesville (and then writes off the debt). Gatesville uses the money to discharge its existing debt to Twingrove. Twingrove then uses that money to declare and pay a dividend to its shareholder Wilcrest which then in turn pays the dividend to Magmac which then pays a dividend to its shareholders, being also the shareholders in OFCL. Simplified even further, in essence the scheme involved a company (OFCL) lending money and then writing off the loan, which permitted another company to pay ESR tax relieved dividends to the shareholders in OFCL.
33 It is possible to admire the ingenuity with which the scheme was devised and efficiency with which it was executed but lament the fact that such skills are put to use for the sole objective of avoiding tax. The reason each party was able to become involved in this scheme, and why companies and advisors were able to devote time and considerable sums of money to the scheme, was that in effect, if successful it would be paid for by the tax avoided by the shareholders in OFCL. It is probably unnecessary to observe that the scheme is entirely artificial. It has no commercial logic. Its only purpose was to permit an ESR dividend to be paid to the shareholders in the company that supplied the original funds. The artificiality of the scheme is not in any way denied by the tax payers. Indeed, they put the matter with disarming bluntness:
“In the transactions here, Mitchelstown sold these reserves to the appellant company, for cash. The shareholders in the appellant company, who are the individuals … then received ESR dividends … the ultimate effect of the transaction was that the shareholders of the appellant company received ESR dividends originally earned by Mitchelstown but purchased by the appellant company.”
34 This was undoubtedly the commercial reality of the transaction. It is, however, worth noting at least two things: first, at no stage of the transaction did the appellant company (OFCL) deal directly with Mitchelstown; and second, not one of the steps in this transaction could constitute “a sale” by any party, at least as a matter of law. Notwithstanding the artificiality of the scheme, the appellant tax payer says that it was perfectly lawful. In the end, franked dividends earned legitimately by an ESR company, passed through a series of companies to the shareholders in Magmac and the appellants herein. Nothing (the Appellants contend) in the ESR scheme required that the shareholders receiving such dividends should be shareholders at any time in the ESR earning company, or indeed be shareholders in the related company, at the time when the profits were earned.
35 It was common case in this appeal that, absent the provisions of s.86 of the Act of 1989, the scheme here complied with the legislation creating the ESR relief and was perfectly lawful. The question which occupied the Appeal Commissioners, the High Court and this Court in turn, is whether s.86 and in particular s.86(3)(b) permitted the Revenue Commissioners to form the opinion that the transaction was a tax avoidance transaction which could be disallowed.
36 Section 86 of the Act of 1989 provides as follows: -
“86. -(1) (a) In this section—
“the Acts” means—
(i) the Tax Acts,
(ii) the Capital Gains Tax Acts,
(iii) the Value-Added Tax Act, 1972 , and the enactments amending or extending that Act,
(iv) the Capital Acquisitions Tax Act, 1976 , and the enactments amending or extending that Act,
(v) Part VI of the Finance Act, 1983, and the enactments amending or extending that Part, and
(vi) the statutes relating to stamp duty,
and any instrument made thereunder;
“business” means any trade, profession or vocation;
“notice of opinion” means a notice given by the Revenue Commissioners under the provisions of subsection (6);
“tax” means any tax, duty, levy or charge which, in accordance with the provisions of the Acts, is placed under the care and management of the Revenue Commissioners and any interest, penalty or other amount payable pursuant to those provisions;
“tax advantage” means—
(i) a reduction, avoidance or deferral of any charge or assessment to tax, including any potential or prospective charge or assessment, or
(ii) a refund of or a payment of an amount of tax, or an increase in an amount of tax, refundable or otherwise payable to a person, including any potential or prospective amount so refundable or payable,
arising out of, or by reason of, a transaction, including a transaction where another transaction would not have been undertaken or arranged to achieve the results, or any part of the results, achieved or intended to be achieved by the transaction;
“tax avoidance transaction” has the meaning assigned to it by subsection (2);
“tax consequences” means, in relation to a tax avoidance transaction, such adjustments and acts as may be made and done by the Revenue Commissioners pursuant to subsection (5) in order to withdraw or deny the tax advantage resulting from the tax avoidance transaction;
“transaction” means—
(i) any transaction, action, course of action, course of conduct, scheme, plan or proposal, and
(ii) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable or intended to be enforceable by legal proceedings, and
(iii) any series of or combination of the circumstances referred to in paragraphs (i) and (ii),
whether entered into or arranged by one person or by two or more persons:-
(I) whether acting in concert or not, or
(II) whether or not entered into or arranged wholly or partly outside the State, or
(III) whether or not entered into or arranged as part of a larger transaction or in conjunction with any other transaction or transactions.
(b) In subsections (2) and (3), for the purposes of the hearing or rehearing under subsection (8) of an appeal made under subsection (7) or for the purposes of the determination of a question of law arising on the statement of a case for the opinion of the High Court, the references to the Revenue Commissioners shall, subject to any necessary modifications, be construed as references to the Appeal Commissioners or to a judge of the Circuit Court or, to the extent necessary, to a judge of the High Court, as appropriate.
(2) For the purposes of this section and subject to subsection (3), a transaction is a “tax avoidance transaction” if, having regard to any one or more of the following, that is to say—
(a) the results of the transaction,
(b) its use as a means of achieving those results, and
(c) any other means by which the results or any part of the results could have been achieved,
the Revenue Commissioners form the opinion that—
(i) it gives rise to, or, but for this section, would give rise to, a tax advantage, and
(ii) the transaction was not undertaken or arranged primarily for purposes other than to give rise to a tax advantage,
and references in this section to the Revenue Commissioners forming an opinion that a transaction is a tax avoidance transaction shall be construed as references to them forming an opinion with regard to the transaction in accordance with the provisions of this subsection.
(3) Without prejudice to the generality of the provisions of subsection (2), in forming an opinion in accordance with that subsection and subsection (4), as to whether or not a transaction is a tax avoidance transaction, the Revenue Commissioners shall not regard the transaction as being a tax avoidance transaction if they are satisfied that—
(a) notwithstanding that the purpose or purposes of the transaction could have been achieved by some other transaction which would have given rise to a greater amount of tax being payable by the person, the transaction—
(i) was undertaken or arranged by a person with a view, directly or indirectly, to the realisation of profits in the course of the business activities of a business carried on by the person, and
(ii) was not undertaken or arranged primarily to give rise to a tax advantage,
or
(b) the transaction was undertaken or arranged for the purpose of obtaining the benefit of any relief, allowance or other abatement provided by any provision of the Acts and that transaction would not result directly or indirectly in a misuse of the provision or an abuse of the provision having regard to the purposes for which it was provided:
Provided that, in forming an opinion as aforesaid in relation to any transaction, the Revenue Commissioners shall have regard to—
(I) the form of that transaction,
(II) the substance of that transaction,
(III) the substance of any other transaction or transactions which that transaction may reasonably be regarded as being directly or indirectly related to or connected with, and
(IV) the final outcome and result of that transaction and any combination of those other transactions which are so related or connected.
(4) Subject to the provisions of this section, the Revenue Commissioners, as respects any transaction, may, at any time—
(a) form the opinion that the transaction is a tax avoidance transaction,
(b) calculate the tax advantage which they consider arises, or which, but for this section, would arise, from the transaction,
(c) determine the tax consequences which they consider would arise in respect of the transaction if their opinion were to become final and conclusive in accordance with subsection (5) (e), and
(d) calculate the amount of any relief from double taxation which they would propose to give to any person in accordance with the provisions of subsection (5) (c).
