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Cite as: [2011] IESC 47

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Judgment Title: Revenue Commissioners v O'Flynn Construction & ors

Neutral Citation: [2011] IESC 47

Supreme Court Record Number: 264/06

High Court Record Number:

Date of Delivery: 14/12/2011

Court: Supreme Court

Composition of Court: Fennelly J., Macken J., Finnegan J., O'Donnell J., McKechnie J.

Judgment by: McKechnie J.

Status of Judgment: Approved


Judgments by	Link to Judgment	Result	Concurring	Dissenting
McKechnie J.	Link
O'Donnell J.	Link	Appeal dismissed - affirm High Court Order	Fennelly J., Finnegan J.	McKechnie J.

Outcome: Dismiss

THE SUPREME COURT

[S.C. Record No. 264/06]

BETWEEN

REVENUE COMMISSIONERS

RESPONDENTS

AND
O’FLYNN CONSTRUCTION COMPANY LIMITED
JOHN O’FLYNN AND MICHAEL O’FLYNN

APPELLANTS

Judgment of Mr. Justice McKechnie delivered the 14^thday of December, 2011.

The first named appellant, as its name suggests, is a company engaged in the construction business: it has never been involved in the manufacture of goods for the export market: it has never been an exporting company. It has two shareholders and two directors, namely, Mr. John O’Flynn and Mr. Michael O’Flynn, the individual appellants above named.

Mitchelstown Export Company Limited, (“Mitchelstown”), which is part of the Dairygold Group was however, involved in such business and through the activities of a number of its subsidiaries, had accumulated, prior to the events next described, reserves of IRŁ1.2M. These reserves were generated under and in accordance with the provisions of the Export Sales Relief legislation. Under that legislation, (“ESR legislation”) such reserves, were tax exempt at two levels: firstly, from corporation tax at the corporate level and secondly, if and when distributed to individual shareholders, from income tax. These, so called “ESR dividends”, were therefore tax free in the hands of the ultimate recipient.

By a series of steps taken between December, 1991 and January, 1992 Mitchelstown sold these reserves, effectively, albeit indirectly, to the appellant and another company for a total of IRŁ117,668.00, which costs were shared equally between the two companies. As being the only shareholders in O’Flynn Construction Company Limited (“O’Flynn Construction” or “the company”), the individual appellants above named had therefore access to its share of such reserves, being a moiety thereof. This ultimately resulted in each person receiving a tax free dividend of IRŁ298,000.00, a result which was facilitated and achieved by these steps (“the transaction”, “the scheme” or “the arrangement”). This distribution was funded, again albeit indirectly, by the company whose business, as previously noted, was entirely disconnected from that of manufacturing or exporting goods.

At a most general level the scheme involved three distinct phases. The first phase, involved the isolation within the Derrygold group of companies, which included Mitchelstown, of ESR reserves of Ł1.2M: the second related to the utilisation of Ł600,000 of those reserves by unconnected persons, who have never been part of this challenge and who therefore will not be referred to further, and the third related to the utilisation of the balance (less accounting fees of Ł4,000) by both Mr. John O’Flynn and Mr. Michael O’Flynn. These phases and the steps involved within them, are apparent from each of the three notices next mentioned, one of which is for reference purposes scheduled to this judgment.

As is immediately evident from such notice the transaction, involving multiple steps, is both elaborate and intricate: however, whilst remaining conscious of its overall complexity, a forensic appraisal of each step is not required to resolve the legal question in issue, it being sufficient in my view to identify some key features of the arrangement for this purpose. Whilst these are referred to in several places throughout the judgment, it is of importance to note that by reason of such arrangement, whether directly or indirectly:-

(a) cash was extracted from O’Flynn Construction and distributed to its shareholders without any of the participants incurring a tax liability,

(b) the assets of the company were depleted by a corresponding amount as it received no value or benefit for such distribution, and

(c) some of the steps involved in the overall transaction were said to have no or virtually no commercial value (para. 15(iii)

infra

By Notices of Opinion dated the 12^th August, 1997, the Revenue Commissioners (or “the Revenue”), through their nominated officer, Mr. Padraic O’Laoghaire claimed that such steps constituted a “tax avoidance transaction” for the purposes of s.86 of the Finance Act 1989, which is the first and still the only general anti-avoidance measure in domestic legislation. Each of the appellants received such a notice. In the case of the company it was asserted that it had obtained a tax advantage by being relieved of any liability for advance corporation tax (ACT) on the distribution of such reserves, and in the case of the individuals by avoiding schedule F charges on receipt of such dividends.

Being aggrieved with such a declaration, the appellants exercised their right to appeal under s.86 (7) of the Act of 1989. In due course the matter was dealt with by the Appeal Commissioners who upheld the tax payers’ objections and concluded that the opinion of the Revenue Commissioners, as outlined in the aforesaid notices, was void.

Immediately on receipt of such decision, both parties expressed dissatisfaction with different aspects of it, as being erroneous in point of law: this was followed by a formal request for a Case Stated. The Appeal Commissioners so agreed and asked the High Court for its determination on the following questions of law, the first of which was raised by the Revenue Commissioners with the remainder by the taxpayers:-

“(i) Whether, on the foregoing facts and evidence, we were correct in holding that the transaction is not a tax avoidance transaction by virtue of s. 86(3)(b) of the Finance Act 1989, on the ground that the transaction did not result, directly or indirectly, in a misuse or an abuse of the ESR provisions, having regard to the purpose/s for which they were enacted.

Whether on the foregoing facts and evidence we were correct in holding that

the transaction gave rise to a “tax advantage” for O’Flynn Construction Company Limited.

the transaction gave rise to a “tax advantage” for Mr. John O’Flynn and Mr. Michael O’Flynn.

the transaction was not undertaken or arranged primarily for purposes other than to give rise to a “tax advantage, and

the transaction was not arranged with a view to the realisation of profits in the course of the business activities of O’Flynn Construction Company Limited, pursuant to s.86(3)(a) of the Finance Act 1989.”

9. The Case Stated was heard and determined by Smyth J., who delivered judgment on the 26^th April, 2006. The learned judge reversed the decision of the Appeal Commissioners and held that the above scheme was in fact, a tax avoidance transaction for the purposes of the relevant statutory provision. In the process the Judge made certain findings and expressed certain views which led him to the conclusion that the Commissioners were correct in so far as they agreed with the position of the Revenue Commissioners, but otherwise were incorrect. In the Notice of Appeal to this court the conclusions so reached are challenged as being erroneous in point of law. As the appeal progressed however, some of the grounds asserted, ceased to be relied upon, with the result that only the principal points which remain at issue will be outlined. This will be done through a recital of the submissions made by the parties. As will become clear, the core issue ultimately will be, whether the transaction in question is or is not a “misuse or an abuse” of the tax relieving measures underpinning the ESR legislation. Before getting to that however, much needs to be examined.

10. To position the background in a legal context, it is necessary, and at this stage, I think helpful, to refer in some detail to s. 86 of the Finance Act 1989,(“the Act of 1989”), which incidentally is now to be found, in amended form, in s.811 and s.811(A) of the Taxes Consolidation Act 1997. In broad terms the structure of the original section which applies to this case, can be described as follows:-

The definition part: in which is defined a “transaction”, a “tax advantage”, and by reference to subs.(2), a “tax avoidance transaction”,

The central operative part: which enables the Revenue Commissioners, by reference to certain specified matters, to form an “opinion” that a transaction is a “tax avoidance transaction”: these matters are referred to in subs.(2),(a),(b) and (c), whose provisions however are expressly stated to be subject to subs.(3),

Subs.(3): such provision, in certain circumstances, further informs the opinion of the Revenue Commissioners in that, having considered the matters set out in the “Proviso” to this provision, they “shall not regard” a transaction, as an avoidance transaction, if satisfied that it falls within subs.(3)(a), the “business profits exemption” or within subs.(3)(b), the “benefit exemption”, which sometimes is otherwise known as the “misuse/abuse provision”.

If however having applied subs.(2) and where applicable subs.(3), such opinion is formed, the Revenue Commissioners have certain powers which in effect enable them to withdraw from the tax payer, the tax benefit of such transaction. The manner in which this done, and the resulting consequences, which include a power to re-characterise for tax purposes the nature of the payment received, are matters to be outlined in the Notice of Opinion.

A right of appeal against the formation of such opinion is provided for. On the hearing of such appeal, the Appeal Commissioners shall determine the issue as if it was an appeal against an assessment to income tax and in so doing shall have regard to all matters which the Revenue Commissioners must have regard to under this section.

Provision is made for seeking, by way of Case Stated, the opinion of the High Court on any question of law.

Despite this overview however, it is still necessary, in light of the technical nature of the issues involved in the appeal, to quote the relevant parts of section 86. These are:-

“(2) For the purposes of this section and subject to subs.(3), a transaction is a “tax avoidance transaction” if, having regard to one or more of the following, that is to say:-

(a) the results of the transaction,

(b) its use as a means of achieving those results, and

the Revenue Commissioners form the opinion that –

(i) it gives rise to, or, but for this section, would give rise to, a tax advantage, and

(j) the transaction was not undertaken or arranged primarily for purposes other than to give rise to a tax advantage,

and references in this section to the Revenue Commissioners forming an opinion that a transaction is a tax avoidance transaction shall be construed as references to them forming an opinion with regard to the transaction in accordance with the provisions of this subsection.

