Mr Vivion O'Brien
Office of the Revenue Commissioners
Mandatory Disclosure Consultation Team
New Stamping Building
Dublin Castle
Dublin 2
24 August 2010

Dear Mr O'Brien

Mandatory disclosure of certain transactions

I refer to eBrief 44 of 2010 and your consultation document on the above.

I enclose the response of the CCAB-I to the consultation document.

We will be happy to provide any explanations or to amplify any of the points made, if required. I also suggest that there may be scope for a special purpose TALC forum, convened along the lines of the special purpose TALC sub-committee for the 2010 Revenue Audit Code of Practice, to assist in finalising the Guidelines.

Yours sincerely
Liam Lynch
Chairman, CCAB-I Tax Committee

Part A

Comment generally on the disclosure regime and its proposed operation as set out in the primary legislation, the draft Regulations and the draft Guidance Notes

CCAB-I recognises that the Mandatory Disclosure arrangements will be implemented and will be a feature of the tax advisor's workload. However, the system that is being proposed is totally disproportionate in an Irish context, and the complexity and lack of clarity is likely to be detrimental to the attractiveness of Ireland as a place to do business.

There are certain principles that should apply to any new mandatory disclosure regime:

1. It should be simple, clear, and easy to operate in practice. It should not impose unnecessary additional administrative costs and processes on business;
2. It should underpin the ease of doing business in Ireland and our international reputation in this regard. It should not be capable of being used by our competitors to undermine this reputation;
3. It should be clear that the benefits that Revenue see in such a system will actually be delivered; and,
4. It should be fair and proportionate.

It seems to us that the regime as currently drafted fails these tests, and requires a substantial amount of work and clarification before it can be implemented. In particular the following issues must be addressed:

5. There is a lack of clarity around what must be disclosed. This puts pressure on tax practitioners to disclose more rather than less, due to reputational considerations and the potential penalties.
6. The lack of clarity is likely to mean that many more matters will be reported to Revenue than may be required. This over-reporting would be counter-productive as it would take Revenue much longer to focus on the matters which are of real interest to them.
   From everyone's perspective it is desirable that there are tests incorporated in both the Regulations and the Guidelines to ensure a workable system. Such tests must be crystal clear on matters which do not need to be disclosed – so called “bright line” tests. The Mandatory Disclosure regime is targeted by definition at taxpayers who are already compliant. This places an even greater onus than usual on Revenue to devise a practical scheme which achieves its ends at minimum cost to the taxpayer and at minimum risk of discouraging new and expanding businesses that are all potential taxpayers.
7. The lack of clarity and the lack of a feedback mechanism increases the complexity of doing business in Ireland. Recent conditions laid down by certain regulatory bodies in Ireland that disclosures be made shows how the regime can be used inappropriately and to the detriment of international business looking to locate in Ireland. Every effort must be made to avoid these unintended consequences. The importance of FDI to Ireland cannot be overestimated and neither can the importance of continuing to grow sustainable domestic businesses both within Ireland and internationally in order to drive job creation.
   Where there is a choice between two jurisdictions and one offers more certainty than the other, the one with more certainty is chosen – the transparency of the Irish tax system has been one of our advantages in marketing Ireland to international investors and Ireland must remain on the right side of this line. Confirmation of a deadline for a Revenue response would therefore be useful. It would re-assure investors that Ireland operates a consistent tax system within clear pre-determined tax law and rules. This would continue to encourage informed investment decisions in Ireland's favour.
8. The inequity of legal professional privilege, as currently provided for in the Mandatory Disclosure legislation and regulations, needs to be amended to provide a level playing field. This is a particular issue for the accountancy profession which provides most of the tax return support for businesses in Ireland.
   There is a number of remedies that might be considered to deal with this point, which might involve either the removal of legal privilege from the legal profession in respect of tax matters, an extension of the treatment afforded to the legal professional to anyone in a position to claim professional privilege (as per the precedent in the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010, or simply applying the same reporting obligations to everyone irrespective of legal or professional privilege. The latter solution could easily be achieved by moving the reporting obligation in all cases other than marketed products from the promoter to the taxpayer.
   In light of the current Prudential case in the UK dealing with the extent of legal professional privilege, and whether it might apply to non-lawyers, it is imperative that the legislation anticipate the future applicability of legal professional privilege and be robust enough to deal with such foreseeable changes. In the interests of equity, parity of treatment should be provided from the outset.