(5) (a) Where the opinion of the Revenue Commissioners that a transaction is a tax avoidance transaction becomes final and conclusive they may, notwithstanding any other provision of the Acts, make all such adjustments and do all such acts as are just and reasonable (in so far as those adjustments and acts have been specified or described in a notice of opinion given under subsection (6) and subject to the manner in which any appeal made under subsection (7) against any matter specified or described in the notice of opinion has been finally determined, including any adjustments and acts not so specified or described in the notice of opinion but which form part of a final determination of any appeal as aforesaid) in order that the tax advantage resulting from a tax avoidance transaction shall be withdrawn from or denied to any person concerned.
(b) Subject to, but without prejudice to the generality of paragraph (a), the Revenue Commissioners may—
(i) allow or disallow, in whole or in part, any deduction or other amount which is relevant in computing tax payable, or any part thereof,
(ii) allocate or deny to any person any deduction, loss, abatement, relief, allowance, exemption, income or other amount, or any part thereof, or
(iii) recharacterize for tax purposes the nature of any payment or other amount.
(c) Where the Revenue Commissioners make any adjustment or do any act for the purposes of paragraph (a), they shall afford relief from any double taxation which they consider would, but for this paragraph, arise by virtue of any adjustment made or act done by them pursuant to the foregoing provisions of this subsection.
(d) Notwithstanding any other provision of the Acts, where—
(i) pursuant to subsection (4) (c), the Revenue Commissioners determine the tax consequences which they consider would arise in respect of a transaction if their opinion, that the transaction is a tax avoidance transaction, were to become final and conclusive, and
(ii) pursuant to that determination, they specify or describe in a notice of opinion any adjustment or act which they consider would be, or be part of, the said tax consequences,
then, in so far as any right of appeal lay under subsection (7) against any such adjustment or act so specified or described, no right or further right of appeal shall lie under the Acts against that adjustment or act when it is made or done in accordance with the provisions of this subsection or against any adjustment or act so made or done that is not so specified or described in the notice of opinion but which forms part of the final determination of any appeal made under the said subsection (7) against any matter specified or described in the notice of opinion.
(e) For the purposes of this subsection an opinion of the Revenue Commissioners that a transaction is a tax avoidance transaction shall be final and conclusive—
(i) if, within the time limited, no appeal is made under subsection (7) against any matter or matters specified or described in a notice or notices of opinion given pursuant to that opinion, or
(ii) as and when all appeals made under the said subsection (7) against any such matter or matters have been finally determined and none of the appeals has been so determined by an order directing that the opinion of the Revenue Commissioners to the effect that the transaction is a tax avoidance transaction is void.
(6) (a) Where, pursuant to subsections (2) and (4), the Revenue Commissioners form the opinion that a transaction is a tax avoidance transaction, they shall immediately thereupon give notice in writing of the opinion to any person from whom a tax advantage would be withdrawn or to whom a tax advantage would be denied or to whom relief from double taxation would be given, if the opinion became final and conclusive, and the notice shall specify or describe—
(i) the transaction which in the opinion of the Revenue Commissioners is a tax avoidance transaction,
(ii) the tax advantage, or part thereof, calculated by the Revenue Commissioners which would be withdrawn from or denied to the person to whom the notice is given,
(iii) the tax consequences of the transaction determined by the Revenue Commissioners, in so far as they would refer to the person, and
(iv) the amount of any relief from double taxation calculated by the Revenue Commissioners which they would propose to give to the person in accordance with subsection (5) (c).
(b) Section 542 of the Income Tax Act, 1967 , shall, with any necessary modifications, apply for the purposes of a notice given under this subsection, or subsection (10), as if it were a notice given under that Act.
(7) Any person aggrieved by an opinion formed or, in so far as it refers to the person, a calculation or determination made by the Revenue Commissioners pursuant to subsection (4) may, by notice in writing given to the Revenue Commissioners within 30 days of the date of the notice of opinion, appeal to the Appeal Commissioners on the grounds and, notwithstanding any other provision of the Acts, only on the grounds that, having regard to all of the circumstances, including any fact or matter which was not known to the Revenue Commissioners when they formed their opinion or made their calculation or determination, and to the provisions of this section—
(a) the transaction specified or described in the notice of opinion is not a tax avoidance transaction, or
(b) the amount of the tax advantage, or the part thereof, specified or described in the notice of opinion which would be withdrawn from or denied to the person is incorrect, or
(c) the tax consequences specified or described in the notice of opinion, or such part thereof as shall be specified or described by the appellant in the notice of appeal, would not be just and reasonable in order to withdraw or to deny the tax advantage, or part thereof, specified or described in the notice of opinion, or
(d) the amount of relief from double taxation which the Revenue Commissioners propose to give to the person is insufficient or incorrect.
(8) The Appeal Commissioners shall hear and determine an appeal made to them under subsection (7) as if it were an appeal against an assessment to income tax and, subject to subsection (9), all the provisions of the Income Tax Act, 1967 , relating to the rehearing of an appeal and the statement of a case for the opinion of the High Court on a point of law shall apply accordingly with any necessary modifications:
Provided that on the hearing or rehearing of the appeal—
(a) it shall not be lawful to go into any grounds of appeal other than those specified in subsection (7), and
(b) at the request of the appellants, two or more appeals made by two or more persons pursuant to the same opinion, calculation or determination formed or made by the Revenue Commissioners pursuant to subsection (4) may be heard or reheard together.
(9) (a) On the hearing of an appeal made under subsection (7) the Appeal Commissioners shall have regard to all matters to which the Revenue Commissioners may or are required to have regard under the provisions of this section and—
(i) in relation to an appeal made on the grounds referred to in paragraph (a) of subsection (7), they shall determine the appeal, in so far as it is made on those grounds, by ordering, if they, or a majority of them—
(I) consider that the transaction specified or described in the notice of opinion, or any part of that transaction, is a tax avoidance transaction, that the opinion, or the opinion in so far as it relates to that part, is to stand good, or
(II) consider that, subject to such amendment or addition thereto as the Appeal Commissioners, or the said majority of them, deem necessary and as they shall specify or describe the transaction, or any part of it, specified or described in the notice of opinion, is a tax avoidance transaction, that the transaction, or that part of it, be so amended or added to and that, subject to the amendment or addition, the opinion, or the opinion in so far as it relates to that part, is to stand good, or
(III) do not so consider as referred to in clause (I) or (II), that the opinion is void,
or
(ii) in relation to an appeal made on the grounds referred to in paragraph (b) of subsection (7), they shall determine the appeal, in so far as it is made on those grounds, by ordering that the amount of the tax advantage, or the part thereof, specified or described in the notice of opinion be increased or reduced by such amount as they shall direct or that it shall stand good,
or
(iii) in relation to an appeal made on the grounds referred to in paragraph (c) of subsection (7), they shall determine the appeal, in so far as it is made on those grounds, by ordering that the tax consequences specified or described in the notice of opinion shall be altered or added to in such manner as they shall direct or that they shall stand good,
or
(iv) in relation to an appeal made on the grounds referred to in paragraph (d) of subsection (7), they shall determine the appeal, in so far as it is made on those grounds, by ordering that the amount of the relief from double taxation specified or described in the notice of opinion shall be increased or reduced by such amount as they shall direct or that it shall stand good.
(b) The provisions of this subsection shall, subject to any necessary modifications, apply to the rehearing of an appeal by a judge of the Circuit Court and, to the extent necessary, to the determination by the High Court of any question or questions of law arising on the statement of a case for the opinion of the High Court.