(3) Without prejudice to the generality of the provisions of subs.(2), in forming an opinion in accordance with that subsection and subs.(4), as to whether or not a transaction is a tax avoidance transaction, the Revenue Commissioners shall not regard the transaction as being a tax avoidance transaction if they are satisfied that -

(a) notwithstanding that the purpose or purposes of the transaction could have been achieved by some other transaction which would have given rise to a greater amount of tax being payable by the person, the transaction –

(i) was undertaken or arranged by a person with a view, directly or indirectly, to the realisation of profits in the course of the business activities of a business carried on by the person, and

(ii) was not undertaken or arranged primarily to give rise to a tax advantage, (the “business profit exemption”)

(b) the transaction was undertaken or arranged for the purpose of obtaining the benefit of any relief, allowance or other abatement provided by any provision of the Acts and that transaction would not result directly or indirectly in a misuse of the provision or an abuse of the provision having regard to the purposes for which it was provided… (the “benefit exemption”)

Provided that, in forming an opinion as foresaid in relation to any transaction, the Revenue Commissioners shall have regard to –

(I) the form of that transaction,

(II) the substance of that transaction,

(III) the substance of any other transaction or transactions which that transaction may reasonably be regarded as being directly or indirectly related to or connected with, and

(IV) the final outcome and result of that transaction and any combination of those other transactions which are so related or connected.” (the “Proviso”)

“Tax advantage” is defined in s.86(1) as:-

“(i) a reduction, avoidance or deferral of any charge or assessment to tax, including any potential or prospective charge or assessment, or

(ii) a refund of or a payment of an amount of tax, or an increase in the an amount of tax, refundable or otherwise payable to a person, including any potential or prospective amount so refundable or payable, arising out of, or by reason of, a transaction, including a transaction where another transaction would not have been undertaken or arranged to achieve the results, or any part of the results, achieved or intended to be achieved by the transaction.”

The Submissions – Tax Payers:
13. As the hearing before this Court was the third occasion upon which these matters have been ventilated, it is not surprising to find that multiple submissions have been made by each party over the years. Whilst in this summary I have concentrated on the major points addressed to this appeal, nonetheless I have from time to time also delved into the submissions previously made. First, I propose to outline the submissions of the appellants.

14. (i) At the outset the tax payers submit that the provisions of s.86 of the1989 Act, must be interpreted in the same way as all other provision of the Tax Code, which is by applying the rules outlined or established in The Revenue Commissioners v. Doorley & Ors [1933] 1 I.R. 750 (“Doorley”), followed by Inspector of Taxes v. Kiernan [1981] I.R. 117 (“Kiernan”) and confirmed by McGrath & Ors v. McDermott (Inspector of Taxes) [1988] 1 I.R. 258 (“McGrath” or “the McGrath principles”). There is no justification either based on the section itself or otherwise to depart from such approach. As a result the trial judge was clearly mistaken when he declared:-

“Section 86 of the Finance Act 1989, (now s. 811 of the Taxes Consolidation Act 1997) provides specific anti-avoidance measures which are clearly intended to block particular schemes that are considered unacceptable by the legislature. The general anti-avoidance provisions were intended to counteract ‘artificial schemes’,

i.e.

transactions which have little or no commercial reality but are carried out primarily to create an artificial tax deduction or to avoid or reduce a tax charge.”

This approach has been characterised elsewhere in the submissions, as a conservative one and has been contrasted with what has been described as “the more rounded approach” taken by the Supreme Court of Canada in

Canada Trustco Mortgage Company v. Canada

[2005] 2 S.C.R. 601 (“

Trustco

”).

(ii) The legislative provisions dealing with ESR relief comprise a self contained code and therefore, any issue arising out of such relief should be governed by those provisions. One such provision is s. 54 of the Finance Act 1974, which contains the anti-avoidance measure specific to such regime. Consequently, it is that provision and not s. 86 of the Act of 1989, by which any suggested invalidity should be considered.

(iii) The learned judge wrongly imposed the burden of proof on the tax payers with regard to the benefit exemption. In this respect they point out that the Revenue Commissioners must have regard to subs. (3), and in particular to the matters listed at (i), (ii), (iv) of the Proviso, in determining whether or not a tax avoidance transaction exists. The onus to establish this, is therefore on the Revenue and does not move with regard to this exemption. This approach finds full support from

Trustco,

where at para.65 of the judgment the court rejected a submission that the tax payer was required to disprove that he or she had violated the object, spirit or purpose of the provision in question. That requirement was on the Minister who it was said was in a much better position than the tax payer to make submissions on legislative intent. Support for this proposition is also to be found in

Lehigh Cement Limited v. The Queen

[2010] F.C.A 124.

(iv) Complaint is also made about what they describe as being an “inadequate analysis” of both subs.(2) and subs.(3) of s. 86 and how each subsection interacts with the other. In particular it is claimed that the learned judge was incorrect in determining that subs.(2) fell to be considered on its own terms and not in the context of the provisions of subs.(3). In their view, a transaction cannot be declared to be a tax avoidance transaction, under subs.(2), without the Revenue Commissioners also having considered subs.(3). In essence, subs.(2) creates the generally applicable rule whilst subs.(3) creates the exception. Therefore, subs.(2) is subject to subs.(3).

(v) The tax payers then go on to conduct their own analysis of s.86. They do so, not only by individual subsection but also by way of multiple cross referencing as between all subsections. Particular attention is given to the word “primarily” as it appears in subs.(2)(ii) and also to the words “purpose or purposes” and the word “purpose” as these appear in subs.(3)(a) and (b) respectively. The use of the word “primarily” clearly indicates that there can be more than one purpose of a transaction and provided that the main purpose is not to obtain a tax advantage, then the underlying transaction is not questionable. In addition, it is unclear whether the misuse/abuse provision of subs.(3)(b), when applicable, replaces the “primary purpose” requirement of subs.(2)(ii), or whether that requirement simply becomes obsolete in such circumstances. In any event this type of assessment was undertaken to demonstrate the fact that the trial judge’s views of the section were either incorrect or incomplete.

(vi) The appellants contend that the steps taken by O’Flynn Construction in December, 1991 and January, 1992 which are above referred to, did not result in creating a “transaction” within the legislative definition of that term.

(vii) Likewise, they allege that no “tax advantage” resulted from this scheme, for two reasons. Firstly, O’Flynn Construction, in accordance with the evidence, never paid a dividend and never intended to pay a dividend: accordingly, there was no standard against which the suggested tax advantage could be measured and as a result, one could not say that such existed. Secondly, even if the company intended to pay a dividend, the result, when advance corporation tax was offset against mainstream corporation tax, was that it still had a nil liability: this mandatory offset requirement was misunderstood by the Revenue. Therefore, as no tax advantage accrued it was impossible to conclude that the “primary” purpose of the transaction was the avoidance of tax.

(viii) It is further said that when the instant transaction is looked at overall, it is clear that it has real commercial effect with enduring economic benefits: the mere fact of a tax payer entering into an arrangement, involving single or multiple steps, which produces a beneficial tax result, does not necessarily mean a violation of s.86. Therefore, the main purpose of the scheme was a commercial or business one.

(ix) The appellants went on to consider the purpose of conferring tax free status on ESR reserves, and said that it was of the highest importance to remember that, since its inception or very soon thereafter, legislative policy had been careful to ensure that the tax attributes of an ESR source dividend, retained their characteristics right to the end recipient. No steps of a restricting nature were ever put in place. In fact, the contrary had occurred as evidenced from various double taxation treaties which had been created between this and other countries

(x) The appellants rely heavily on the Canadian case of

Trustco

in their submissions on the misuse/abuse point. They quote from para.45 of the judgment where the Supreme Court, by way of example, outlined a number of situations which might come within the misuse/abuse aspect of s.245 of the Income Tax Act 1985. The court said:-

“This analysis will lead to a finding of abuse of tax avoidance when a tax payer relies on specific provisions of the Income Tax Act in order to achieve an outcome that those provisions seek to prevent. As well, abuse of tax avoidance will occur when a transaction defeats the underlying rationale of the provisions that are relied upon. An abuse may also result from an arrangement that circumvents the application of certain provisions, such as specific anti-avoidance rules in a manner that frustrates or defeats the object, spirit or purpose of those provisions. By contrast, abuse is not established where it is reasonable to conclude that an avoidance transaction under s.245(3) was within the object, spirit or purpose of the provisions that confer the tax benefit.”

Whilst not exhaustive it was suggested that this list was informative and that when the instant transaction is measured against each of the examples given, the same does not breach any of these criteria.

(xi) Further reference was made to para.60 of the judgment which stated:-

“Abuse of tax avoidance may be found where the relationships and transactions as expressed in the relevant documentation lack a proper basis relative to the object, spirit or purpose of the provisions that are purported to confer the tax benefit, or where they are wholly dissimilar to the relationships or transactions that are contemplated by the provisions.”

(xii) Finally, the appellants make several individual complaints about the failure of the learned judge to deal or deal adequately with a number of submissions advanced by them. Many are listed above but others include assertions, that the opinion formed under s.86 was fatally flawed on the grounds that the tax benefit was invented by a re-characterisation which is not permitted for the purposes of the opinion but only for the purposes of the result and secondly, that as the nominated officer had not given evidence, the opinion was void.

The Submissions: Revenue Commissioners
15. In general terms the Revenue Commissioners entirely support the judgment of the High Court and endorse the views and conclusions of the learned judge in all respects. In particular however, they make the following essential points which can be summarised as follows:-

(i) The historical method of interpreting taxation statutes was never intended to apply to a provision of a general avoidance nature, which s. 86 of the Act of 1989 is. This is entirely consistent with the McGrath decision where the transaction under scrutiny had to be considered in the absence of any such provision. It was for such reason only that the Supreme Court refused to follow the House of Lords decision in W.T. Ramsay Ltd. v. Inland Revenue Commissioners

[1982] AC 300 and why it had declined to adopt a new judicial principle of fiscal nullity. In addition, it is also said that

McGrath

expressly acknowledged that if and when a provision such as s.86 was enacted, the traditional interpretative methods would have to yield, giving way to a new approach based on statutory spirit and intent. In this regard the Revenue rely on a passage from the judgment of the High Court, Carroll J., and of the Supreme Court, Finlay C.J., both of which are cited at paras. 30 and 40 of this judgment. Therefore, s.86 has to be construed in a manner which gives primacy to legislative intent, as determined by legislative purpose.

(ii) The Revenue’s essential submission is that the appellants entered into this scheme or arrangement so as to enable cash to be extracted from O’Flynn Construction and be distributed to its shareholders in a manner, without either company or individual, incurring a liability to tax: in the case of the Company - ACT, and in the case of the shareholders - a Schedule F charge. The dividends in question were indirectly funded out of company profits with the result that, as it received no consideration for such distribution, its assets were correspondingly depleted by such amount, (see subpara.(iii)(c) next mentioned).

