The opportunity for taxpayers to make a qualifying disclosure in relation to offshore matters now has an expiry date.

After 30 April 2017, Irish tax defaults related to offshore matters could lead to the terrible trio of unmitigated penalties, publication as a tax defaulter and prosecution, even if the taxpayer comes forward voluntarily. Section 56 of Finance Act 2016 (which amends Section 1077E Taxes Consolidation Act 1997) has made front-page news, with the new measures being billed as Revenue’s “crackdown” on offshore tax defaulters. The boost to Revenue’s coffers from related settlements is estimated as €30 million.

Don’t find yourself, or your clients, in a mayday situation post-May Day. These are the ten things you should know.

1. Why is 1 May 2017 a key date for tax defaults relating to “offshore matters”?
   Broadly speaking, a disclosure made on or after 1 May 2017 will not be a “qualifying disclosure”, and will not provide the related protection from penalties, publication and prosecution, where:

• any matters contained in the disclosure relate directly or indirectly to “offshore matters”, and
• in any other case, the person, before the date the disclosure is made, has an undisclosed tax liability relating to offshore matters that are known or become known at any time to Revenue. There is an exclusion but only for tax defaults where the penalty would be 15% or less of the tax due (e.g. the default falls under the category of careless behaviour without significant consequences and there is full taxpayer cooperation).

The taxes in question include income tax, corporation tax, capital gains tax, capital acquisitions tax, value added tax (VAT) and stamp duty.

2. So what are “offshore matters”?
   “Offshore matters” is very broadly defined and essentially means any income, gains, accounts or assets, that are accruing, arising, held or situated outside of Ireland.

3. What is the background?
   It is almost a year since media coverage of the Mossack Fonseca story – the “Panama Papers” – revealed how certain defaulters use offshore structures and accounts to avoid paying tax. Minister Noonan cited the Panama Papers in his Budget 2017 speech when flagging the changes to the qualifying disclosure rules.
   Meanwhile, a huge amount of data on foreign assets and receipts of Irish resident taxpayers is beginning to flow to Revenue through the OECD’s Common Reporting Standard (CRS), the European Council Directives on administrative cooperation (DAC1) and mandatory automatic exchange of information (DAC2), the US’s Foreign Account Tax Compliance Act (FATCA) and other international reporting and exchange of tax information channels. Revenue will mine this data by applying risk rules and advanced analytical processes to select taxpayers for review. From the tax policy perspective, it is no longer acceptable for offshore tax evaders to avail of mitigated penalties and to avoid criminal prosecution by coming forward voluntarily.
   Similar measures have been introduced in the UK. HMRC’s Worldwide Disclosure Facility opened on 5 September 2016, marking the final chance for UK offshore tax defaulters to come forward before HRMC uses CRS data and toughens their approach to non-compliance related to offshore income or gains. New sanctions will be introduced after 30 September 2018.
   

4. Who will be affected?
   Revenue’s awareness campaign is now kicking-off in earnest, with its press release of 17 February 2017 (“Income Tax Payers Get Important Advice from Revenue”), swiftly followed by the issue of related letters to taxpayers and agents that filed an income tax return in 2015. However, the Finance Act 2016 changes do not relate only to individuals. The new measures affect disclosures made in relation to “a person”, meaning individuals, companies, trustees and other persons will all be impacted.
   The only numerical example provided in Revenue’s “Frequently Asked Questions (FAQs) about Qualifying Disclosures relating to Offshore Matters” concerns a sole trader who lodged €200,000 in a Northern Ireland bank account and did not declare the income for Irish tax purposes; a clear instance of deliberate behaviour.
   
   However, tax defaults relating to offshore matters can arise in any number of ways. For instance, an individual may not apply the correct foreign exchange translation rates in calculating the capital gains tax due on a disposal of sterling denominated UK shares. Likewise, an Irish tax company could make an error in the calculation of double tax relief for foreign tax paid on offshore branch profits and underpay its corporation tax liability as a result. In practice, the post-30 April 2017 changes could be relevant to generally compliant taxpayers who make genuine mistakes.
   

5. When is the deadline?
   The deadline for making a qualifying disclosure in relation to offshore matters is 30 April 2017. Revenue’s FAQs make it clear that filing a notice of intention to make a disclosure will not allow taxpayers to extend the deadline.
   The timing may seem tight but it is clear from the Dáil debates in November 2016 regarding the Finance Bill that there is significant political support for the Finance Act changes. There was political pressure to accelerate the deadline to 31 December 2016 so that this “criminal activity” would not be extended any further “preferential treatment”.
   