(10) The Revenue Commissioners may, at any time, amend, add to or withdraw any matter specified or described in a notice of opinion by giving notice (hereafter in this subsection referred to as the “notice of amendment”) in writing of the amendment, addition or withdrawal to each and every person affected thereby, in so far as the person is so affected, and the foregoing provisions of this section shall apply in all respects as if the notice of amendment were a notice of opinion and any matter specified or described in the notice of amendment were specified or described in a notice of opinion:
Provided that no such amendment, addition or withdrawal may be made so as to set aside or alter any matter which has become final and conclusive on the determination of an appeal made with regard to that matter under subsection (7).
(11) Where pursuant to subsections (2) and (4), the Revenue Commissioners form the opinion that a transaction is a tax avoidance transaction and, pursuant to that opinion, notices are to be given under subsection (6) to two or more persons, any obligation on the Revenue Commissioners to maintain secrecy or any other restriction upon the disclosure of information by the Revenue Commissioners shall not apply with respect to the giving of the notices as aforesaid or to the performance of any acts or the discharge of any functions authorised by this section to be performed or discharged by them or to the performance of any act or the discharge of any functions, including any act or function in relation to an appeal made under subsection (7), which is directly or indirectly related to the acts or functions so authorised.
(12) The Revenue Commissioners may nominate any of their officers to perform any acts and discharge any functions, including the forming of an opinion, authorised by this section to be performed or discharged by the Revenue Commissioners and references in this section to the Revenue Commissioners shall, with any necessary modifications, be construed as including references to an officer so nominated.
(13) This section shall apply as respects any transaction where the whole or any part of the transaction is undertaken or arranged on or after the 25th day of January, 1989, and as respects any transaction undertaken or arranged wholly before that date in so far as it gives rise to, or would, but for this section, give rise to—
(a) a reduction, avoidance or deferral of any charge or assessment to tax, or part thereof, where the charge or assessment arises by virtue of any other transaction carried out wholly on or after a date, or
(b) a refund or a payment of an amount, or of an increase in an amount, of tax, or part thereof, refundable or otherwise payable to a person where that amount, or increase in the amount, would otherwise become first so refundable or otherwise payable to the person on a date,
which could not fall earlier than the said 25th day of January, 1989, as the case may be.”
37 This is a provision of almost mind-numbing complexity. As will become apparent the core issue in this case is the interpretation of s.86(3)(b), and in particular whether the transaction here can be said to result directly or indirectly in the “misuse or abuse” of the ESR provision having regard to the purposes for which it was provided. However, those words require to be put in their statutory context, something which in turn necessitates a consideration of the pre-existing case law. Furthermore, the issue must be analysed in its factual context. Accordingly, it is necessary to trace a number of factual and legal steps by which it can be said the issue presents itself for resolution by this Court.
38 On the 12th August, 1997, an Officer of the Revenue Mr. P.C. O’Laoighaire nominated under the provisions of s.86(12) of the Act of 1989, issued a notice of opinion to the taxpayers in this case that the transaction was captured by s.86. Against that opinion, the taxpayers appealed to the Appeal Commissioners. The Appeal Commissioners rejected a number of contentions put forward by the tax payer, but concluded that the transaction was entitled to the benefit of s.86(3)(b) i.e. that it was undertaken for the purposes of obtaining the benefit of export sales relief, and did not result directly or indirectly in a misuse or abuse of the provision having regard to the purposes for which it was provided. The reasoning of the Appeal Commissioners is set out in a careful and detailed statement of case stated prepared for the High Court at the request of the parties and dated the 13th July, 2005. Subsequently, the High Court (Mr Justice Smyth) rejected the taxpayers’ appeals for those portions of the Appeal Commissioners’ determinations where the Appeal Commissioners had rejected the tax payers’ claims, but allowed the Revenue Commissioner’s appeal against the Appeal Commissioners’ determination on s.86(3)(b). It is against that judgment, that the tax payers now appeal to this Court. Since all the issues which were debated in this Court are addressed in the case stated, and in particular since the Appellants here seek to reinstate the reasoning of the Appeal Commissioners on the interpretation and application of s.86(3)(b), it is necessary to consider the Appeal Commissioners’ reasoning in some detail.
The Determination of the Appeal Commissioners
39 The Appeal Commissioners first determined that the transaction was a tax avoidance transaction within the meaning of s.86(2). The results of the transaction were to deplete the assets of OFCL and to enrich the shareholders of OFCL without either the company or the shareholders incurring any tax. There were other means by which the results or at least part of the results could be achieved, most obviously by the payment of a dividend by the company to the shareholders. Subject to an argument which did not arise in this appeal, and remains to be determined, the payment of the dividend would have resulted in the company incurring a tax in the shape of Advance Corporation Tax (“ACT”). The payment of the dividend would also have involved the shareholders incurring income tax. As a result of the transaction the company and the shareholders have thus avoided a potential liability to tax, by reason of which the transaction gave rise to a tax advantage within the meaning of the section. The Appeal Commissioners further determined the transaction was entered into solely for the purposes of obtaining a tax advantage and accordingly, the negative test contained in s.86(2)(ii) was satisfied, in that the transaction was not undertaken or arranged primarily for the purposes other than to give rise to a tax advantage. But for ss.3 therefore, the Commissioners would have concluded that the transaction was a tax avoidance transaction within the meaning of the section. The High Court upheld this reasoning, but the tax payer has appealed these determinations to this Court. In my judgment, the Appeal Commissioners were entirely correct in the conclusion to which they came and I agree with their reasoning save that it seems to me that the proviso to s.86(3) applies to the formation of an opinion under s.86(2). That proviso requires the Revenue Commissioners (and on appeal the Appeal Commissioners) to have regard when forming their opinion to the form of the transaction, the substance of the transaction, and the substance of any other transaction or transactions with which that transaction may reasonably be regarded as being directly or indirectly related to or connected with, and the final outcome and result of that transaction and any combination of other transactions. Because it is included in a proviso and moreover a proviso to s.86(3) the significance of this provision might be overlooked. It seems clear however, that it requires the Revenue Commissioners in the first place to have regard both to the form and the substance of the transaction. Both those tests, when applied, support the conclusion to which the Appeal Commissioners came. The form of the transaction (or series of transactions) is highly artificial and has no commercial logic. Indeed a number of the steps that the participants were required to take to bring the scheme to fruition appear to defy commercial logic. The substance of the transaction, furthermore, is the acquisition of the Mitchelstown ESR to permit the (indirect) payment of the profits of OFCL to its shareholders without incurring the tax that would be due on a direct payment by the company to its shareholders by way of dividend. Consideration of the form and substance of the transaction can only reinforce the conclusion that this was a tax avoidance transaction within the meaning of s.86, unless it could be said to fall within ss.3.
40 The Appeal Commissioners concluded, however, that the opinion of the Revenue Commissioners was void because they, the Appeal Commissioners, considered that the provisions of s.86(3)(b) were applicable and that the transactions did not result directly or indirectly in the misuse or abuse of the provisions having regard to the purposes for which the relief was provided.