(iii) The overall transaction has no or virtually no commercial value. This is apparent from the following steps within the transaction:-

(a) the subscription by Dalemount Investments Ltd and Gatesvale Investments Ltd. on the 10

^th

December, 1991, for share capital in Mitchelstown. The share capital was issued at a premium of Ł99.00 per share and on the 18

^th

December, 1991, the shares were redeemed at par, each company thereby suffering a loss of Ł658,845.00;

(b) the payment of a dividend of Ł1.2M by Mitchelstown to Twingrove Investments Ltd. on the 16

^th

December, 1991, following the subscription for share capital on the 10

^th

December, 1991, and;

^st

March, 1992, of Ł650,000.00 relating to its investment in Dalemount Investments Limited.

(iv) Accordingly, the above steps clearly constitute a transaction, giving rise to a tax advantage and being one not undertaken primarily for purposes other than to give rise to such advantage.

(v) In dealing with the issue of abuse or misuse, it is asserted that in the first instance the purpose for which export relief was granted must be ascertained and having done so the transaction must then be assessed against that, so as to determine compliance or infringement.

(vi) The history of ESR relief was then outlined, by tracing its statutory provisions, including amendments, from its inception to its end for both levels of relief. Like the appellants, the Revenue rely on para. 60 of

Trustco

and said that the transfer of ESR relieved dividends, to a construction company not involved in the export business, and being one which had never made an investment in that regard, is not the purpose of ESR relief. The relationship between Mitchelstown and O’Flynn Construction is totally dissimilar to the relationship contemplated by the ESR provisions: the latter contemplate that such dividends should end up in the hands of a shareholder of an exporting company, whether directly or indirectly. Whilst it is acknowledged that the ESR legislation did not expressly prohibit “the sort of transaction undertaken by the appellants”, that fact is not dispositive of the issue. Whilst the dividend may be paid “up the line” its recipient cannot be shareholders who are entirely unconnected with the exporter. For such to occur is to totally offend legislative intention. The case of

Charles McCann Ltd v. O’Culacháin

[1986] 1 I.R. 196 (“

McCann”

), through the judgment of McCarthy J. is particularly relied upon in this regard, wherein it is said, that the purpose of ESR relief has been “judicially determined”.

(vii) In considering whether or not the transaction is an avoidance one or is excused therefrom by the relief exemption, it is submitted that careful scrutiny of the multiple steps involved, the sequential manner of their occurrence and the overall structure, is required. In that regard, whilst it is admitted that Mitchelstown had legitimate export sales reserves, it is suggested that the transaction, virtually of itself, demonstrates emphatically just how far removed it is from the real purpose of ESR relief. Accordingly, such provisions were directly or indirectly misused or abused.

(viii) When dealing with the relationship between subs.(2) and subs.(3) of s.86, the Revenue Commissioners have suggested:-

(a) that the attempt to link subs.(2)(a) and subs.(2)(b) and (c), with para.(i) and para.(ii), respectively of subs. (2) is incorrect and disregards the plain wording of subs.(2), which states that regard may be had to “any one or more” of the matters mentioned in (a), (b) and (c);

(b) that each matter specified in the Proviso in subs (3) is important, and when applied shows, that whilst in form the shareholders received dividend from Magmac International Limited, a company specifically incorporated for the purposes of the transaction, in substance such dividends, as the final outcome shows, were financed by O’Flynn Construction, and;

(c) that the tax payers had failed to address subs.(3) as they are unable to demonstrate how the criteria required for the benefit exemption has been met.

(ix) In responding to the burden of proof argument, the Revenue point out that such issue was dealt with in

Trustco

by reference to the three requirements of s.245 of the Income Tax Act 1985, which had to be established before the avoidance rule applied. These were:-

(a) that a tax benefit resulted from a transaction;

(b) that the transaction is an avoidance transaction, meaning that its main purpose was to obtain a tax benefit, and;

(c) that it was abusive in the sense that it was not consistent with the object, spirit or purpose of the provisions relied upon by the tax payer (s. 245(4)).

The Supreme Court held that the onus was on the tax payer to refute requirements (a) and (b) but on the Minister to establish (c). It is therefore said, that notwithstanding the differences between the respective avoidance measures, it is still clear that even under Canadian law, the tax payer had to discharge some burden.

(x) The situation in Ireland however is different: given the wording of s.86(3)(b), in particular the requirement that the Revenue Commissioners should be “satisfied” that the tax payer is entitled to avail of the benefit provision, the onus of proof must be on the tax payer, to so satisfy. This submission is consistent with

Doorley,

which was approved by the Supreme Court in

Saatchi & Saatchi Advertising Limited v. McGarry

[1998] 2 I.R. 562. Moreover, it is also consistent with the normal evidential rule of he who asserts must prove. In this context the limited extract quoted by the tax payers from

Lehigh

is no more than an application of the court’s ruling in

Trustco.

Finally, and irrespective as to where the onus of proof may lie, the Revenue Commissioners were entitled to dis-apply subs.(3)(b) as “all necessary proofs” in this regard were present.

(xi) Although the Revenue Commissioners, have in their submissions referred to Canadian case law from time to time, they also urge caution in its application given some significant differences between s.245 of the Income Tax Act 1985, and s.89 of the Act of 1986

This is further dealt with at para.102 of this judgment.

(xii) Finally, the Revenue Commissioners take issue with each of the other complaints agitated on behalf of the tax payers.

Decision of the Appeal Commissioners:
In firstly addressing their particular role when dealing with an appeal under s.86 of the Act of 1989, the Appeal Commissioners took the view that this did not involve reviewing the opinion of the Revenue Commissioners either in law or in fact, rather, on the established evidence, their task was to determine, on the balance of probabilities, whether or not the statute applied. The test in so deciding was an objective one.

Secondly, they had no difficulty in concluding:-

(i) that the various steps described in the Notice of Opinion constituted a “transaction”;

(ii) that the scheme afforded a “tax advantage” both to the company and to the individual tax payers: in the former case a reduction, avoidance or deferral of a potential charge to advance corporation tax (ACT) and in the latter to a schedule F charge;

(iii) that the transaction was not undertaken primarily for purposes other than to give rise to a tax advantage and,

(iv) that it was undertaken to obtain the benefit of the relief available under the ESR regime.

Therefore, but for the relevant provisions of subs.(3), namely the benefit provision, they would have concluded that the transaction was a tax avoidance one.

The Commissioners then considered the relationship between subs.(2) and subs.(3) of s.86, holding that any transaction which fell within the provisions of subs.(3), was not a tax avoidance transaction within the section. Accordingly, subs.(3) has a significant bearing on subs.(2), despite the contrary impression which its opening words “…Without prejudice… to the generality of that subsection…” might convey.

It will be recalled that, there are two essential components to export sales relief, the first is the tax free status of certain profits earned by companies from the manufacture of goods within the State which thereafter were exported, and the second is that on the distribution of such profits in the form of dividends, the same are likewise entirely free of Irish tax in the hands of the ultimate recipients.

In the instant case there is no doubt but that the ESR profits, accumulated by Mitchelstown, were derived from bona fide export sales. Therefore, there could be no question of abuse or misuse applying in this regard.

When considering the purpose of such relief within the context of the second component, as described, the Appeal Commissioners referred to McCann, where the Supreme Court held that the purpose of granting relief on profits derived from the manufacture of certain goods, was to encourage employment within the State and to promote exports therefrom. Whilst these remarks were not specific to ESR, nonetheless the Commissioners were satisfied that such views were relevant, but not conclusive, as to the purposes of the relieving provisions in the instant case, pointing out that such observations were directed to the position of a company and not that of shareholders.

Further, as part of the same inquiry, they also had regard to what conditions were or were not imposed on such relief. No restrictions of any kind were prescribed on shareholders who could benefit (see para.96 infra). Given the absence of such restrictions, the Commissioners were satisfied that “the comprehensive and entirely unencumbered nature” of the exemption could only be regarded as intentionally “buttressing the total exemption” of the corporate profits from tax. Finally, when distinguishing between misuse and abuse, they offered certain examples of situations that might be considered as falling within one category rather than the other. (see paras(xx) and (xxi) of the Case Stated)

As a result of their analysis, the Commissioners held that the distribution of bona fide export sales relieved profits, by means of the transaction in issue in this case, did not breach the anti-avoidance requirements of s.86. They concluded at para.(xxix) of the case by stating:-

“To conclude that there has been a misuse of the export sales relief provisions would in our view be to ignore the statement of the law laid down in

McGrath v. McDermott

. While it is necessary to look at the purpose for which s.86 was enacted, in our opinion s.86, in itself, cannot be used to abandon the clear principles of statutory construction laid out in that case. These principles of statutory interpretation set out in

McGrath v.

McDermott

prohibit us from adopting such a purposeful approach.”

The High Court Judgment:
Having set out his views that s.86 was a general anti-avoidance provision intended to capture, what he described as “artificial schemes”, which had little or no commercial reality (para.14(1) supra), the learned judge went on to consider what continuing role, if any, the principles of statutory interpretation outlined in McGrath had, in light of the existence of that provision. In this context he referred to certain passages from the judgments of the High Court and of the Supreme Court, in that case. Whilst these are discussed later in this judgment (paras.40 & 41), their relevance in the High Court clearly arose in the context of a submission or suggestion that McGrath was redundant or required substantial modification.

On one reading of the judgment it might be suggested that the ultimate view of the High Court on this point was somewhat unclear. At p.25 of the transcript the learned judge having quoted para. (xxix) of the case stated said:-

“In my judgment that final determination is to disregard the provisions of s.86 and in particular proviso of subs.(3) which specifically indicates that the Revenue Commissioners shall have regard to the substance of the transaction. Prior to the introduction of that provision in s.86, the determination of ignoring a purposeful approach would be correct.”

However, at pp.17 and 18, he expressly said that, in approaching the interpretation of s.86 he would be guided by what Finlay C.J. said in McGrath at p.276 of the report, which he quoted in full:-

“The function of the court in interpreting a statute of the Oireachtas is, however, strictly confined to ascertaining the true meaning of each statutory provision, resorting in cases of doubt or ambiguity to a consideration of the purpose and intention of the legislature to be inferred from other provisions of the statute involved, or even other statutes expressed to be construed with it. The courts have not got a function to add to or delete from express statutory provisions so as to achieve objectives which to the courts appear desirable. In rare and limited circumstances words or phrases may be implied into statutory provisions solely for the purposes of making them effective to achieve their expressly allowed objective.”

