How to lower your tax bill – the multimillionaire way
Paradise Papers reveals a wealthy Irish family’s six-year battle with the Revenue to pay ‘as little tax as possible’
The Paradise Papers refers to a batch of 13.4 million leaked files from the Appleby offshore law firm based in Bermuda
I want to make sure that everybody at this meeting has the same objective, she said: “to pay as little tax as possible.” It was Monday, October 12th, 2009, and the speaker was Michelle Wolfe of Butterfield, a Bermuda-based bank and provider of “specialised international financial services”.
The meeting included no fewer than 18 solicitors, barristers, tax advisers and members of an Irish and English business family named Murphy. They were gathered in the London offices of Macfarlanes law firm to discuss a proposed strategy for dealing with the Irish Revenue Commissioners.
The case involved the beneficiaries and trustees of more than 20 connected offshore trusts which held assets worth hundreds of millions of euro on behalf of the Murphy family – relatives of the founder of the London-based Murphy Group construction firm, John Murphy snr.
They would eventually make a tax settlement of unknown size with the Revenue Commissioners in 2015, but only after six years of negotiations involving teams of lawyers and tax advisers in Ireland, the UK and Bermuda, in a process that was overseen by the supreme court in the British Overseas Territory.
Details of the process appear in the so-called Paradise Papers, a batch of 13.4 million leaked files from the Appleby offshore law firm, which were released in 2017 and revealed how deeply the offshore financial system is entangled with the overlapping worlds of politics, private wealth and corporate giants.
Two factors had brought the matter to a head for the trustees and the Murphy family in 2009. First, the Irish Revenue Commissioners had announced an amnesty-type scheme that year. And second, the founder of the Murphy Group, John Murphy snr, had died on May 7th, aged 96. His death created additional Irish tax obligations that had a four-month deadline.
Murphy had died one of the richest and most successful Irish businessmen of his generation, though his background was modest.
Born near Cahersiveen, Co Kerry in 1913, he spent much of his youth fishing off Bray Head, Co Kerry, and around the Blasket Islands. He received little formal education, and left school at a young age to work in a stables in Killorglin.
In the 1930s he emigrated to England, where his first job was clearing snow at an airport. But, like so many Irish emigrants of the time, he soon entered the building trade. During the second World War Murphy developed a reputation for delivering airfields and runway repairs on time and on budget. After the war he became involved in major infrastructural projects and his London-based group became famous for its green vans with the word Murphy on their sides.
A family statement at the time of Murphy snr’s death said: “He built and moulded [the company] by the force of his will and character and instilled a sense of pride in his workforce for what they were building together.
“He gave them the right to hold their heads up when times were tough for the Irish, and they were proud to call themselves ‘Murphy men’.”
In the 1970s, J Murphy & Sons was pursued by the Inland Revenue over tax evasion, relating to a system of employment known as “the lump”, whereby workers hired themselves out to the highest bidder. The company was fined £750,000 and several employees were jailed, though John Murphy was never charged.
Later, the firm was involved in construction projects for the 2012 London Olympics programme, for the upgrading of London’s Victorian sewerage and completing the mile-long Stansted airport tunnel.
Known in family circles as “the Boss”, Murphy himself shunned the limelight and the multimillionaire lifestyle. Even in his later years, he would visit his original Tufnell Park site in London and breakfast with the workers there.
In 2012, according to documents contained in the leaked files, the trusts had assets worth approximately £350 million
The Kerryman was still chairman of the group when he died in 2009 with a personal fortune estimated at £190 million. By then J Murphy and Sons amounted to some 18 companies across Britain with some 3,000 employees, and business interests also in Ireland, Greece and the Middle East.
According to its latest filed accounts, the Murphy Group had a turnover of £614 million in 2016 and was involved in projects in the UK, Ireland, Canada and Australia.
John Murphy snr had also established more than 20 offshore trusts which held ownership of the assets he had accumulated over the course of his successful career. Included in the trust assets were shares in the Murphy Group. The beneficiaries were his children and their children.
In 2012, according to documents contained in the leaked files, the trusts had assets worth approximately £350 million. Other trusts may have held further assets but these are not dealt with in the leaked documents.
Murphy and his first wife, Christina, who died in July 1977, had two sons: Bernard and the late John jnr. Bernard Murphy lives in Ireland, while his late brother lived in England.
John Murphy snr and his second wife, Kathleen, had two children, Caroline and James, who are understood to live in England. The current chief executive of the group, John Murphy, is a grandson of the founder.
Over the years the group paid out multimillion-pound dividends, and the trusts made payments to their beneficiaries.