41 The careful reasoning of the Appeal Commissioners on this critical aspect of the decision commenced by observing that the transaction was clearly undertaken to obtain the benefit of ESR. They also observed that the subsection distinguished between abuse and misuse. They considered that the concept of abuse had to be construed with careful reference to the phrase “having regard to the purposes for which it was provided”. In this regard, they referred to the dictum of McCarthy J in Charles McCann v O’Culachain [1986] 1 IR 196 at p. 201 (“It is manifest that part IV of the Act of 1976 was, by tax incentives, to encourage the creation of employment within the State and the promotion of exports - naturally -outside the State objectives - of proper, social and economic kind which the State, would be bound to encourage.”) and considered that the export aspect of the export sales relief scheme was introduced for the same purpose. The Commissioners considered that a fraudulent scheme claiming relief for goods which were not exported at all, could not constitute an abuse of the scheme as s.86 only applied when a tax advantage was achieved through the use of some arrangements which considered without reference to s.86 were effective in avoiding and reducing the tax. A fraudulent scheme was not a use of the ESR scheme at all, rather than being an abuse of it. However, by contrast they considered that a scheme for transferring goods outside the country and then importing them again for sale in Ireland, would be an example of an abuse. “Misuse” was they considered a less strong concept, but an example might be diverting all expenses to the home sales of the business (which profits were taxable) and thus indirectly boosting the tax relievable profits on exports made by the same business. They observed that “the relief was not provided to enable companies to minimise profits on such home sales” and accordingly such a scheme would be a misuse of the relief. Applying this reasoning to the facts of this case, the Appeal Commissioners concluded that there had been no abuse or misuse of the export aspect of the scheme.
42 Turning then to the exemption of tax on dividends, the Appeal Commissioners observed that there was no obvious limitation on this aspect of the scheme e.g. no requirement of any payment of the dividend by any specific date or by reference to any specific period, nor to any person such as existing shareholders, or indeed even shareholders in the exporting company. The conclusions of the Appeal Commissioners on this aspect of the case deserve quotation in full (Decision of 27th April, 2000):
“(xxv) In view of the fact that no such restrictions were enacted we conclude that the comprehensive and entirely unencumbered nature of the exemption can only be considered as intentionally buttressing the total exemption of the corporate profits from tax.
(xxvi) The above comments may need qualification in connection with an ESR Dividend that was paid in substitution for some other legal entitlement foregone by the recipient: e.g. if a salary entitlement were waived and an equivalent amount was paid in the form an ESR dividend to an employee or director, that might in our view, be considered a misuse of the relief having regard to the fact that the relief was not enacted to enable employees to avoid tax on their salaries. The specific anti-avoidance legislation introduced in the 1974 Act can be taken as a confirmation of this point but, even in the absence of that legislation we would be of this point of view. To generalise it may be that the use of the tax free nature of the dividends to avoid a specific tax charged that otherwise would have arisen could be said to be a misuse, whether direct or indirect, of the relief.
(xxvii) …
(xxviii) In regard to the second component of the Export Sales Relief scheme insofar as the shareholders are concerned we are of the view that the payment of bona fide Export Sales Relief relieved profits in the present case does not amount directly or indirectly to a misuse or abuse of the relief having regard to the purposes for which the said second component was enacted and the nature of the relief afforded to those dividends.
(xxix) To conclude that there has been a misuse of the export sales relief provisions would, in our view, be to ignore the statement of the law laid down McGrath v McDermott. While it is necessary to look at the purpose for which Section 86 was enacted, in our opinion Section 86, in itself, cannot be used to abandon the clear principles of statutory construction laid out in that case. These principles of statutory interpretations set out in McGrath v McDermott prohibit us from adopting such a purposive approach.
(xxx) Accordingly, for the reasons set out above, we are precluded from forming the view that the transaction was a tax avoidance transaction by virtue of the terms of S86(3)(b) Finance Act 1989.”
43 At the request of the Revenue Commissioners the Appeal Commissioners stated the case to the High Court as to whether their conclusions on s.86(3)(b) was correct in law. At the request of the tax payers, they also stated the case as to whether (1) the transaction gave rise to a tax advantage for either the company or the individual tax payers; (2) whether the transaction was not undertaken or arranged primarily for the purpose other than to give rise to a tax advantage; and (3) whether the transaction was not arranged with a view to the realisation of profits in the course of business activities in the company pursuant to s.86(3)(a). On each of these latter three points the High Court held that the Appeal Commissioners were correct. For reasons already set out, I am satisfied that the determinations of the Appeal Commissioners on these points were correct in law. The main issue argued on this appeal therefore, was whether the Appeal Commissioners’ findings on s.86(3)(b) were correct.
44 There was some argument as to the standard of review to be applied by the High Court and the Supreme Court on appeal in circumstances where the section required the Revenue Commissioners and the Appeal Commissioners to be of an opinion. While in different circumstances that issue might become central to the Courts’ determination, it seems clear that here the issue is one as to the true interpretation of s.86(3)(b) and its application to facts in this case, which are not in dispute. Accordingly the issue is one of statutory interpretation and therefore an issue of law, and no question of deference to the findings of fact or inferences drawn by either the Revenue Commissioners or the Appeal Commissioners, arises.
45 The High Court found that the Appeal Commissioners were incorrect in law on this issue. The Court’s reasoning is found in a short passage in the judgment: -
“In my judgment, the transaction the subject of these proceedings- whereby export sales relieved reserves in the Dairygold Group were transferred to a company that was not engaged in the manufacture of goods for export to enable fully tax relieved dividends to be paid to the shareholders of a construction company, is completely at odds with the purpose for which the export sales relief was provided”.
46 The tax payer has appealed that determination to this Court.
The High Court Decision
47 Among the material relied upon in this appeal, is a critical commentary on the High Court decision entitled “The O’Flynn Case: Clarification of s811 TCA 1997 (Irish Anti-Avoidance)” Irish Tax Review (July, 2006) p. 37, authored by a tax professional. It makes an important point which is heavily relied upon by the Appellant, at p. 38: -
“The legislation clearly envisaged that a manufacturing company might be within a group and have corporate shareholders. It also clearly envisaged that those corporate shareholders could avail of the benefit of export sales relief when they themselves paid dividends out of reserves obtained from dividends from the exporting company.”
48 It is perhaps an overstatement to say that the legislation “clearly envisaged” this result although it clearly did not prohibit it. However, the core argument is important. Since there is no temporal or causal link between the exporting of the goods and the receipt of the dividends, it would be possible for the tax payers here to have become shareholders in Mitchelstown and to have received themselves or through their company ESR dividends. For example, if the only asset that Mitchelstown or any parent company had was the ESR reserves, then that company could have been acquired by the individual tax payers, or the relevant companies who then would have had access to the ESR, and could have received dividends which were tax relieved because of the prior export of goods by Mitchelstown assuming all the time (and this is an important point) that it would be possible to devise a method of introducing funds into the company which would allow it to pay the dividend. If such an arrangement is permissible, the argument runs, then it might be asked why is this present scheme invalid. Certainly it is said that the argument that the scheme does not exist to permit tax relief dividends to be paid to directors of property companies, is not at a minimum a sufficient reason for disallowance since it is possible to conceive of circumstances in which just that could occur entirely lawfully.
49 However, the comment is couched in a tendentious tone which, while surprising, is nevertheless instructive. It seems to reflect the frustration among tax practitioners with the uncertainties created by s.86. While criticism, even intemperate, of judicial decisions is entirely permissible, and on many occasions may offer illuminating insights, it is in my view significant, that this article makes criticisms of the High Court decision, (including for example the complaint that the High Court did not first decide on the constitutionality of the section), which any person with legal experience which extended beyond the field of tax law would immediately recognise as obviously misplaced. Tax law is a field where the mathematical virtues of clarity and precision are particularly valued, and where concepts such as “purpose”, “abuse”, “misuse” and even “tax advantage” may appear frustratingly elusive. But there are circumstances, of which this case may be an example, in which the narrow and penetrating focus which can illuminate fine points of detail can also obscure that which a broader inquiry might discern.