Its seems to me that these passages are not necessarily inconsistent and can be read as meaning that s.86 was interpreted in accordance with McGrath but when so construed, the section itself required the form, substance and outcome of the transaction to be considered. In other words the Proviso in subs.(3) applied.

In any event what is clear is that the learned judge, whilst upholding the views of the Appeal Commissioners in so far as they rejected the submissions of the tax payers, nonetheless disagreed with them in their conclusion that the relief exemption applied. As a result he was satisfied that the steps outlined in the Notice of Opinion constituted a transaction, that a tax advantage accrued to all tax payers and that the main purpose was to attain such an advantage. In addition, whilst acknowledging that the Revenue Commissioners were obliged to form an opinion as to whether or not a transaction is a tax avoidance transaction, nonetheless he felt that when a tax payer sought to rely on para.(b) of subs.(3) of s.86, the requirement was on him to establish this exception to the satisfaction of the Revenue Commissioners. In essence, on the major point he held that ESR dividends were not intended to be treated as commercial products and that given the total disconnection between the business of O’Flynn Construction and the business of a genuine exporting company, the use to which Mitchelstown reserves were put by virtue of the subject transaction, was totally at odds with the purpose of affording such reserves tax free status. The scheme was therefore contrary to s.86.

Conclusion
The first issue which should be addressed concerns the interpretive approach to s.86 of the Act of 1989: what tools should a court use to ascertain its meaning? It is argued by the appellants that the McGrath principles remain intact, whilst the Revenue Commissioners assert that, by reason of its nature and generality, a purposeful or schematic approach must now prevail. This question is quite distinct from the application of its provisions once properly construed. Whichever suggestion may be correct and despite the general importance of this issue, the more crucial point is how does the section, in particular subs.(3)(b), when applied, affect the transaction? First, however it would be useful to remind ourselves of these principles and how they developed.

The facts of Revenue Commissioners v. Doorley [1933] I.R. 750 are not of individual importance, save to note that the appellant tax payers were seeking to benefit from certain exemption provisions, regarding succession duty and legacy duty, in respect of which the Revenue Commissioners had raised an assessment. Having disavowed the existence of any special canons of construction when dealing with taxation provisions (Attorney-General v. Carlton Bank [1899] 2 QB 158), and having rejected any influence derived from an equitable approach, Kennedy C.J. held that, a liability to tax would follow if it came within the letter of the imposing provision “however great the hardship may appear to be to the judicial mind”, but where it fell outside, it would not, “however apparently within the spirit of the law the case might be” (Partington v. Attorney General L.R. 4 H.L. 100). He summarised his views as follows:-

“The duty of the court, as it appears to me, is to reject a

priori

line of reasoning and to examine the text of the taxing act in question and determine whether the tax in question is thereby imposed expressly and in clear and unambiguous terms, …for no person is to be subject to taxation unless brought within the letter of the taxing statute, that is, …as interpreted with the assistance of the ordinary canons of interpretation applicable to the Acts of Parliament…” (p. 765 of the Report)

The learned Chief Justice went on to say that these principles equally apply to the issue of exemption, which must also be confirmed in clear and unambiguous language. It would be wrong to limit an exemption and thereby extend liability, unless clearly mandated by the section to so do. In short, before a charge can be imposed or an exemption granted, the court, by adopting the normal rules of construction, which include giving the words their ordinary natural meaning in the context in which they appear, must be satisfied that the assessment raised is within the clear, express and unambiguous language of the provision in question. It should be noted that the reference to “context” must be understood as referring to “immediate context” and not otherwise, as the essence of his judgment clearly demonstrates.

Inspector of Taxes v. Kiernan [1981] I.R. 117 (“Kiernan”) did not in any way demur from that as above stated. Henchy J., in determining whether the word “cattle” included “pigs”, for the purposes of s.78 of the Income Tax Act 1967, held that such provision was clearly addressed to the public at large and therefore, should be given its “ordinary or colloquial” meaning. In addition, when referring specifically to statutes creating a penal or taxation liability, the learned judge went on to say that where “there is looseness or ambiguity attaching to it, the word should be construed strictly so as to prevent a fresh imposition of liability from being created unfairly by the use of oblique or slack language”. This is entirely consistent with Doorley.

Before looking at McGrath could I refer to two further authorities, the first of which is the famous case of the The Commissioners of Inland Revenue v. His Grace The Duke of Westminster [1936] 1 A.C. 1. In that case the court was confronted with an interpretative clash which could only be resolved by according supremacy either to the legal position and effect of a transaction or, to the substance and nature of such transaction. In confirming the former, the court rejected any suggestion that a liability could be imposed by reference to the spirit or contemplation of the statute or by inference or analogy. Indeed, the substance argument was dismissed by Lord Tomlin, in graphic language as being no more “than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable”. Consequently, as can be seen, the approach favoured in the Westminster case was entirely consistent with that of the Supreme Court in Doorley.

This issue, as to “legal effect” or “form and substance”, once again arose in the case of O’Sullivan v. P. Limited [1962] I.T.C. 355 (“O’Sullivan”). In that case Kenny J., who reviewed a number of English authorities including the Duke of Westminster, held quite definitely, that whether a tax liability arose out of a transaction depended upon the meaning of the transaction document, to be ascertained in accordance with the principles of construction above mentioned. In other words, a court would evaluate a transaction by reference to its legal effect and not by reference to its form or substance, or as sometimes put, its financial result. In so concluding he felt that Lord Greene M.R. in I.R. Commissioners v. Wesleyan & General Assurance Society [1946] 2 A.E.R. 749 had captured “the true view of the matter and the effect of the Duke of Westminster case”, when at p.751 he said:-

“In dealing with income tax questions it frequently happens that there are two methods at least of achieving a particular financial result. If one of those methods is adopted, tax will be payable. If the other method is adopted tax will not be payable…the net effect from the financial point of view is precisely the same in each case, but one method of achieving it attracts tax, and the other method does not. There have been cases in the past where what has been called a substance of the transaction has been thought to enable the court to construe a document in such a way as to attract tax. That doctrine was, I hope, finally exploded by the decision of the House of Lords in

I.R. Commissioners v. Duke of Westminster.

”

Accordingly, in the lead up to McGrath the above situation, represented the law, both in England and in this jurisdiction.

In W.T. Ramsay Limited v. I.R.C. [1982] AC 300 (“Ramsay”), the House of Lords, solely by judicial intervention, modified the Westminster principle: many, including McCarthy J. in McGrath (p.278), have said, entirely abolished it. Whichever, a new doctrine of “fiscal nullity” emerged, in which the transaction in issue was to be scrutinised, and ultimately determined, by reference to legislative intent. To that end the nature of the arrangement, its form, purpose and its results, were paramount. If by this approach the spirit of the taxation provision was offended, the transaction became an “avoidance” one. Several cases quickly followed, much along the same lines, such as I.R.C. v. Burmah Oil Co. Ltd. [1982] STC 30. H.L. (Sc.), Furniss v. Dawson [1984] AC 474, being but a few. Whilst the precise nature of the individual schemes differed from case to case, the courts approach to evaluating their legality, by reference to legislative contemplation, became established. It is the approach rather than the structural detail of the transaction which is important, as McGrath’s decision was essentially determined, not by reference to the transaction but rather, by reference to principle.

In McGrath the Irish Courts were invited by the Revenue Commissioners to follow the Ramsay jurisprudence, said at the time, to be still evolving. Both the High Court and the Supreme Court declined to so do. In the High Court, Carroll J. having surveyed some relevant law, followed the Westminster case and Kenny J.’s decision in O’Sullivan. She did so on the basis that to do otherwise, would be to usurp the legislative function, noting that the method of imposing tax in this country was by way of the Annual Finance Act, following budgetary decisions. In summary, her views were:-

“However, in my opinion the imposition of tax and the granting of relief on tax is solely a matter for the legislature.” (p.272)

In the Supreme Court Finlay C.J., with whom three other members agreed, summarised the court’s position at p.276 of the report:-

“The function of the courts in interpreting a statute of the Oireachtas is, however, strictly confined to ascertaining the true meaning of each statutory provision, resorting in cases of doubt or ambiguity to a consideration of the purpose and intention of the legislature to be inferred from other provisions of the statute involved, or even of other statutes expressed to be construed with it. The courts have not got a function to add to or delete from express statutory provisions so as to achieve objectives which to the court appear desirable…”

The reference in this passage to purpose and intention refers to a standard element of literal interpretation when doubt or ambiguity exists. No further or extended meaning is possible, for to do so is to disregard the remainder of the judgment which decisively dealt with the opposing contentions of the parties. In the other decision delivered, McCarthy J., came to the same conclusion and whilst noting that Doorley was not cited in the High Court, nonetheless expressly endorsed the essence of what Kennedy C.J. had said in that case. Therefore, as between what was described as the new approach giving rise to the new doctrine, and that established in Westminster/Doorley, the former was firmly rejected and the latter firmly vindicated.

That this approach has continued to apply, after the enactment of s.89 is undoubted and is clearly evidenced by several decision of both the High Court and the Supreme Court. Take for instance Texaco (Ireland) Limited v. Murphy [1991] 2 I.R. 449, which curiously enough also involved a tax relieving measure. In that case Texaco, which had incurred considerable costs in its search for oil, sought to bring its activities within s. 21 of the Corporation Tax Act 1976, so as to obtain the benefit of the allowances available under that provision. McCarthy J., speaking for the Supreme Court, when referring to the appropriate principles of construction said at p.454:-

“It is an established rule of law that a citizen is not to be taxed unless the language of the statute clearly imposes the obligation.”

