High Court takes glimpse into murky world of tax avoidance
A GLIMPSE INTO the ways in which the wealthy avoid tax even when in receipt of massive income was on display in the High Court in Dublin this week.The court heard that as part of a tax avoidance scheme aimed at lowering the tax bill of at least 26 Irish millionaires, a London asset management company called Schroder organised a scheme whereby millions of euro worth of “losses” were artificially devised for tax purposes so as to reduce real and very significant capital gains tax bills.
The total potential loss to the Exchequer is estimated by the Revenue to be in the region of €110 million and arises from capital gains profits of €550 million made by the 26 people, or an average of €21.15 million each.
Counsel for the businessmen, Michael Collins SC, said the essence of the scheme was very simple. “The artificiality of it was obvious. It met the duck test.”
The latter was a reference to a comment by former Revenue Commissioner Michael O’Grady at a conference in January 2011, where he said the best way of spotting a tax avoidance scheme was the “duck test”. If it looked like tax avoidance it probably was.
In the case of Cork businessman John Punch, Irish government gilts were bought from the Royal Bank of Scotland for €10.7 million, sold to Schroder for €20.39 million (a price that bore no relation to market value), and then sold back to Royal Bank of Scotland for €10.79 million, all on the same day. The transactions resulted in a gain of €9.6 million for Mr Punch.
Meanwhile, Mr Punch also engaged in a foreign exchange transaction that resulted in a loss of €9.7 million. These transactions were organised by Schroder in London.
Gains on investments in Government gilts are not taxed and so the gain made on the gilts did not form part of the resulting tax computation. This meant that, in return for a real loss of €100,000, Mr Punch had managed to generate a €9.5 million tax loss that could be used when computing his capital gains tax bill.
In the year in question Mr Punch had received a €6.4 million capital distribution from a company, Ballycurreen Cross Holdings, which he owned with his cousin, Martin Punch. “The transaction was mainly aimed at avoiding tax on this,” Mr Collins said.
John Punch created an entitlement that the Revenue calculated would have reduced his capital gains tax bill for that year by €2.15 million. It would also have benefitted him to the tune of €54,000 in taxes saved in subsequent years.
Mr Collins said the transactions that lay behind the tax scheme were linked to the the Euro Stoxx 50 index of top euro zone shares.
If shifts in share prices stayed within certain bounds, then the scheme worked. If they didn’t, then the amount of money lost by Mr Punch would remain the same, though the tax effects would be different.
The Revenue is challenging the scheme under Section 811 of the Taxes Consolidation Act, 1997, which allows it to deny the tax advantages of transactions that it can show are tax avoidance as defined in the act.