50 The decision in this case with the Appeal Commissioners, is both clear and concise, and is measured and temperate in its tone. However, in my judgment it contains a number of errors of law, which are traceable to its approach to statutory interpretation. In focussing sometimes minutely on the language contained in part of s.86(3)(b) the analysis misses important guides to the meaning of the subsection, resulting in an unduly constrained application of the section. In order to understand s.86(3)(b), it is necessary to place that subsection in the context of s.86 more generally, and also to understand s.86 against the background of the law which it sought to change.
51 It was common case on this appeal that it was significant that s.86 was introduced in the Act of 1989, a provision which followed shortly after the important decision of this Court in McGrath v McDermott [1988] IR 258. It is agreed, that the purpose of the section was to address the consequences of that decision, and indeed reverse it. In that case, both the High Court and the Supreme Court had refused to follow a recent development in the two famous, if controversial, cases then relatively recently decided by the UK House of Lords : Ramsay v Ireland Revenue Commissioners [1982] AC 300, and Furniss v Dawson [1984] 2 WLR 226. Instead, the courts of this jurisdiction had restated the law as set out in IRC v Duke of Westminster [1936] AC 1.
52 These cases are familiar to all tax practitioners but they require some elaboration. The Westminster case was in many ways the foundation stone for modern tax avoidance and tax mitigation strategies. The majority of the House of Lords (over the telling dissent of Lord Atkin) refused to look to the substance of a transaction in which the employees of the Duke of Westminster engaged, a scheme in which they received untaxed covenanted payments equal to the amount that they had previously received as wages. The court considered that it could only look at the legal nature of the transaction (a covenant which did not attract tax) and could not have regard to the substance of the transaction (employment which did). The principle articulated in the Westminster case, is contained in a well known passage in the speech of Lord Tomlin at pp. 19-20: -
“… it is said that in revenue cases there is a doctrine that the Court may ignore the legal position and regard what is called “the substance of the matter”, and that here the substance of the matter is that the annuitant was serving the Duke for something equal to his former salary or wages, and that therefore while he is so serving, the annuity must be treated as salary or wages. This supposed doctrine … seems to rest for its support upon a misunderstanding of language used in some earlier cases. The sooner this misunderstanding is dispelled, and its supposed doctrine given its quietus, the better it will be for all concerned, for the doctrine seems to involve substituting “the incertain and crooked cord of discretion” for “the golden and streight metwand of the law”. Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less that it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. This so called doctrine of “the substance” seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable.”
53 The Duke of Westminster’s case was considered in this jurisdiction in O’Sullivan v P Ltd (1962) 3 ITC 355, and endorsed. When this approach was coupled with the proposition that taxation (like criminal liability) was only to be imposed by clear language narrowly construed, it was perhaps inevitable that more and more artificial schemes could be produced to seek to exploit perceived loop holes in the tax code. In this progression, the tax advisor would always be one lucrative step ahead of the Revenue. While the legislature might seek to enact legislation to close the loop hole that would only be effective for the future, and then the process would begin again.
54 It appears that in the UK there was a growing discontent with this state of the affairs. In Ramsay and Furniss, the House of Lords adopted a novel approach. Without reversing or indeed appearing to question the decision in the Westminster case, the Court nevertheless concluded that in the words of Lord Fraser in Furniss at pp. 228-229:
“The true principle of the decision in Ramsay was that the fiscal consequences of a pre ordained series of transactions, intended to operate as such, are generally to be ascertained by considering the result of the series as a whole, and not by dissecting the scheme and considering each individual the dual transaction separately.”
55 This was, it was said by some, a principle of statutory interpretation i.e. that in truth the relief sought, or loss incurred, was not what the statute had meant, or was intended to mean. In taking this approach, it was notable that the courts were adopting an approach first taken in the judgment of the distinguished US Judge Learned Hand in Helvin V Gregory (1934) 69 F 2nd 501, a decision nearly contemporaneous with the decision in the Duke of Westminster’s case. For others, the cases represented a significant change in the substantive law.
56 The departure illustrated by both Ramsay and Furniss and the doubts as to whether this constituted a new departure in substantive tax law or merely a principle of statutory interpretation (or both) appears to have given rise to a series of cases and considerable debate in the UK (see, for example IRC v McGuckian[1997] 1 W.L.R.991, MacNiven v Westmoreland Investments[2003]1 A.C. 311 and, Barclays Mercantile Business Finance Ltd v Mawson [2005]1 A.C.684; a paper entitled “Ramsay 25 years on: Some Reflections on Tax Avoidance”, delivered by Lord Walker of Gestingthorpe to the Chancery Bar Association on the 23rd of March, 2004, and published in (2004) 120 L.Q.R. 412, and Prof. Judith Freedman’s article, “Interpreting Tax Statutes: Tax Avoidance and the Intention of Parliament” (2007 123 Jan L.Q.R. 53). It is not necessary however to consider here the merits of that judicial development in the common law of another jurisdiction because in McGrath v McDermott [1988] IR 258 this Court expressly refused an invitation to adopt a similar course.
57 In the High Court in McGrath, Carroll, J had pointed out that the legislature had not enacted a general prohibition of tax avoidance schemes such as has been done in Australia and Canada. She also observed that in those jurisdictions the courts had rejected the idea of judicial interference in the development of tax law by the development of a concept of fiscal nullity.
58 In the Supreme Court, Finlay CJ expressly agreed with the judgment of the High Court. At p. 276 of the report he said:
“The function of the courts in interpreting a statute of the Oireachtas is, however, strictly confined to ascertaining the true meaning of each statutory provision, resorting in cases of doubt or ambiguity to a consideration of the purpose and intention of the legislature to be inferred from other provisions of a statute involved, or even of other statutes expressed to be construed with it. The courts have not got a function to add to or delete from express statutory provision so as to achieve objectives which to the courts appear desirable.”
He concluded at p. 277: -
“In some jurisdictions such as Canada and Australia, general statutory provisions against tax avoidance have been enacted, which in cases to which they apply would, of course, affect the interpretation of specific provisions of taxation laws. In the absence of any such general provisions in our law, there are no grounds for departing from the plain meaning of these sections.”
59 McCarthy, J delivered a concurring judgment. He specifically addressed the position in the UK where it has been stated that the Westminster case had not been overruled and that Ramsay and Furniss, merely stated a principle of statutory interpretation. He observed at p. 278: -
“For myself I am unable to perform the mental gymnastics that I think necessary to conclude that WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 did not reverse Inland Revenue Commissioners v Duke of Westminster [1936] AC 1. But that is not for me …”
60 Nor is it a task for this Court, but it is worth noting that by 2004 Lord Walker of Gestingthorpe could observe, extra judicially, that it was now possible to “regard Westminster as no more than a ghost from a different age”.
61 This background, sketched albeit in broad terms, is nevertheless of considerable importance in the interpretation of s.86. At the time McGrath was being heard by the Irish courts it appeared that the UK courts, by a combination of the development in the law of statutory interpretation and the development of a concept of fiscal nullity, had freed themselves from the constraints imposed by the narrow interpretation of taxation legislation and exclusive focus on the legal concepts involved in a transaction, to the detriment of a consideration of the commercial substance of it, which had been encouraged by the decision in the Westminster case and developed an effective constraint upon tax avoidance. That development had however been achieved only at a price of some doctrinal difficulty, and also some difficulties of definition. Perhaps for those reasons, the Irish courts in McGrath considered that such a development could not be achieved by judicial development alone, but would require legislation. It is central to the question of interpretation which arises in this case that s.86 was enacted as an immediate response to the decision in McGrath and its implicit invitation, to enact a comprehensive anti-avoidance provision. Looked at against this background therefore it becomes clear that s.86 is clearly directed towards the reversal of the Westminster case in Ireland, and more.