In a much quoted observation in Cape Brandy Syndicate v. IRC [1921] 1 K.B. 64 at p.74, Rowlatt J. said:-

“…in a taxing act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”

The learned judge went on, once again, to affirm Doorley and McGrath and emphasised that the first rule of statutory construction “remained that words be given their ordinary literal meaning”. He then observed that any principle whereby, a statute should be construed as a whole has “perhaps less relevance to the construction of revenue legislation than, for instance, that of a social purpose”. Furthermore, by reference to the facts of Texaco, he dismissed a submission that the section in question should be construed by reference to other sections, proximate or not, as being “unsound in law”. See also Saatchi & Saatchi Advertising Ltd v. McGarry [1998] 2 I.R. 562 where the Supreme Court, despite having much sympathy for the tax payer, dismissed its appeal as a direct consequence of confirming such principles. I mention these cases only to illustrate the validity of McGrath, which evidently has continued to be applied well beyond 1989.

From this quick survey of the above authorities and those to which they refer, the resulting position relative to taxation statutes may thus be summarised:-

(i) the duty of the court is to establish the intention of the Oireachtas by reference to the language used,

(ii) in so doing, as such provisions are directed to the public at large (at least generally), the normal rules of interpretation apply, which means that, the words used should be given their ordinary and natural meaning, having regard where appropriate, to the context in which they are employed;

(iii) to create a tax charge the same must be founded within the clear, unambiguous and express terms of the provision relied upon: if the liability comes within the “wording” of the provision, that is an end to the matter: the tax payer must be taxed;

(iv) the principle last mentioned equally applies, where an exemption to tax is asserted: such exemption and its scope must likewise be so founded, as otherwise the basis of liability may be impermissibly enlarged;

(v) if the suggested charge is not within the “wording” of the provision as so understood, the tax payer is not liable: Principles of construction based on or derived from equity or approaches based on inferences or analogy or fairness have no part to play in this exercise;

(vi) if there is any doubt or ambiguity attaching to the language used, the same should be construed strictly so as to prevent the imposition of fresh liability or the extension of existing liability;

(vii) in essence, legal effect has primacy.

Despite the courts actual decision in McGrath and its unanimous affirmation to date, the Revenue Commissioners seek to rely on the following remarks, as confirming the correctness of their submission on this interpretative point. Carroll J., having noted the absence of any general statutory prohibition on tax avoidance schemes in this jurisdiction, unlike others, went on to say:-

“It is for parliament if it thinks fit

to confer on the courts

the power to determine whether a scheme was conceived primarily for the purpose of tax avoidance and be disallowed accordingly. If the legislature has failed to “plug a hole” in advance or has failed to pass a law which strikes generally at tax avoidance schemes, then I am strongly of the opinion that it is not the function of the court to intervene.” (p. 272) (emphasis added)

Reliance is also placed on what Finlay C.J. said at p. 277:-

“In some jurisdictions such as Canada and Australia, general statutory provisions against tax avoidance have been enacted, which in cases in which they apply would of course affect the interpretation of specific provisions of taxation laws. In the absence of any such general provisions in our law, there are no grounds for departing from the plain meaning of those sections.”

With great respect I cannot see how these observations can be applied to suggest that when and if, as we now have, a general avoidance provision, the manner of the court’s approach to its interpretation, must differ from the principles above outlined. In other words some new method of construction is required simply because the provision is and is described, correctly, as a general anti-avoidance measure. How I view the above passages is to say that the courts were not prepared to condemn a transaction, otherwise lawful, unless such invalidity resulted from the operation of a statutory provision. Whether specific or general it mattered not. It was for the Oireachtas to legislate on anti-avoidance matters. Rules of construction could not be used as a substitute for this omission. This is quite clear from other remarks made by Finlay C.J. at p.277 of McGrath where he said:-

“Apart from the special constitutional rights vested in Dáil Éireann in regard to taxation legislation in their character as money bills, the acceptance by the Oireachtas of its special powers and duties in regard to tax legislation, with particular reference to the desirability of preventing the success of tax avoidance schemes, is exemplified…by the fact that since 1973 there have been eight Finance Acts containing chapters specifically headed with the words “Anti-Avoidance” or similar words.

Not only am I quite satisfied that it is outside the functions of the courts to condemn anti-avoidance schemes which have not been prohibited by statute law, but I would consider it probable that such a role would be undesirable even if it were permissible…”

This passage in essence captures what the court was saying i.e. this area is within the remit of the legislature. Of course, I accept the fact that if a general provision is enacted, it may have follow-on consequences for other specific provisions of the taxation code. By the nature of its generality, it may precisely be designed, intended to and in fact have, such effect. This however, is simply a method of legislative incorporation. Instead of inserting a specific anti-avoidance clause, to apply to each individual taxation stream within the overall code, or to invalidate some particular transaction or practice (for example, that prohibited by s.54 of the Finance Act 1974), the Oireachtas has decided to establish a provision intended to have general application in respect of all statutes nominated for that purpose by s.86 of the Act of 1989. Therefore, it is quite likely, as I have said, that it will have consequences for other provisions. That, however, in my view, has nothing to do with how the provision in question should be interpreted. I find it impossible to accept that the McGrath principles are appropriate to a specific measure, including one of avoidance, but ought to be disregarded in respect of a general measure. Moreover, as previously stated, the continuing applicability of such principles has never been doubted (See para.38 supra). The court in McGrath did not simply reject fiscal nullity, it also rejected the means by which the concept was arrived at. It said no to establishing a judicial anti-avoidance doctrine: it was right then and it is right now. Consequently, I reject any suggestion that the manner in which this Court should interpret s.86 of the Act of 1989should differ in any way from the principles above described.

Having established in my view what the correct interpretive approach is, I now turn to consider the relevant parts of s.86. I do so whilst expressly rejecting any suggestion that such interpretation should be influenced by background, as so described by the Revenue. They say that it must be assumed that s.86 is a direct response to McGrath’s rejection of their invitation to the court in that case, to develop a doctrine of fiscal nullity by judicial means. Further, in effect it is also said that one should proceed on the basis that the section achieved what was intended, namely disowning McGrath. Such a proposition, if I have correctly summarised it, is in my view alarming. I refuse to speculate as to the motives behind the enactment of s.89 or any other taxation provision, for that matter. Unless such are clearly grounded and ascertained, the exercise is fraught, not only with difficulty, but also with danger: in particular as to the use to which any such conclusion may be put. This case illustrates the point: it has been squarely said that the provision was intended to override McGrath and of necessity, by implication at least, to apply Ramsay in this jurisdiction. If so, why did not the section model itself on the key points deducible from such line of authority? In fact the section seems to have been heavily aligned to its Canadian equivalent albeit with some modest judicial and statutory input from elsewhere. To try and identify the reasons giving rise to this composite approach may be of great interest to academic lawyers but is surely of little value to judicial decision. Moreover, it would be unthinkable from my point of view to accept that a provision, effectively per se, implemented what was intended, unless that could be independently verified by acceptable rules of construction. Otherwise intolerable uncertainty and confusion would be introduced, which would, in the long run, benefit neither government nor tax payer. Therefore, in my view the section, construed in the manner indicated, covers what it does, no more no less.

Much discussion has taken place about the precise meaning of s.86 and the relationship between its individual subsections. As is acknowledged by all, the provision is clearly complex and is capable of giving rise to considerable difficulty, at both a conceptual and practical level. As a result, I do not propose to conduct a detailed analysis of it or of the interplay between its different aspects, unless such becomes necessary so as to determine some key issue in the case. One immediate effect of this approach relates to the Proviso. As the benefit exemption is in issue, subs.(3) becomes relevant and consequently, the Proviso applies. This means that I do not have to decide whether, if neither exemption was relied upon, the Proviso would still apply. If such circumstances should exist, it is seriously difficult to see how subs.(3) would have any relevance apart from the Proviso. Therefore in such event the issue would be whether it is an integral part of subs.(2), or simply in some way ancillary to it, as being part of subs.(3)? Questions like, why it was not incorporated expressly within the wording of subs.(2) arise, as does its compatibility with the text of that subsection which declares that the opinion of Revenue shall be regarded as having been formed in accordance with “the provisions of this subsection” (See para.48 infra). Any suggested answer on the basis that it applies, because it must have been intended to apply, is one I would completely reject. Other concerns also exist. However, as I have said, I do not have to decide this issue for the reasons given: therefore from my point of view, the matter remains unresolved.

As the Proviso in subs.(3is to be applied then the form, substance and outcome of the transaction fall for consideration. However, they do so by reason of the express wording of such Proviso, not otherwise: statute has intervened and its meaning, according to McGrath, must be given effect to.

The critical parts of the section, which are set out in full at para.11 supra, are those contained in subs.(2) and subs.(3), for it is those provisions which essentially govern the validity of the arrangement under review. The remainder of the section, inter alia, confers power on the Revenue to take certain steps which, in effect, have the consequences of withdrawing from the tax payer, the advantage otherwise secured.

Under subs.(2) a “transaction” may be declared to be an avoidance transaction, if having regard to any one or more of the specified criteria (para.65 infra), the Revenue Commissioners form the opinion that:-

(i) a tax advantage arises, and

(ii) that the transaction was not undertaken or arranged primarily for purposes other than to give rise to a tax advantage.

