This month’s Chartered Accountants Tax Case Digest looks at a recent Commercial Court decision in Ireland on the status of correspondence from Revenue in legal proceedings and whether the case warranted a judicial review.

The Court, in its decision, held that Cintra was not entitled to a judicial review. The key point to note in this case is the statement by the Judge to the effect that non-binding letters issued by a public body such as Revenue do not amount to a decision which imposes legal consequences. In his words “All these letters have done is to grant to Cintra the privilege of having a preliminary non-binding view of the Revenue on its transaction”.

Background

This case involved an application by Cintra, a Spanish tax resident company, who sold its shares in Eurolink Motorway Operation Ltd (“Eurolink”) (an Irish incorporated and tax resident company) on 25 February 2016 for an order of certiorari(a review) of a decision contained in two letters to its solicitors from the Revenue Commissioners (“Revenue”) dated 15 September 2015 and 19 October 2015. Leave for judicial review was sought in December 2015.

The Court had to consider whether the refusal by Revenue to give confirmation of the tax status of a transaction which was sought by the taxpayer amounts to a determination which is subject to judicial review by the Court.

Eurolink had entered into a public private partnership (PPP) contract with the National Roads Authority under which Eurolink agreed to design, construct, operate, maintain and finance the M4/M6 Kinnegad to Kilcock Motorway. Eurolink provided €322 million in capital to finance the construction of the roads and in return received the vast majority of the tolls over a 30 year period. Eurolink also had a licence to access the roads in order to collect tolls, carry out maintenance work and any other obligations under the PPP contract.

The value of the toll collection was significant and the purchase price under the contract whereby Cintra sold 45.99% of the issued share capital in Eurolink to DIF Intra M4 Ireland Ltd was €9,229,100.

The sale contract contained a condition whereby Cintra had to provide DIF Intra M4 Ireland Ltd with a completed Form CG50A or a letter from Revenue confirming that the CG50A form was not required. If either was not obtained, the purchasers would have to withhold 15% of the purchase price and remit this capital gains tax to Revenue.

Before the contract was signed, William Fry, the solicitors representing Cintra wrote to Revenue requesting, instead of a Form CG50A, a confirmation that capital gains tax was not payable by Cintra on the grounds that the shares in Eurolink did not derive their value from land in the State.

Cintra and Revenue disagreed on this point. It was Cintra’s view that Eurolink did not have an interest in land; rather it had a licence to enter the road network under its contract and this did not amount to an interest in land. Therefore Cintra took the position that the sale of its shares in Eurolink was not subject to capital gains tax. Revenue disagreed however. While it was accepted that Cintra did not have a proprietary interest in land, it was the view of Revenue that the definition of an interest in land was extended beyond proprietary interest.

William Fry wrote to Revenue on 25 August 2015 stating that it was:

“inappropriate to request a Form CG50A on the basis that we are of the view that the shares, which are the subject matter of the sale, do not derive their value from Irish land or buildings and, accordingly, the transaction does not fall within the scope of Section 980 TCA 1997. We are therefore requesting confirmation from the Revenue Commissioners, in lieu of a Form CG50A, that Irish withholding tax as provided under Section 980 TCA 1997 does not apply and therefore a CG50A is not required”.

Revenue responded by letter dated 15 September 2015 stating:

“While it is accepted that the companies do not have a proprietary interest in the above Motorways, I do not see that the operation of section 980 (2) (d) TCA 1997 requires that there be a proprietary interest in land for the functioning of the provision. While Eurolink M4/M6 may not have proprietary rights over the respective Motorways, it would certainly seem that the companies have legal rights (constructing and operating the Motorways) that the values in the shares would appear to lie, which are inextricably linked to the Motorways.

In this regard, I cannot provide confirmation that the shares in Eurolink M4/M6 do not derive their value or the greater part of their value from land in the State and I am therefore of the view that the disposal of the shares in these companies by your clients comes within the provisions of section 980(2) (d) TCA 1997”.

William Fry responded to this letter stating that Eurolink was essentially a service company, providing services such as toll collection and maintenance and that the shares did not derive their value from any interest in land.