62 Prior to s.86 the only question was whether or not the transaction came within the strict words of the statute some times literally and narrowly construed. In the case of a tax statute, if the component parts of the transaction did not come within the provision, then it was not possible to look at the substance of the transaction to contend that tax should be applied. Similarly in the case of a relief, if the transaction came within the words of the provision granting relief then the relief must be granted, no matter how contrived the scheme, nor how far removed it was from the activity sought to be encouraged by the relief. But under s.86 the potential tax benefit to a tax payer may be disallowed if the Revenue comes to the conclusion that the transaction is one designed to confer a tax advantage and constitutes a tax avoidance transaction. As the Appeal Commissioners in this case observed, the essential starting point to the application of s.86 is a determination that absent its provisions the taxation charge would not apply, or in the case of an exemption, that its benefit would be available to the tax payer, on a literal construction of the language of the relevant statute.
63 Looked at in this light, sections 86(2) and 86(3) appear to be directed towards making the difficult distinction between a commercial transaction which has been legitimately structured in such a way as to mitigate the tax view on the one hand, and a purely tax driven transaction designed to give rise to a tax advantage on the other. This is apparent from the provisions of s.86(2)(ii) and its mirror image in s.86(3)(a)(ii). The fact that any given transaction gives rise to a tax advantage is not in itself enough to disallow that benefit. Such a transaction only becomes a tax avoidance transaction if it satisfies the requirements of s.86(2). That subsection directs the Revenue Commissioners to have regard to the results of the transaction, and its uses and means of achieving those results and any other means by which part of the results could have been achieved. In considering this issue the proviso to s.86(3) requires that the Revenue Commissioners have regard both to the form and substance of the transaction. The transaction will be a tax avoidance transaction if the Revenue Commissioners (having considered the matters set out above i.e. results, use, form and substance) form the opinion that the transaction gives rise to a tax advantage and that “the transaction was not undertaken or arranged primarily for purposes other than to give rise to a tax advantage”.
64 It may be of some significance that s.86(3)(a) goes on to state positively what shall not be regarded as a tax avoidance transaction. That will arise if the Revenue are satisfied that even though the transaction could have been structured in a way which had given rise to a greater amount of tax, the transaction was nevertheless “undertaken or arranged by a person with a view, directly or indirectly, to the realisation of profits in the course of business activities of a business carried on by the person”, and “was not undertaken and arranged primarily to give rise to a tax advantage”.
65 While this does not purport to be a definitive or detailed analysis of the provisions of s.86(2) and s.86(3)(a), it is clear that the distinction sought to be made in the section between permissible tax advantage and impermissible tax avoidance, is a distinction between legitimate tax mitigation of a genuine commercial transaction on the one hand, and a transaction undertaken or arranged primarily for the purposes of giving rise to a tax advantage. This is a distinction which is more easily described than applied, but for present purposes, it is neither necessary nor desirable to explore the well travelled and heavily contested borderline between these concepts. It is sufficient for the interpretation of the critical provisions of s.86(3)(b) to observe that that is the distinction sought to be made throughout s.86.
66 In my view the background to s.86, together with its internal structure, is important in considering the true meaning and application of s.86(3)(b). That subsection cannot be treated as a stand alone provision on reliefs and benefits. It is a component part of the overall provision. Section 86 as a whole requires a consideration of whether or not the Revenue Commissioners should form an opinion that a transaction is a tax avoidance transaction, and sets out those matters to which the Commissioners should have regard in forming that opinion. Section 86(2) seeks to identify those matters which are to be treated as tax avoidance transactions. The matter could perhaps have been left at that, but s.86(3) seeks to identify positively matters which are not tax avoidance transactions. In considering paragraph (b) of subsection (3) the pattern set by s.86(2) is instructive. The starting point for the application of s.86(2) is that the transaction would not come within the taxing provision, were it not for the provisions of s.86(2) and the disallowance and re-characterisation permitted pursuant to that section, s.86(3)(b) is only capable of applying to transactions which are otherwise within the relief provision at least as literally construed. There must be use, before there can be said to be misuse or abuse. Here again, therefore, it is clear that the Westminster approach has been modified significantly. Prior to the enactment of s.86(3)(b) if a transaction came within the specific words granting relief then that was the end of the inquiry. However, it is now necessary to consider whether the transaction constitutes a misuse or abuse of that relief having regard to the purposes for which it was provided.
67 Taking this approach, it is I consider, apparent that the careful analysis of the Appeal Commissioners was too narrow, and consequently in error as a matter of law. In the first case, it is not apparent that the determination proceeded upon an appreciation of the significance of s.86 and the significant change it effected in the pre-existing law. The only passage where the Commissioners dealt with the prior law is the following short passage which is difficult to follow:
“To conclude that there has been a misuse of the expert sales relief provisions would, in our view, be to ignore the statement of law laid down in McGrath v McDermott. While it is necessary to look at the purpose for which s.86 was enacted, in our opinion s.86, in itself, cannot be used to abandon the clear principles of statutory interpretation laid out in that case. These principles of statutory interpretations set out in McGrath v McDermott prohibit us from adopting such a purposive approach.”
68 First, there is here no positive statement of the significant effect of s.86 upon the decision in McGrath v McDermott, which might be said to be the raison d’etre of the section. Second, it is curious to find McGrath being invoked for any purpose other than as illustrating the law sought to be altered by the section. The ratio decideendi of that decision was merely that it was not open to the Court by a process of development of the common law to develop a doctrine of fiscal nullity which would for example remove from a tax payer relief which was otherwise applicable on a strict reading of the enactment. That decision did not propound any statement of law relevant to the interpretation of a statutorily developed anti-avoidance measure, which the decision contemplated, and to some extent encouraged. For the same reason it cannot be said that the decision laid out “clear principles of statutory interpretation”, still less principles relevant to the interpretation of a provision designed to permit the refusal of relief otherwise permitted under the relevant code. Even if this passage is taken as a reference to the obligation of the courts to interpret and apply the specific words used by the Oireachtas, then it is not clear how that is of assistance, let alone of decisive importance, when the task is to interpret and give effect to words chosen by the Oireachtas in s.86 designed to give the court the statutory power which the Supreme Court had doubted it could develop as a matter of common law. There is in this approach, something that seems to hark back to the pre s.86 regime, rather than an acknowledgement of the significant change brought about by that provision.
69 The suggestion that the principles in McGrath preclude a “purposive approach” is also perplexing. In the first place the express words of s.86 require the Commissioners to have regard to the “purposes for which it [the relief] was provided”. Furthermore, the decision in McGrath itself expressly contemplates an approach to the interpretation of legislation that has always been understood as purposive. In that decision Finlay, CJ restated the orthodox approach to statutory interpretation at the time when he adverted to the obligation of the courts in cases of doubt or ambiguity to resort to a “consideration of the purpose and intention of the legislature” at p. 276. Indeed, if McGrath stands for any principle of statutory interpretation it implicitly rejects the contention that any different and more narrow principle of statutory interpretation applies to taxation matters. As Lord Steyn observed in the Northern Ireland case of IRC v McGukian [1997] 1 WLR 991, there has been a tendency to treat tax law, almost uniquely in the civil law as continuing to be the subject of a strict literalist interpretation. “During the last 30 years there has been a shift away from literalist to purposive methods of construction. Where there is no obvious meaning of a statutory provision the modern emphasis is on a contextual approach designed to identify the purpose of a statute and to give effect to it. But under the influence of the narrow Duke of Westminster doctrine [1936] AC 1, 19 tax law remained remarkably resistant to the new non-formalist methods of interpretation. It was said that the taxpayer was entitled to stand on a literal construction of the words used regardless of the purpose of the statute …(t)ax law was by and large left behind as some island of literal interpretation.”