6. How much will the interest and penalties cost?
   Helpfully, Revenue’s guidance on qualifying disclosures relating to offshore matters includes an “estimator”; an editable spreadsheet calculating the tax, interest and penalties due. The estimator reveals some interesting features of Revenue’s approach in relation to these pre-1 May 2017 disclosures, including:

• Income, capital gains and VAT arising up to and including 2006 can be treated as arising in 2006,
• Statutory interest only applies from 2006,
• Pre 6 April 1991 income tax (plus levies), capital gains tax and VAT liabilities attract a 100% penalty in line with amnesty rules, and
• Other liabilities attract a penalty of 10%.

The FAQs also make it clear that the benefit from making a qualifying disclosure include that:

• The penalty for underpaid tax may be substantially reduced. In most cases the penalty will be reduced to 10% of the tax due (this contrasts sharply with the position where there is no qualifying disclosure, in which case the penalties range from 15% to 100%, depending on the category of the behaviour involved and the extent of the taxpayer’s cooperation with Revenue);
• The taxpayer’s name and settlement details will not be published by Revenue in the quarterly list of tax defaulters; and
• If the disclosure is valid, Revenue will not seek to initiate an investigation with a view to criminal prosecution.

7. What if a taxpayer did not come forward in relation to a previous Revenue amnesty?
   Up to now, taxpayers who did not come forward under the 2004 Offshore Assets Special Investigation amnesty might expect a 75% penalty, at best, and publication as a tax defaulter. The position set out in Revenue’s estimator seems much more attractive.
   However, the FAQs do not clearly explain who may be excluded from the ability to make a qualifying disclosure prior to 1 May 2017. The guidance only refers to meeting the “eligibility conditions” for making a qualifying disclosure and does not provide examples. The FAQs separately note that if there is an ongoing enquiry or investigation into matters which are the subject of a taxpayer’s disclosure, and the taxpayer has been contacted by Revenue on those matters, then the taxpayer is not eligible to make a qualifying disclosure. However, the FAQs do not clarify which of the various previous offshore investigations are considered “ongoing” for this purpose.
   Taxpayers who did not reply to previous correspondence from Revenue regarding offshore matters, as well as taxpayers who did not fully “come clean” in a previous disclosure, should seek tax advice regarding the potential impact that this past behaviour may have on their eligibility to make a pre-1 May 2017 qualifying disclosure (as well as on any previous settlements).
   

8. How should a taxpayer make a disclosure?
   Revenue’s FAQs and the “Making a Disclosure” section of its website include detailed guidance on how taxpayers should submit a disclosure form online, prepare the related calculations and pay the related tax, interest and penalties.
   The reference in the FAQs to payment of penalties at the time of making the disclosure is in contrast to the usual position under the Code of Practice for Revenue Audit and other Compliance Interventions (“the Code of Practice”), where a qualifying disclosure does not need to state the amount of the penalties, with penalties instead being subsequently agreed and paid.

9. What if a disclosure includes a mistake?
   The FAQs confirm that if a taxpayer unintentionally understates the amount payable, the taxpayer will still receive the benefits of making a qualifying disclosure. However, the taxpayer will be liable to pay the balance – the additional tax, statutory interest and penalty.
   The guidance also states that if Revenue forms the view that the understatement was intentional, then the benefits associated with making a qualifying disclosure may no longer apply.

10. What if a taxpayer makes a disclosure from 1 May 2017 onward?
    The FAQs confirm that making a disclosure in relation to offshore matters prior to 1 May 2017 will not necessarily preclude the taxpayer from making a qualifying disclosure in relation to onshore matters after 1 May 2017.
    Where a disclosure after 1 May 2017 also contains offshore matters, the benefits of a qualifying disclosure may not apply. However, the FAQs confirm that if:

• the “offshore matters” do not result in a default that gives rise to a penalty that exceeds the penalty applicable where the default was careless in nature rather than deliberate, i.e. 15%,
• the default was without “significant consequences” i.e. the underpayment did not exceed 15% of the total tax due in relation to a return,
• and the person co-operated fully with any Revenue investigation

that person will still be in a position to apply for the benefits of a qualifying disclosure.

Revenue has clarified that the benefits of self-correction, innocent error and technical adjustment continue to be available for taxpayers in relation to defaults. It should also be remembered in the context of the “15% penalty test” that where the aggregate amount of a person’s tax or duty default is less than €6,000 and the default is not in the deliberate behaviour category, the default should not give rise to a penalty.

It may take some time before Revenue’s practice in relation to disclosures from 1 May is fully established. In the meantime, mark 30 April 2017 in your diaries, look out for further updates from Revenue in the run-up to the deadline and make sure you leave adequate time to prepare.

Jacinta Shinnick is a Tax Director in KPMG with over 10 years’ experience. She specialises in advising Irish headquartered multinational businesses and high net-worth individuals on Irish and international tax matters.

Email: jacinta.shinnick@kpmg.ie