The observations in this submission on the consultation will mostly relate to the legislation and draft regulations, as this will constitute the sum total of the law in this area. However, it is also important that there is clarity on the interpretation Revenue will apply to the law.

In a number of respects, the guidelines appear to indicate a higher onus of requirement than the legislation. We do not believe that any guidelines in respect of a particular item of legislation should be open to the charge that they are broader in this way than the legislation itself.

The regulations and legislation do not sufficiently define what is considered to be disclosable tax planning, and what might constitute ordinary day-to-day tax planning that is not disclosable. CCAB-I views the regulations and legislation to be so widely drafted that many common tax-planning practices are potentially disclosable, including many that are already known to Revenue. We recognise that this may not be the intention behind the legislation. However, much greater clarity is required on this point.

A possible remedy might lie in distinguishing between commercially-driven and tax-driven transactions. In the former, arrangements are made to ensure that tax reliefs are fully availed of in the course of effecting the transaction. They are a tax-efficient method of achieving a commercial or personal objective. Examples might include a reorganisation of a business to allow it to function more efficiently, where it would be important that such reorganisation can be achieved at minimal tax cost. Tax-driven transactions would encompass tax planning leading solely to a tax advantage without reference to any substance or commercial outcome (other than a tax advantage, or mainly a tax advantage) of the transaction. Effectively, transactions that are carried out for bona fide commercial purposes would be excluded from the requirement to disclose. This would be in line with the approach being adopted in Canada where the legislative framework on tax avoidance is already much more closely aligned with that in Ireland.

Whatever approach is taken, some carve-out is required to limit the type of transactions coming within the disclosure regime, in order to avoid an unmanageable burden on those reporting, and on scarce Revenue resources.

It seems clear that any review of transactions that have already occurred cannot, by definition, be disclosable under this regime. This would include, for example, the review of the VAT position of a taxpayer or of a particular transaction, or a review of expenditure for the purposes of making a claim for a research and development tax credit. This clarity is welcomed.

There does not seem to be any debate invited relating to the appropriateness of the penalties proposed. There is the protection that penalties can only be proposed by application to the court, but it appears that the court only has discretion in determining whether a disclosure should have been made, and not whether a penalty should apply. We would therefore propose that the court should also have jurisdiction in limiting the penalty that can apply. In addition, the penalties are not equal with regard to a failure by someone covered by legal professional privilege versus any other party. The potential penalties should be the same in all cases, and there should be no discrimination built into the legislation.

The current protective notice regime (Section 811A TCA 1997) was amended as recently as 2008. We believe that the 2008 amendments have resulted in a change in behaviour, particularly in light of the reduced burden of proof provisions. We wonder if it is too early to assess whether the 2008 legislation is working as intended, and whether conclusions drawn from the low number of protective notifications are flawed as changed behaviour would reduce the expected number of disclosures. A simpler solution, if Revenue are concerned on the timing of disclosures, would be to bring forward the date for the existing Section 811A protective notification.

In addition, the proposed regime is taken almost word-for-word from the new UK regime, aspects of which is still under consultation and has not been proven in practice. In addition, the UK does not have a general anti-avoidance rule such as the one contained in Section 811 TCA 1997, and therefore the UK tax authorities do not have the same legislative framework at their disposal as the Irish authorities already have. In this regard, it seems to us that it would be more appropriate for Ireland to look towards the Canadian model which is currently being debated. In any event, if we are to copy the system from another country, we should copy an existing system that is operating well on the ground, and not one that is currently subject to consultation while being phased in. (albeit a much longer process than is the case in Ireland).

Note: The full submission, which includes CCAB-I's views on the specific questions set out in Revenue's consultation document, is available on Chartered Accountants Ireland website at http://www.charteredaccountants.ie/Members/eLibrary/Representations/20101/CCAB-I---Mandatory-Disclosures/