70 In Barclays Mercantile v Mawson [2004] 3 WLR 1383 the House of Lords emphatically reaffirmed that the same principles of statutory interpretation applied to taxation statutes as to other non criminal statutes. Indeed, it was the realisation in Lord Steyn’s words in IRC v. McGuckian [1997] 1 WLR 991 at p. 999, that “those two features – literal interpretation of tax statutes and the formalistic insistence of examining steps in a composite scheme separately – …[which] allowed tax avoidance schemes to flourish” which led the UK Courts to insist that the same principles of statutory interpretation applied to tax statutes as to other legislation. In Ireland, however, this was something that was acknowledged at least implicitly in McGrath, and explicitly in the provisions of the Interpretation Act 2005 which embodies a purposive approach to the interpretation of statutes other than criminal legislation and made no concession to a more narrow or literalist interpretation of taxation statutes. Accordingly, the Appeal Commissioners’ conclusion that the principles set out in McGrath prohibited the adoption of a purposive approach is incorrect on a number of levels.
71 What I consider to be the unduly narrow approach taken to the provisions of s.86, and the changes effected by it, led inevitably to an erroneous application of the provision to the facts of this case. In the first instance the Commissioners offered a generalisation which might have been thought to have led to the disallowance of the relief in this case:
“To generalise, it may be that the use of the tax free nature of the dividends to avoid a specific tax charge that otherwise would have arisen could be said to be a misuse whether direct or indirect of the relief.”
72 On the facts of this case, it could be said that the tax free nature of the dividends here was used to avoid the specific tax charge that otherwise would have arisen on a distribution of the profits of OFCL. At a minimum it might be expected that the determination of the Commissioners would explain why this generalisation did not lead to the conclusion that this was a tax avoidance transaction captured by s.86. Furthermore, while it is helpful to attempt to offer some definition of the individual components “abuse” and “misuse”, and in that respect to distinguish between them, in my view, the section is best understood when those concepts illuminate each other. The statutory phrase, “misuse … or an abuse of the provision having regard to the purposes for which it was provided” is to be read as one comprehensive indication that the object of the subsection is to ensure that reliefs and benefits are only available to transactions which can be regarded as a proper and intended use of the provision. In any given case it will not matter whether that transaction is characterised as an abuse or misuse; what is important is that full effect is given to the intention of the section that only appropriate uses of the provisions get the benefit of the tax relief. It is also a telling illustration of the narrowness of the conceptual approach taken in the determination, that the examples given of abuse and misuse are themselves both limited and confusing. It is not at all apparent that to divert all expenses to taxable domestic profits of business manufacturing products for both export and the domestic market, would, even prior to s.86, have been entitled to ESR relief since the amounts claimed for such relief would not have been in respect of profits generated by the export of qualifying products. By the same token it is doubtful whether a scheme for the export and immediate reimportation of goods for sale on the domestic market, would have been entitled to the benefit of the relief since it must be at least arguable that the export was a sham. Again and at a minimum, neither example seems a particularly credible example of what the act clearly contemplates; a transaction squarely within the words of the provision granting relief but disallowable as a misuse or abuse of it. On the other hand, the suggestion that payment of ESR dividends to employees in lieu of salary would be a misuse is rather difficult to understand on the Commissioners’ approach, since it implies some broad evaluation of what is otherwise a valid application of the scheme (dividends from qualifying profits are paid to qualifying shareholders). If it is permissible to deny relief to such a transaction under s.86 then it is difficult to understand the principled distinction between this example, and the present case where although dividends are paid from qualifying reserves through to qualifying shareholders, the effect of the scheme is to permit OFCL to distribute its profits without payment of tax.
73 The absence of any clearly articulated and principled distinction between these cases, and the difficulty in suggesting any substantial content to the concepts of misuse and abuse, is telling. The approach in the determination, careful and detailed though it is, seems hampered by a tendency to hark back to the orthodoxy that existed prior to the enactment of s.86, rather than to identify and give full effect to the significant changes effected by that section.
74 The idea that any particular scheme can produce a result that the Oireachtas did not intend, is much more easily expressed than applied in practice. The legal intent of the Oireachtas is to be derived from the words used in their context, deploying all the aids to construction which are available, in an attempt to understand what the Oireachtas intended. But in very many cases, the Oireachtas will not have contemplated at all, the elaborate schemes subsequently constructed, which will take as their starting point a faithful compliance with the words of the statute. In some cases it may be that there is a gap that the Oireachtas neglected, or an intended scheme which was not foreseen. In those cases, the courts are not empowered to disallow a relief or to apply any taxing provision, since to do so would be to exceed the proper function of the courts in the constitutional scheme. In other cases the provision may be so technical and detailed so that no more broad or general purpose can be detected, or may have its own explicit anti-avoidance provision. In such a case there may be no room for the application of s.86 since it may not be possible to detect a purpose for the provision other than the basic one that the Oireachtas intended that any transaction which met requirements of the section should receive the relief. However, there are some cases of which this is one, where it may be possible to say with some confidence that though there has been compliance with the literal words of the statute, the result is not the sort of relief that the Act intended should result. In such cases, s.86 permits an evaluation of the particular transaction and a consideration as to whether it comes not just within the words, but also within the intended scheme, or is rather, a misuse or abuse of it. The fact that such an evaluation may be difficult and can create some uncertainty, is not a reason to avoid the task. Certainly in tax matters it is difficult to achieve and the desire to provide certainty to those who wish to avoid a taxation regime which applies to others similarly situated to them, is something which ranks low in the objectives which statutory interpretation seeks to achieve. The tax payer could, after all, achieve a high level of certainty, but at the price of paying tax on dividends received.
75 The assessment of the purpose of any relief involves something somewhat more sophisticated that a repetition of a general dictum from a judgment, even one delivered by McCarthy, J. The question is not what the general purpose of any scheme is - the unsurprising subject of promoting manufacture and export and therefore maintenance of employment - it is what is the purpose of this particular scheme? As Denham, J. observed, the purpose of an Act is best discerned from the words used. When recourse is had to a generalised purpose such as the encouragement of exports, there is a frustrating of ascending the levels of generalisation rather then descending towards specificity.
76 The limitations of the general approach can be seen by the fact that it can be deployed almost rhetorically on either side of this case. On behalf of the tax payer for example it might be said – and indeed was said – that the products here had been manufactured and exported, and employment generated, and that the State had agreed that profits derived from that activity would be exempt from tax and could generate tax free dividends, and therefore that the State was at no loss and got what it bargained for - tax forgone on the amount of profits in return for employment sustaining and export creating manufacture. On the other hand, it could equally be said that the transaction or transactions at issue here - the introduction of funds, first by Dairygold and then by OFCL, and a multiple declaration of dividends - had nothing to do with achieving the export of goods or the maintenance of employment. The goods had been exported and any jobs created long before the series of transactions were put in place over the Christmas period of 1991. This type of approach owes more to rhetoric than analysis and is unlikely to be particularly helpful in resolving the difficult issues in this case. In my view, the most productive source of insight into the meaning of s.86(3)(b) is the text itself, as understood against the structure of s.86 and its background.
