€150m tax scheme investigated

 

The Revenue Commissioners is investigating how at least 20 major companies managed to avoid paying tax on more than €150 million which was then used to reward staff with tax-free income.

The use of the tax avoidance mechanism came to light as a result of investigations into the use of trusts and offshore structures which were being used to conceal the identities of the Irish beneficiaries.

Internal documents show in recent months the Revenue identified the extraction of €152.6 million tax-free from 20 companies which are the subject of investigation.

The companies involved are not named, but the loophole is linked to a scheme which allows firms to reduce their tax bills on income arising from patent royalties and research and development.

After first detecting issues over how the scheme was being used, officials advised the Department of Finance to close off the loophole through legislation enacted earlier this year.

The Revenue Commissioners declined to comment last night on whether tax laws were broken or if prosecutions are likely. It would only say that its investigations were ongoing.

The focus of the inquiry is likely to be on whether this money legitimately arose from patent royalties and other sources, according to taxation experts.

Latest figures show that the Revenue has collected about €40 million from its special investigations into trusts and offshore structures.

Officials have been investigating more than 1,000 cases in jurisdictions such as Jersey, Switzerland, Liechtenstein and the Cayman Islands where some trusts were used to keep funds out of the Revenue’s sight.

Many of these funds were designed to create the impression that the non-resident trustees or entities were the owners of the funds, hiding the identities of the Irish people involved.

The Revenue obtained two High Court orders earlier this year requiring the delivery of banking and financial information relating to these types of offshore funds. So far, it has collected an average of €180,000 from 220 cases.

Other long-standing investigations into tax schemes are continuing to yield money for the exchequer.

The Ansbacher investigation – an inquiry into the use of an offshore bank – has resulted in the collection of just under €110 million from a total of 140 Ansbacher-type schemes.

There are now 11 of these cases which remain to be finalised. This year, these investigations yielded €2 million.

Of all the Revenue’s special investigations over the last decade or so, the most lucrative has been its probe into undisclosed offshore assets which has yielded some €967 million and involved just under 15,000 cases.

This is followed by investigations into undeclared life assurance products (€485 million); bogus accounts (€421 million), voluntary disclosures (€227 million) and Dirt audits (€225 million).

The latest investigation focuses on the use of patent royalty schemes, which have been a widely used mechanism by large firms to reduce their effective tax rate and reward staff with tax-free income.

The standard structure had three main steps: a manufacturing company which paid royalties; a patent company which received the royalties tax free; and then the payment by the patent company of dividends tax-free to employees.

As a result of recent legislative changes, these employees are now fully taxed on this income. A number of tax consultants have in recent months been advising firms to create alternative tax-efficient structures, records show.

The economic downturn and a shortfall in tax means there is now increased pressure on the State to collect as much tax revenue as possible.

The amount of tax the Revenue has been forced to write off has been on the rise as a result of the rising number of companies in liquidation, receivership and bankruptcy, new figures show.

Officials expect to write off a total of about €360 million in tax owed by the end of this year, an increase of 20 per cent over last year.