When the trustees of more than 20 of the Murphy trusts, Bank of NT Butterfield & Son, and Butterfield Trust (Bermuda), began to consider an approach to the courts in Bermuda in 2006 over the issue of potential Irish taxes, they were opposed by certain family members, according to a legal note in the leaked files. “The amount of tax involved could be considerable.”
The following year some members of the family served notice that they might launch proceedings claiming that Butterfield was never properly appointed as trustees. Discussions between the parties ensued.
In 2009, after the Irish Revenue announced the voluntary disclosure scheme for offshore trusts, Butterfield decided to go to the supreme court in Bermuda and seek directions.
The court directed that the trustees seek to avail of the scheme, and it was eventually agreed that Mike Farrell, of KPMG in Dublin, would act on behalf of the trusts and all the members of the family, in negotiations with the Revenue.
At the 2009 London meeting Farrell outlined his proposed strategy for dealing with the Irish Revenue while the beneficiaries and trustees of the more than 20 connected offshore trusts were making a voluntary disclosure.
The KPMG tax expert explained that he had read himself into the brief, spoken at length to a number of the Irish professionals already involved, and then “retreated to his ‘bunker’ to consider the best possible strategy”, according to a memo of the meeting.
Eamonn Griffin of Dublin financial advisers FGS had already done a lot of work on the case, but Farrell was of the view that it was best if Revenue was dealing with only one voice, and he recommended that he be that person. His involvement as negotiator had already been approved by the supreme court in Bermuda.
The Revenue had announced earlier in the year those who made a voluntary disclosure and paid their taxes by October 31st, 2009, would avoid being named and would qualify for other benefits under their offshore trusts scheme. A disclosure had already been made to the Revenue in September, but there was no way, Farrell said, that a payment would be agreed by the end of October.
Farrell would approach the Revenue, explain the legal position on the various issues, “and then ‘hunker down’ for a long winter”, the meeting was told.
It was his view that the Revenue’s expectations were high, that it had probably pencilled in a significant amount of tax from the case, and it would “not be easy to disabuse the Revenue of that expectation”.
One of the many complex issues that would have to be dealt with was that of the domicile of Murphy snr’s first wife, Christina. If she was domiciled in Ireland, but resident in England, at the time certain trusts were settled, then this could create tax liabilities in Ireland.
Farrell, by the time of the meeting, had come to a view on the domicile issue and it was playing into how he would deal with the Revenue.
He would “engage quickly, show that he was serious, disabuse the Revenue quickly of the belief that they would be getting a great deal of money, set out the position on domicile in short order, and play a number of other cards available to him to show the Irish Revenue that it would take a long time to get an outcome; in short, the aim would be to show the Revenue that there is a fight on their hands,” according to the memo.
Farrell told the meeting the “negotiations would be tough” and that the Revenue “are good tacticians”. “In relation to the substance of the negotiations, [Farrell] noted that in these situations, the rulebook – by which he meant the strict legal position – was often not the most important matter from the point of view of tactics and the settlement reached.”
It was not a good time to be negotiating with the Revenue because of the financial situation of the Irish exchequer, which was “extremely poor”, the meeting was told. The Revenue “are under extreme pressure to collect as much money as possible from taxpayers”.
Revenue would want to show that tax had been paid somewhere. It would not like it if the tax “evaporated in the middle of the Irish sea”
English QC David Goldberg, acting for the family, said he was very happy with the strategy being outlined. The Revenue might want to get a cash settlement rather than risking an expensive and uncertain course of litigation, he said.
Ashley Crossley, representing Butterfield, the Bermuda-based provider of trust services to the family trusts, said he supported having Farrell negotiate jointly on behalf of the family and the trustees.
During a debate about Christina Murphy’s domicile and its implications for English and Irish tax, Farrell said the Revenue would want to show that tax had been paid somewhere. It would not like it if the tax “evaporated in the middle of the Irish sea”.
Farrell said it was “simply a matter of law” that Christina Murphy was “domiciled in Ireland for UK tax purposes but domiciled in England for Irish tax purposes. There was little that the Revenue could do about this.”
Goldberg said “that because tax was not paid in one country meant that tax must be paid in another was simply an emotional argument not based on any legal analysis, but an argument which Revenue authorities were nonetheless susceptible to”.
He said it would be necessary to take into account the Revenue’s expectation that tax must be paid somewhere. Their starting position would, clearly, be that if tax had not been paid in England it should be paid in Ireland.
“However, our starting position should be that it was very uncertain that there was any Irish tax liability at all.” A deal could then eventually be done.
Deborah Lodge, a member of the Murphy family, asked Farrell for his views on the Revenue official who would be dealing with the matter. There had been a concern that another Revenue official “might have wanted a large settlement as one of his final achievements”, but he had now retired.