The subsection specifically states that for the purpose of the section, its provisions are “subject to subsection (3)”, and that any reference to the opinion of the Revenue Commissioners shall be construed as a reference to the formation of that opinion in accordance with the provisions of the subsection. This means that the opinion criteria is to be found here. (see para. 45 supra)

Subs.(3), which opens with the words “Without prejudice to the generality of the provisions of subsection (2)”, goes on to say that when forming the aforesaid opinion, the Revenue Commissioners shall not regard a transaction, as a tax avoidance transaction, if they are satisfied that:-

“(a) …

Provided that, in forming an opinion as aforesaid in relation to any transaction, the Revenue Commissioners shall have regard to…

(I) the form of the transaction,

(II) the substance of that transaction,

(III) the substance of any other transaction or transactions with which that transaction may reasonably be regarded as being directly or indirectly related to or connected with, and

(IV) the final outcome and result of that transaction and any combination of those other transactions which are so related or connected” (“the Proviso”)

As can be seen the opening words of subs.(2) renders its provisions subject to subs.(3) and the opening words of subs.(3) classify its provisions as being “Without prejudice to the generality …” of the provisions of subs.(2). Given the terminology above underlined, it is clear that a relationship exists between both subsections and that, neither can be viewed as a stand alone provision or operated in isolation, one from the other. The phrase “Without prejudice to the generality…” was considered by the learned High Court judge who ascribed to it a meaning which resulted in subs.(2) not being limited by subs.(3). Whilst Ashbourne Holdings v. An Bord Pleanála [2003] 2 IR 114 was cited in this regard, where s.26(1) and (2) of the Local Government (Planning and Development) Act 1963 were considered, it is not clear to me if any parallel can be drawn between s.86 of the Act of 1989 and these other provisions. Section 26(1) of the Act of 1963 contains a general power to impose conditions, but only by reference to specified criteria, which evidently by itself creates a restriction on the scope of the power. Subsection (2) states that:-

“Conditions under

Subsection

(1)…may without prejudice to the generality of that

subsection

, include all or any of the following…”

It is, therefore, clear that subs.(1) contains the general provision, even if self restricting, whereas subs.(2), without expressly curtailing the power, elaborates with some specific conditions, each of which however, must be looked at individually so as to determine effect. In Ashbourne Holdings, condition (2)(a) of subs.(2), which was the relevant one, itself had a further limitation within it. Therefore, at best Ashbourne is an example of one meaning of “without prejudice” and then only at a most general level.

In the context of subs.(2) and subs.(3) of the Act, the “Without prejudice to the generality…” phrase, could not have such meaning. Quite clearly subs.(3) does affect subs.(2): it does so by prescribing certain conditions in two specific areas which, if satisfied, have the effect of preventing a transaction from being an avoidance one, even if otherwise it would be. Therefore it seems to me that, subs.(3) where applicable, is restrictive of subs.(2), in the manner described.

There can be no doubt therefore in my mind but that whenever either the business profit exemption or the relief exemption are in issue, the Revenue Commissioners cannot form an opinion if they are satisfied that the transaction in question comes within either provision. The wording of the subsection is clear: they “shall not regard”, a transaction as an avoidance one if so satisfied. What is equally clear is that the section permits of one opinion only. Not the formation of a prima facie, provisional or interim opinion to be tested or validated through the filter of some later process. Nor is there any room for an opinion giving rise to some form of negative clearance or the like. That being so, it seems to me that the Revenue Commissioners must apply the relevant provisions of subs.(2) to all transactions, together with subs.(3) if either or both of the exemptions are in play. (See para.45 supra). This situation is quite unlike s.245 of the Canadian Income Tax Act 1985, where in certain circumstances a transaction may retain its classification as a tax avoidance transaction but without tax consequences. In this jurisdiction, either it is an avoidance transaction with tax consequences or it is not. In my view therefore, on the facts of this case, the provisions of both subsections apply, subject only to that part of subs.(3) which relates directly to the business profit exemption.

Within this statutory framework as interpreted in the manner indicated, the issue on appeal must be considered: it is of course whether or not the High Court was correct in determining that the transaction above described was a tax avoidance transaction for the purposes of s.86 of the Act of 1989. Within that question there are a number of specific matters which must be addressed before a conclusion can be reached. These include:-

(i) whether the scheme is a “transaction” as legislatively defined, if so,

(ii) whether the transaction gives rise to a “tax advantage”, as so defined, in relation to each tax payer, if so;

(iii) whether by reference to any one or more of the specified criteria in subs (2)(a), (b) and (c), but subject to subs (3), the transaction is a “tax avoidance transaction”;

(iv) whether under subs (3) the transaction was undertaken for the purpose of obtaining the “benefit” of the tax free status of ESR dividends and, if so;

(v) whether the transaction resulted directly or indirectly in a “misuse or abuse” of such relieving provisions, having regard to the purposes for which they were enacted.

All of these questions were asked in the High Court by way of the case as above indicated. In addition, at that time the tax payer was also relying on the business profit exemption contained in subs.(3)(a) of the section. At the hearing of this appeal that issue was not pursued and accordingly, it is not specifically dealt with in this judgment.

General Observations:
Before addressing these issues there are a number of general matters which should be noted as well as three specific points which it would be convenient to deal with, at this juncture. Firstly, some general observations:-

(a) there is but one transaction, being that as described in the Notice of Opinion: it is not suggested that each step constitutes a separate transaction. Therefore, it is the transaction in its entirety which must be considered when the individual components of the section are being examined;

(b) the transaction itself is not in issue: the tax payers do not question its existence or that the individual steps within it were carried out,

(d) the transaction, subject to s.86, was effective to achieve the results intended;

(e) the transaction is otherwise lawful and does not breach any other provision of the tax code or any provision of company or regulatory law;

(f) the question of its validity, by reference to s. 86, must be judged objectively: the subjective motives of the tax payers are irrelevant;

(g) there is no distinction between corporate and individual tax payers save that, under the heading of “tax advantage”, the company has advanced an additional argument, and;

(h) there is no constitutional challenge in this case to any part of s.86.

The Role of the Appeal Commissioners – The Court:
The first of the three points, relates to the role of the appellate bodies in a case such as this. Any person aggrieved by the formation of an opinion under s.86 is entitled to appeal the resulting Notice to the Appeal Commissioners, who shall determine it, in accordance with the provisions of subs.(8) and (9) of the section. On the hearing of such appeal, the Appeal Commissioners, having had regard to all matters which the Revenue Commissioners should or did have regard to, shall consider whether the transaction, the subject matter of the appeal, is or is not a tax avoidance transaction. If they consider it is, they shall make an order that the opinion “is to stand good”; whereas if they arrive at a contrary conclusion they shall order that the opinion shall stand “void”. Under s.86(1)(b), all references to the “Revenue Commissioners” in subs.(2) and (3), and in the appeal provisions above mentioned, shall, subject to any necessary modification, be considered as referring to the Appeal Commissioners, to a judge of the Circuit Court or, to the extent necessary, to a judge of the High Court as may be appropriate.

From such provisions it is quite clear that the jurisdiction of the Appeal Commissioners is not one of review, regardless of standard, but rather is one of re-hearing based on the evidence previously adduced before the Revenue Commissioners and such further evidence as may be given before them. They therefore form their own opinion as to whether the transaction is an avoidance one. One direct and immediate consequence of this is that the failure, in itself, of the nominated officer to give evidence before the Appeal Commissioners is irrelevant. It matters not. The Appeal Commissioners are mandated to form their own opinion on the evidence available, wherever and from whomsoever that emerges. Therefore, the submission made by the appellants in this regard cannot succeed.

The position of the Circuit Court does not arise for consideration: that of the High Court is governed by the normal rules applicable to its jurisdiction to advise on points of law having been requested to so do by way of case stated. This Court on appeal is in a like situation. Matters such as those raised in Mara v. Humming Bird Ltd [1982] I.L.R.M. 421 do not arise: the test is simply one of legal correctness.

Section 54 of the Act of 1974:
The second point arises out of the provisions of s.54 of the Finance Act 1974. Firstly, it is said that as being an anti-avoidance measure specific to export sales relief, which is a self-contained code, the same dis-applies the more general measure from having any application in this case. Therefore, s.86 must be disregarded. I cannot accept this submission. The wording of s.86, which was enacted subsequent to s.54, is of sufficient breadth to have general application to any “transaction” as defined, once that transaction relates to a provision of any Act mentioned in the section for this purpose. As ESR legislation is undoubtedly so included, it seems clear that s.86 is capable of applying. Moreover, the ambit of s.54 is confined and specific and does not cover a scheme, the nature of which is under review in this case. Consequently, I would not accept this point. The second way in which s.54 is relevant, is in the context of the history of legislative intervention in the export sales relief code, a matter which is separately dealt with at para.93 infra.

Onus of Proof
The final point relates to the tax payers’ assertion that, in respect of each component, which must be established so as to give rise to the existence of a tax avoidable transaction, the onus of proof is on the Revenue. They say that the Revenue Commissioners initiate this jurisdiction and adjudicate on a transaction’s tax validity. As such a review is entirely within their control, they must carry the burden. This applies even when an exemption is claimed, given the wording of subs.(3), which obliges the Revenue to disregard the transaction if the qualifying conditions of either subpara.(a) or (b) of the subsection are satisfied. It is said that the entire procedure is quite unlike the “usual run of the mill assessment”, where the inspector disagrees with the tax payers’ computation of his or her liability. In such circumstances if an appeal is mounted, the onus of proof is clearly on the appellant. That is not the situation under s.86 and therefore, case law under the assessment procedure is not relevant. In support they refer to Trustco and, in particular, on the court’s decision that the Minister is obliged to establish an abuse of the provision relied upon.

The Revenue Commissioners in response, address two specific aspects of the section: firstly, however it should be noted that they say very little about the burden in the overall context of its role under the section. With regard to “main purpose”, issue in subs.(2), it is claimed that once there is a reasonable basis for considering that a transaction was not undertaken primarily for non-tax purposes, the onus shifts to the tax payer to disprove such a basis. Secondly, and in any event, it is said that the onus of proof must be on the tax payer where an exemption to tax is asserted under subs (3).

In my view, the situation arising under s.86 is at least to a certain but definite extent, different from the situation where an appeal against an assessment is raised. In the first instance the avoidance provision can only be activated by the Revenue Commissioners, who, for the provision to have effect, must arrive at a view that the scheme or arrangement is captured by it. They must assess a violation and do so by issuing a Notice of Opinion to that effect. Such a notice can only issue if by reference to certain specified matters, they have reached a definite conclusion. This exercise is conducted by way of objective assessment. In addition, they assert, not simply a breach of the section, but also what, in their opinion and judgment, are the tax consequences which arise if, such an arrangement had not taken place. All of these steps involve positive assertions on the part of the Revenue. In such circumstances, noting the wording and structure of the section, and in the absence of any provision to the contrary, it seems to me that if the notice is challenged the normal evidential rule of “he who asserts must prove”, applies.

With regard to the exemptions in subs.(3), the situation is not that straightforward. On the one hand, if either exemption is claimed, the Revenue Commissioners cannot assert the existence of an avoidance transaction if they are satisfied as to the validity of such a claim. (emphasis added) In such circumstances the transaction is never an avoidance one. This situation is quite unlike the position where there is prima facie or presumptive liability to tax, but the tax payer is excused the consequences by falling within the provision of an exemption. The scheme under subs.(3), in conjunction with subs.(2), is not structured in this way. So it is not altogether correct to simply assert that subs.(3)(a) and subs.(3)(b) are but exemption provisions.