A meeting between William Fry and Revenue took place on 9 October 2015 and a second letter from Revenue issued on 15 October 2015. The pertinent points in the letter were as follows:

“Revenue view is that the operation of section 980 does not require a proprietary interest in land. In line with the definition of “land” in the Interpretation Act 2005 and in section 5(1) TCA 1997 all that is required is an interest in or right over land. And in this regard, the PPP contract confers an interest in or right over land… The fact that the access rights are given by way of licence is not seen to be of any significance. The fact is that the operating companies are carrying out their functions under the terms of the PPP contracts. And the contracts could not be implemented in the absence of access to the relevant lands… The Revenue view is strongly to the effect that the operating companies do, under the terms of the contracts, hold interests in or rights over the roads for the contract periods. And that is sufficient for the purposes of section 980”.

The Court had to decide whether the two Revenue letters were justiciable so as to be subject to the current judicial review proceedings.

There is no provision in the Taxes Acts which deals with the binding nature of Revenue opinions. A Tax Briefing issued in May 2014 entitled “Large Cases Division: Opinions/Confirmations on Tax/Duty Consequences of a Proposed Course of Action” sets out the approach taken by Revenue on issuing opinions. In summary, the Tax Briefing states that opinions issued are not binding on Revenue and it is at the discretion of Revenue officials to review the position when a transaction has been completed and all the facts are known. It is also noted in the Tax Briefing that a taxpayer may form a different opinion or take a different position to the opinion or confirmation provided by Revenue.

In this case, the letter issued by Revenue on 15 September 2015 contained the following sentence:

“I am therefore of the view that the disposal of the shares in these companies by your clients comes within the provisions of section 980 (2)(d) TCA 1997”.

This sentence is important as it states that the writer is not forming a determination, rather a view which in line with the Tax Briefing. The view is non-binding and one which the taxpayer is entitled to disregard and form a different view. Therefore it is possible to assume that if further information had been provided to the Revenue, it is possible that this view could be changed. This gives further strength to the argument that it is a determination rather than a view.

Decision

The Court had the view that the letters issued by Revenue granted Cintra a preliminary and non-binding view of the Revenue on the transaction. Cintra’s legal position remained the same before and after the letters from Revenue because the letters issued by Revenue were not binding. While Cintra was more aware that Revenue was likely to make a decision that Cintra would be liable to capital gains tax on the sale of the shares, this increased awareness was not a legal consequence which is justiciable. Furthermore, as the shares had not been sold at the time the judicial review was sought, it was the Court’s view that it was impossible to impose legal consequences at that point as there was no guarantee that the shares would be sold. Therefore the letters were non-binding views on something that might never occur.

It was further noted that a decision can only be made by the Revenue on whether capital gains tax is due once the shares are actually sold. Otherwise there could have been no liability to tax and therefore no decision by Revenue which could have had legal consequences.

If a judicial review was not initiated, the logical next step would have been a request by Cintra for a refund of the capital gains tax withheld by the purchaser. This would have resulted in a binding decision by Revenue and one which Cintra could then have appealed the determination to the Appeal Commissioners.

Cintra objected to this route, saying it was not a genuine appeal since it involved Cintra having to suffer capital gains tax which it had disputed in the first instance. It was Cintra’s argument that it should be entitled to judicially review the letters of the Revenue before tax was deducted. The Court disagreed saying that the reason withholding taxes were in place was for the purpose of catching all transactions and not just those transactions where there is a tax liability.

The Court stated that it is not the taxpayers’ interpretation which determines whether tax is due and should a taxpayer object to paying this tax, they should not be entitled to a judicial review on this basis. Taxpayers should use the appeal route as normal; otherwise every tax payer would choose the judicial review route. Relief in this case was therefore refused.

In conclusion, perhaps the key point to note in this case is the statement by the Judge to the effect that non-binding letters issued by a public body such as Revenue do not amount to a decision which imposes legal consequences.. In his words “All these letters have done is to grant to Cintra the privilege of having a preliminary non-binding view of the Revenue on its transaction”.

The Judge added that if relief was granted, it could lead to a situation whereby if a tax payer disagrees with a non-binding interpretation by Revenue which is designed to help taxpayers, the result of that disagreement is that Revenue’s non-binding interpretation could be subject to challenge in the High Court. This could result in Revenue not giving opinions and therefore ceasing to help taxpayers with their transactions. Therefore the wider implications beyond this case must be looked at.

The full judgment in this case is available from

http://www.courts.ie/Judgments.nsf/0/EA54FE327D11355580257FDA0039AA10