77 Section 86(3)(b) requires the Commissioners to scrutinise the transaction and to consider whether it, while complying with the letter of the ESR provisions, may constitute a misuse or abuse of the provision having regard to the purposes for which it was provided. The transaction under scrutiny involved a company, Mitchelstown, which had ESR reserves, but could not or would not declare a dividend, entering into a complex series of transactions which at a commercial level involved the effective sale of its reserves to a company, OFCL, which used its distributable reserves to fund a dividend through Mitchelstown, the ultimate recipients of which were the individuals who were the shareholders in OFCL.
78 I have no doubt that this was a tax avoidance transaction, which could not benefit from s.86(3)(b) because it was a misuse and/or abuse of the ESR scheme. The Appeal Commissioners emphasised what they considered to be the broad nature of the relief. But it is notable, that the ESR scheme has a number of limitations. In particular, it did not override company law. Exports by themselves did not generate the tax relief. It was necessary to achieve profits before any tax could be relieved. Similarly it was only if the company was in a position to lawfully declare a dividend, that any shareholder could receive a tax free benefit. Finally, and significantly, the scheme itself made no provision for the sale or trade in export sales relief reserves.
79 In considering what constitutes a misuse or abuse of the scheme, for ss.(3)(b) the Revenue Commissioners are in my view, to have regard to those indicators which are identified in s.86 as going towards ascertaining the existence of a tax avoidance transaction. Those matters are the form of the transaction and its substance, whether it was undertaken for the realisation of a profit in the course of business activities, carried out by any person, and finally, whether it was undertaken primarily for purposes other than to give rise to a tax advantage. These are factors which the Commissioners are to take into account in determining whether a transaction which complies with the strict letter of the tax code, may nevertheless be disallowed as a tax avoidance transaction, and they are therefore important guides to whether a transaction which complies with the words of a statute providing a benefit and/or a relief, may nevertheless be disallowed as a misuse or abuse of the provisions. The determination under s.86(3)(b) is part of the general process of the formation of an opinion under s.86 and s.86(3) makes it clear that in the forming of such an opinion in accordance with the subsection, the Revenue Commissioners shall “have regard to the form of the transaction and “ the” substance of the transaction” and the other matters set out in the proviso to s.86(3). In my view, however, for the reasons already set out the Commissioners are not confined to the proviso but should also have regard to those other matters to which attention is directed under s.86.
80 Here, the form of the transaction was highly artificial and contrived. It was not the realisation of profits in the ordinary course of business activities. It was a transaction arranged primarily to give rise to a tax advantage, and the substance of the transaction was to permit OFCL to pass its distributable profits to its shareholders, without incurring tax. A scheme which allows the shareholders in a non exporting company to benefit from Export Sales Relief on the profits of the non exporting company, is surely a misuse or abuse of the scheme having regard to the purpose for which the provision is provided.
81 It is not, in my view, a valid or compelling criticism to say that the circumstances can be hypothesised where the shareholders of the domestic property company could validly receive ESR dividends from Mitchelstown. This could occur for example if OFCL or its shareholders had acquired Mitchelstown, or any company which had shares in that company. Firstly, it should be said that hypotheses are valuable as methods of debate and discussion, and in seeking to isolate and define distinctions of principle. But it must be borne in mind, that this type of reasoning by analogy has inherent limitations. It is always possible to hypothesise circumstances one degree different from the present, and to continue to elaborate until the desired result is achieved. That process of reasoning by Chinese whisper, can ultimately reach a nonsensical result. In every examination there will be the last person to pass and the first candidate to fail, and they may be much more similar to each other than to their fellow candidates but that is not a reason to alter either of the results. The process of legislation and its application may often involve drawing the lines in contested cases and the fact that there may be closely parable cases on either side of the line is not in itself a reason to alter the conclusion.
82 A bona fide purchase of a company or shareholding in a company which allows the payment of export sales relieved dividends is arguably consistent with the scheme of the relief, since the original export receives the anticipated benefit through the purchase price rather than dividends and the purchasers paying the price receives what is a valuable asset. Such a transaction may not fall within s.86 at all, since it may not give rise to any tax advantage, and may be a transaction in the normal course of business and not primarily directed to achieving a tax advantage. Here, the substance of the transaction (which s.86 permits and indeed enjoins the Commissioners to have regard to) involved the use of the profits of OFCL, which if distributed to its shareholders will attract tax, being paid by a circuitous route to those very persons without attracting tax, through a series of steps devised for the sole purpose of achieving that result. The observation contained in the judgment of the High Court may have been over broad in suggesting that the purpose of the ESR scheme was not to provide relief to a domestic property company. It may be enough however that the substance of the transaction was to use the funds of a domestic property company to pay dividends to its shareholders relieved of tax, and that such an outcome is the antithesis of the statutory scheme.
83 Finally, the Appellants urged upon the Court that since the provisions of s.86 were patterned upon the General Anti-Avoidance Rule (GAAR enacted in Canada) the Court should follow certain decisions of the Canadian Superior Courts on those provisions. Where the decisions of the Canadian courts are often of considerable assistance it does not seem to me that the patterning of s.86 (with some significant changes) on the provisions of the Canadian GAAR, can necessarily be understood as an indication that the courts should adopt the subsequent decisions of Canadian courts as a guide to the interpretation of s.86. First, there are significant differences between the provisions of GAAR and s.86. Second, and more significantly, there are also important differences of approach to the interpretation of statutes, and the ability to rely on extraneous statements as an aid to interpretation, and finally the burden of proof as to the purpose of an enactment. Furthermore, as Prof. Freedman’s article records, the Canadian jurisprudence has not itself been received with universal acclaim. It appears to me therefore that the most reliable guide to the interpretation of s.86, is to interpret it with the assistance of the canons of construction regularly employed by these courts, and by placing the text carefully in its context within s.86 generally, and against this the background of the decided cases and in particular the law which was sought to be changed by the section. When so viewed it is clear that s.86 seeks to make a decisive change in the approach to taxation schemes. In doing so it requires the Revenue Commissioners to engage in an exercise, if not of discretion, then at least of evaluation and judgment. This may be a difficult task in some cases and certainly is a distinct change of approach in tax law. This is, however, not the untrammelled discretion feared by Lord Tomlin in the Westminster case. Any such determinations by the Revenue Commissioners must be reasoned, and open to appeal to the Appeal Commissioners, who have shown themselves capable of careful scrutiny of such decisions. The decisions of the Appeal Commissioners in turn, are capable of appeal and review in the courts. In any event the fears expressed by Lord Tomlin may have been exaggerated. As Lord Walker observed, Lord Atkin’s dissent has perhaps worn better than Lord Tomlin’s invocation of the metewand of the law. But with the entry into force of s.86 of the Act of 1989 that debate became obsolete. The function of the Revenue Commissioners, and on appeal the Appeal Commissioners, and the courts, is to seek to discern the intention of the Oireachtas and to faithfully apply it to the individual case. I am satisfied that the transaction is not entitled to the benefit of s.86(3)(b), and rather, is a tax avoidance transaction within the meaning of s.86(2). It follows, that the Revenue Commissioners were correct to form that opinion, and the High Court was correct in the result to which it came. I would dismiss the appeal.