However, on the other hand, such provisions are in my view clearly more analogous to an exemption provision than any other. If they are in play then the consequences of the section as a whole, may be bypassed. Most likely, but not necessarily in all circumstances, the tax payer will assert reliance on such provision. Therefore, in my view it is proper to treat these subsections, as akin to exemption provisions and accordingly, following well established law, the onus of proof in this regard should be on the tax payer.

Reliance has been placed on Trustco by both parties in this regard. However, as appears elsewhere in this judgment (para.15 (ix)) the Supreme Court of Canada dealt with this issue by reference to three specific matters arising under s.245 of the Income Tax Act 1985. It held that the onus was on the tax payer to contest the Minister’s assessment with regard to the existence of a tax benefit and also with regard to the “main purpose” component of the transaction; but was on the Minister to establish abuse. I do not agree that one can isolate the latter ruling and apply it to this case. In fact whilst s.245 has similarities to s.89, it is in many material respects, different in both wording and structure. Consequently, I do not propose to rely on Trustco in this regard.

Tax Avoidance Transaction
Central to this case is of course the existence of a tax avoidance transaction which comes about where the Revenue Commissioners, having regard to (a) “the results of the transaction” and/or (b) “its use as a means of achieving these results” and/or (c) “any other means by which the results…could be achieved”, of subs.(2), but subject to subs.(3), form an opinion that a “transaction” exists, that it gives rise to a “tax advantage” and that it was not undertaken “primarily” for purposes other than to give rise to such an advantage. This is the criteria by which the existence of a tax avoidance transaction is established. As can be seen it has a number of individual components which must be examined in the context of the matters specified. Firstly, a consideration of these matters.

Regarding the requirements of (a), (b) and (c) of subs.(2), I would say the following:-

(i) By reference to subpara.(a), it is clear from the accounts of O’Flynn Construction that for the period ending the 31

^st

March, 1992, the company wrote off the sum of Ł650,000 which relates to its investment in Dalemount Investments Ltd., and thus, without receiving any consideration therefor, thereby depleted its assets in that regard. In addition, the individual shareholders were enriched as a result of such depletion. Moreover, this occurred without the company or the individuals incurring any liability to tax.

(ii) By reference to subpara.(c), the other means by which the aforesaid results, at both corporate and individual level, could have been achieved, were most obviously the payment of a dividend by the company. This conclusion is the most reasonable one available in light of the fact that no consideration was given for the funds so received and no other circumstances existed which would have enabled the company to claim the distribution as a deduction for corporation tax purposes, and;

(iii) By reference to (b), it is clear that payment of such a dividend as last mentioned, would have resulted in the company having a liability to ACT and its shareholders to income tax.

Having thus so concluded, in which regard I entirely agree with the Appeal Commissioners, it is now necessary to consider some further individual aspects of an avoidance transaction.

Is there a Transaction ?
A “transaction” means:-

“(i) any transaction, action, course of action, course of conduct, scheme, plan or proposal, and;

(ii) any agreement, arrangement, understanding, promise or undertaking, whether expressed or implied and whether or not enforceable or intended to be enforceable by legal proceedings, and;

(iii) any series of or combination of the circumstances referred to in paras.(i) and (ii),

(iv) ….” (s.86(1))

The scheme in this case involved multiple steps which cumulatively were designed to achieve a single result. The Revenue Commissioners have decided, in the Notice of Opinion, to define the transaction as being the aggregate of these steps. Given the broad definition of the term, to include, course of conduct, scheme, arrangement or undertaking, the submission that such constitutes a “transaction” within the meaning of the section cannot in my view be doubted.

Is there a Tax Advantage?
A “tax advantage” has been defined as meaning:-

“(i) a reduction, avoidance or deferral of any charge or assessment to tax, including any potential or prospective charge or assessment, or;

(ii) a refund …

Arising out of, or by reason of, a transaction, including a transaction

where another transaction would not have been undertaken or arranged to achieve the results, or any part of the results

, achieved or intended to be achieved by the transaction.” (s.86(1)) (emphasis added)

It is submitted on behalf of O’Flynn Construction that these provisions are intended to refer to real tax and not to a tax which they describe as “illusory”. There must be an actual or potential charge to tax, as would for example arise, out of a completed contract or an existing contract which may or may not be completed. No such liability exists in this case. It is also said in the same breath that a norm, standard or comparator against which the tax advantage may be measured, must likewise exist. If there is no liability then there cannot be a tax advantage. To suggest otherwise is to withdraw a tax advantage from a tax liability which has never existed in the first place.

In support of this proposition it is said that the company never paid a dividend and that there is no evidence to suggest that it ever would. Moreover, even if it had paid a dividend, there would still be a nil liability in view of the offset provisions as between ACT and mainstream corporation tax.

There are two answers to this submission, both arising out of the statutory definition of “tax advantage”. Firstly, the reference to any reduction, avoidance or deferral, applies not only to a charge but also to a “potential charge”: in my view this is sufficiently broad to capture the advantage said to have accrued to the company appellant. Secondly, the suggestion that a comparator must exist before a benefit can be obtained is to disregard that express part of the definition which is underlined above(at para.68). Those words clearly mean that proof of an alternative transaction is not required and therefore, the existence of a comparator is not necessary.

In this regard I would respectfully agree with what is stated in Ward, Burke and Judge, “Irish Income Tax 2005”, 2005 Ed., (Tottel Publ. 2005) at p.9, where it is said:-

“The reference to a transaction, where another transaction would not have been undertaken to achieve the same results etc, emphasises that … s.86 is not confined to transactions where the tax payer achieves a given result by structuring his transaction in a particular form which results in his obtaining a tax advantage. Thus, transactions which are undertaken (wholly or partly) in order to save tax and where accordingly no equivalent transaction would have been undertaken in the absence of the hope for tax savings also fall within the potential scope of section 86.”

If it was otherwise, it would mean that tax payers could successfully avoid the parameters of the section by arguing that no alternative transaction would have been undertaken, thus, no charge to tax would have arisen, no tax advantage would have accrued and consequently the transaction could not be said to be a tax avoidance one. In my view, the width of the definition is sufficient to establish that O’Flynn Construction has obtained a tax advantage in this case, namely the avoidance of a potential charge to ACT.

This submission has no application to the individual appellants, who clearly avoided a potential charge to income tax under Schedule F.

Was the Main Purpose to Avoid Tax?
The tax payers correctly point out that a tax avoidance transaction cannot be established unless the “primary purpose” of the underlying scheme is to give rise to a tax advantage (subs.(2) of s.86). In other words its main purpose must be to that effect. In addressing this point the appellants advance what is commonly referred to as the “commercial purpose” defence and suggest that the scheme was a real business and commercial venture giving rise to enduring economic benefits. As such, even if structured in a tax efficient manner, it is not an avoidance transaction. A simple example supports this conclusion: if a tax payer sells an investment property and chooses a route (from a number) which results in less tax being paid, that sale cannot be captured by the section.

For my part, I entirely subscribe to the view that there is no obligation on a person to conduct his or her business in a manner which maximises tax revenue. I refer of course to legal obligation. This applies even when sophisticated instruments, devised by tax and legal consultants have been used. On the contrary, as has been observed in so many cases, “no commercial man in his senses is going to carry out a commercial transaction except upon the footing of paying the smallest amount of tax involved”. Indeed, the subsection recognises this, as the inclusion of the word “primarily”, is intended to preserve the right of the tax payer to structure a business driven transaction in a tax efficient manner. However, such must be duly compliant with any specific rule, set of conditions or prohibition: in the instant case this means that the main purpose of the arrangement must not be tax driven. In order to determine this, an objective view of the transaction must be taken so as to assess the relative importance of the reasons behind it. In this case, viewing the scheme impartially, I cannot identify a “business objective” or a “commercial basis” to the transaction other than to save tax. There was no other substantive reason in my view for entering into the scheme and completing the transaction. Certainly no other primary reason or purpose. To suggest that it was but a commercial venture structured in an efficient manner, is to mis-describe it. In my view, the transaction cannot be characterised in this way. Given the structure of the transaction, involving prearranged sequential steps, all required to achieve its intended end and noting the actual results so achieved (which are described elsewhere in this judgment), I am satisfied that the Appeal Commissioners, in light of the entirety of the evidence, were correct in concluding that such “was not undertaken or arranged primarily for purposes other than to give rise to a tax advantage”. Accordingly, the transaction satisfies that component of a tax avoidance transaction as is identified in subpara.(ii) of subs.(2).

The results of the above findings are that unless the benefit exemption applies the transaction is captured by the section.

The Relief Provision permitting the Relief Exemption:
Section 86(3)(b) has two requirements within it: firstly, that the transaction was undertaken for the purpose of obtaining the benefit of a relieving tax measure (not specific to ESR) and secondly, that the transaction has not directly or indirectly abused or misused that measure having regard to the purpose for which it was enacted (emphasis added). In other words it is intended by this provision to negate a scheme’s validity, which otherwise is unobjectionable, if it violates the purposes of the relieving measure. When determining this issue the Proviso applies. There is no contention about the first limb of this provision, as it cannot be doubted but that the transaction was arranged for the purposes of obtaining the benefit of tax relief then available under the ESR scheme. As this conclusion is non-controversial, there is no necessity to discuss the interesting point relating to the interplay between that “purpose” aspect of the first limb and the “primary purpose” component of a tax avoidance transaction, which is referred to at subs.(2)(ii) of the Act (para.14(v) supra). I would only note, as with the entire section, that if such had to be undertaken it would be no easy exercise.

The Revenue’s position under the heading is that the purposes for which ESR was established must be ascertained by a contextual construction of the relevant provisions: Doorley is cited in this regard. Much reliance is also placed on McCann which it is claimed has identified the motive behind the legislative exemption which is, to promote employment within the State and to encourage exports from the State. In fact it is said that, through the judgment of McCarthy J., the purpose of such relief has been “judicially determined”.