Farrell said the retiree’s replacement “was likely to be more difficult to deal with”. He was under pressure to produce results from the offshore trusts inquiry, “and this made him a difficult customer to negotiate with”.
Goldberg said it was “always good to make it clear to the Irish Revenue that whilst a negotiator had to be reasonably civil, there was always a ‘Mr Nasty’ in the background willing to take over if the Revenue failed to engage properly.” He suggested he might be able to take on that role.
Michelle Wolfe, of Butterfield, asked how much she should put aside for the payment of tax. “She asked whether £20 million or £50 million would be a sensible amount.” Farrell said it was likely that no tax would need to be paid in the coming six months.
Farrell said there would “no economy with the facts” and that he would be presenting the situation to the Revenue as it was, not as he would wish it to be.
At several stages, differences emerged between the Irish and English-based members of the Murphy family.
By late 2011, according to the leaked files, it was apparent that there were disagreements between Butterfield and English-resident members of the Murphy family on one part, and the Irish-resident members of the family on the other, as to how the negotiations being conducted by Farrell should proceed. The trustees brought the dispute back to court in Bermuda, to seek further directions.
Meanwhile, protracted discussions continued over the challenge to the legitimacy of the appointment of Butterfield as trustees. Then, according to a note in the files, Butterfield was presented with “an agreement between the three branches of the Murphy family that the Murphy Settlements [the trusts] be restructured so that there be a division of trust assets between the three branches of the family”.
KPMG was engaged to give tax advice.
In the leaked files the trusts are described as holding interests in the Murphy Group as well as Irish companies and Irish property. A reorganisation was carried out in 2005, called the Daisies Reorganisation, which was aimed at simplifying the complex trust structure and reducing the Irish tax burden.
Computations by FGS found that the tax liability in relation to one trust could be as high as €30.5 million
In particular, the reorganisation was designed to address issues to do with Irish discretionary trust inheritance tax.
In the leaked files, varying views are expressed in the late 2000s by UK and Irish lawyers as to whether the reorganisation was valid, or “worked”. At the heart of the matter was a discussion over the domicile of Christina Murphy at the time of her death. The answer to this question could have different tax consequences for members of the family living in England and Ireland, depending on whether her domicile was determined to be in either jurisdiction.
By the late 2000s the trustees and the various branches of the family had received advice from, among others, solicitors firms A&L Goodbody, Matheson and William Fry, Irish senior counsel Patrick Hunt and Lyndon McCann, and financial adviser Eamonn Griffin of FGS.
The English advisers to the Murphy family included solicitor Mark Bridges, of Farrer & Co London, private solicitor to Queen Elizabeth since 2002, according to the firm’s website.
Computations by FGS found that the tax liability in relation to one trust could be as high as €30.5 million, as of April 2005.
The trustees were concerned that they were primarily liable for Irish discretionary trust inheritance tax. While family members would be liable for any Capital Acquisitions Tax on any gifts or inheritances received from the trusts, Butterfield would be secondarily liable if any tax went unpaid, according to the documents.
Michelle Wolfe, managing director of Butterfield, told the court in Bermuda in August 2009 that the English QC David Goldberg, acting for the family, had expressed the view that the course being taken by the trustees, in approaching the Irish Revenue, was mistaken and the “fiscal equivalent of a train wreck; it is a wrong-headed approach.”
During a conference call in July 2009, she said, family members had “wholeheartedly accepted Mr Goldberg’s advice”.
It was subsequently agreed that the approach to the court would be to sanction the appointment of a negotiator who would act for all parties and not just the trustees in dealings with the Revenue.
At one stage in mid-2009, at the suggestion of the family, the person concerned was to have been accountant Des Peelo, best known for having represented the late Charles Haughey in his dealings with the Revenue Commissioners. When a dispute broke out between the various parties involved, Peelo withdrew.
In the end, Mike Farrell was selected as negotiator. The settlement was eventually made in 2015. It is not clear whether “Mr Nasty” ever had to step in.
A spokesman for the family and the trustees said they did not wish to respond to detailed questions submitted by The Irish Times, and did not wish to disclose the size of the settlement. The spokesman confirmed that Butterfield had, with the consent of all members of the family, approached the Revenue in 2009 and made a voluntary disclosure having taken advice on complex legal issues.
“Following that disclosure and acting in accordance with further legal and taxation advice, [the trustees] entered into a confidential arms-length settlement with the Revenue Commissioners which resolved those issues.”
The negotiations and settlement, he said, were overseen by, and approved by, the supreme court in Bermuda, in proceedings which were also confidential.