As measured against this criteria, the transaction in question, of which a close examination is required, has neither effect. From its form and manner it is clear that the scheme was but an attempt to re-characterise the profits of a construction company as being those of a manufacture-export-company. Its true purpose was to extract money from O’Flynn Construction and by an artificial device, to avoid the ordinary consequences of such a distribution, namely the incurring of a tax liability on both the company and the recipients. The specific legislative intent governing ESR did not envisage that reserves (even though legitimately accumulated) could be channelled through an interconnected and an unrelated company and thus onwards to its shareholders without the incidence of tax liability. Therefore, the arrangement in question is a blatant misuse or abuse of the export provisions.

The appellants support the analysis and conclusion reached by the Appeal Commissioners on this issue.
Before one can determine whether the transaction is a misuse or an abuse of the reliving provisions, it is necessary to consider the purposes for which such provisions were enacted. This “purpose” inquiry is an express obligation of subs.(3)(b), and does not derive from the interpretive provisions earlier described. It is solely statute based. Moreover, there could be no justification for any type of general inquiry on the misuse or abuse aspect of the case. The section is utterly clear in this regard; such must be measured against the purposes of ESR relief and not otherwise.

To identify legislative policy in any given area of the law is no easy matter: however, even if always difficult, it can be more readily ascertainable in certain particular areas. In other areas the task may be close to the impossible. In this case we are dealing with a taxation measure, specific in itself, but connected with and interrelated to many other areas of the taxation code. The making of such law is a legislative function, embarked upon, at least annually in this jurisdiction. Such intervention is usually designed to promote some policy of the existing government. Such policy is usually formulated at political level and reflects much diversity; so much so that, unless at the core of the process, it can be almost impossible to decipher. Yet the judiciary is frequently called upon to search for, find, describe and define what the policy is of some piece of legislation or other. How is it to go about this and where does it search? Surely it cannot be expected, for several reasons, to conduct an analysis such as a political scientist would? Recourse to parliamentary debates or sourcing the views of individually interested lobby groups have never been countenanced. Equally so with regard to the views of the legislators, including the sponsoring Minister. So how does one achieve this inquiry: more accurately how does one do so, in a manner which avoids the infusion into the process of purely subjective opinion, whilst at the same time preserving some level of certainty and respecting the remit of parliament?

Any suggestion that the courts could, having identified the legislative policy by whatever means, apply that policy to influence, modify or alter the wording of a taxation provision, would be tantamount to judicial intrusion into this key legislative sphere, and would be a usurpation of such legislative power. Neither the formation of taxation policy nor the creation of a taxation charge are matters for the judiciary. Such would be quite an inappropriate exercise of judicial function.

In my view there can be only one answer: policy must be anchored in the language used, recourse being had, where appropriate, to its context as disclosed by the statute (or relevant part thereof) as a whole. In this case, the restrictions by which ESR relief was subject, may be considered, and when analysed will demonstrate just how unregulated, the transmission of such dividends has always been.

Relief, especially tax incentive reliefs, are enacted either for a specific or a general purpose or for a combination of both. When referring to manufacturing relief, McCann identified the purpose of such relief as being to encourage the creation of employment within the State and to promote the export of goods from it. Although dealing with the more general relief relating to manufacturing, of which ESR was the precursor, I am entirely satisfied to regard such views as being relevant to this case. However, it could not be said that McCann intended to be conclusive in that regard, noting that the court was addressing but one aspect of the relief. Therefore, I cannot agree with the breadth of the submission that McCann is determinative of the “purpose” issue of export relief. It therefore becomes necessary to refer to the history of such relief itself.

In 1956, and as subsequently amended, the legislature introduced a scheme, whereby companies which could prove that goods were “in the course of trade exported out of the State”, were entitled to claim full tax exemption on the resulting profits for a period of fifteen years, followed by a further period of five years during which the percentage relief tapered to zero. Originally it was confined to goods but later expanded to cover diverse other activities. Matters such as the precise eligibility criteria, how profits were calculated for this purpose and within what accounting period the relief had to be claimed, are not of relevance to us. The relief, contained in Part III of The Finance (Miscellaneous Provisions) Act 1956, under the heading “Profits from Exports – temporary relief from Income Tax and Corporation profit tax”, which became known as Export Sales Relief (ESR), ceased to be available after the 5^th April, 1990.

Under the scheme provision was also made whereby, as an exception to the general rule that all distributions made by companies were subject to tax in the hands of the recipients, dividends received from ESR profits were likewise free of tax. In this regard it was frequently said that such relief “flowed through” to the dividends so received. This relief was phased out (s.52 of the Finance Act 1990) and from 1994 onwards all ESR dividends were fully taxed.

Apart from the aforegoing sections and those next mentioned, there are no other significant legislative provisions, which are material to determine the purpose of the relief.

As has been pointed out elsewhere, ESR consisted of two entirely separate reliefs. The first was at a corporate level where the qualifying company paid no corporation tax on the profits generated from such business. The second was at the shareholder level where dividends, which were ultimately sourced from such profits, were likewise tax free. There is no dispute in the instant case but that Mitchelstown legitimately accumulated export sales relieved of dividends and that such dividends were the source of the distribution received by the individual shareholders on the 27^th January, 1992. Therefore the issue in this case is not at the corporate level which was the level under discussion in McCann, but rather at the individual level. The essential point therefore is, whether to serve the purpose of ESR relief, as properly intended, it is necessary to prescribe conditions or impose restrictions on who may be classified as shareholders for the purposes of receiving tax free dividends from legitimately earned and sourced reserves? On this critical point, the Revenue Commissioners, in short, say that tax free status of such dividends extends only to investing shareholders in the qualifying exporting company or in related or connected companies, all forming part of the same group of exporting companies; whereas the appellants assert the absence of any justification for this view and submit that when properly construed the intervention of the Oireachtas discloses a contrary position.

On this issue it must firstly be noted that the Revenue cannot identify a single piece of relevant legislation, either standing alone or when read with any other, which prevents or seeks to prevent what is sought to be achieved by the transaction under review. This is of importance not simply from a negative viewpoint. Whilst I do not accept that this situation is determinative of legislative intent, nonetheless it must be a matter of high significance.

It is also highly instructive to note that the Oireachtas has never attempted to prescribe conditions, which had to be satisfied before the ultimate shareholder recipient could obtain such dividends tax free. In fact, having quickly intervened to remove the only restriction imposed, it did not thereafter further interfere. The amendment I speak of was made in 1958. Under s.15 of the Act of 1956, the word “company” was confined to a body corporate which in the course of trade exported goods: this had the unintended effect of confining the tax attributes of ESR dividends to companies which in the chain of companies were the exporting companies rather than to all companies in that chain. The amendment, which substituted the word “body corporate” for the word “company” was backdated to 1956, and was never subsequently altered. This had the effect that a shareholder in the parent company could benefit from the relief even if the exporting company was at the end line in the chain of corporate connection. Thus, despite a number of later amendments to the scheme, the legislature was careful to ensure that no matter how many legal persons existed between the exporting company and the ultimate shareholder, the dividend attributes were attained at all stages.

A number of other examples exist where the tax free nature of ESR dividends was promoted as an economic policy of the State. Section 84 of the Corporation Act 1976, commonly known as s.84 loans, was an instance in point. Another demonstration of legislative intent was the extension of such tax free attributes, through various international treaties negotiated between Ireland and foreign jurisdictions. In effect, such provisions ensured that not only Irish but also foreign residents, without limitation could obtain this beneficial tax result.

Another perhaps even more enlightening example is the enactment of s.54 of the Finance Act 1974, above referred to in a different context. Following the establishment of export relief, a practice developed whereby, instead of taking a salary, employees, mostly high placed executives, were issued with non-voting preferential shares in a company on which dividends were regularly paid. Such dividends suffered no tax in the hands of such employees. In order to combat that practice, s.54 of the Act of 1974 was enacted. Under its provisions the Revenue Commissioners were entitled to treat dividends, received for services rendered, as salary under Schedule E. These provisions did not prohibit such dividends entirely and many such executives continued to use the scheme as a way of topping up the basic salary requirements typically by taking 10% of total remuneration in this way. Eventually, by s.52 of the Finance Act 1992, all such dividends were fully taxed after 1994.

From the above it can clearly be seen that these relieving provisions attracted legislative attention: yet no attempt was made to restrict or otherwise curtail the benefit of the exemption, as dividends percolated through into the hands of the ultimate recipient.

Evidently there was a reason for this and in that regard, I concur with views of the Appeals Commissioner who stated the following when considering the purpose of such relief and also with the analysis which supported their view: at para.(xxiv) they said:-

“The complete exemption of a company’s profits from tax was a radical proposal. The fact that the exemption was confined to exported goods was highly likely to and in fact did, lead to foreign based companies coming to Ireland to establish manufacturing and exporting operations. The exemption from tax to which recipients of dividends from qualifying companies were entitled was, arguably, more radical than the exemption of the underlying profits from tax in that they were no restrictions imposed on the shareholders in those companies. Some of the possible distinctions between shareholders that could have been made in connection with the exemption of the dividends from tax are as follows:-

The exemption to apply only to

shareholders with a percentage holding of above or below a certain threshold:

dividends paid subject to a certain minimum level:

dividends paid out prior to a particular date subsequent to the generation of the profits:

either corporate or individual shareholders:

shareholders living in Ireland or living abroad:

those shareholders who are either employees or directors of the company:

those persons who were shareholders at the time the profits were earned by the company:

those persons who were shareholders at the time of the actual manufacture and/or export of goods:

dividends paid by a company prior to its ceasing to trade, and

those non-resident shareholders who were resident in a country with which Ireland have conducted a double taxation agreement.”

96. What this assessment highlights, in stark terms, is that no attempt had been made over its thirty five year life span, to regulate the tax status of such dividends: strikingly restrictions regarding matters such as the following were never put in place:-

(i) the temporal relationship as between profits earned, profits distributed and acquisition of shareholding,

(ii) the legal personality of the shareholder, the size of shareholding and the duration of its retention,

(iii) the legal proximity of shareholder to exporting company,

(iv) the nature of the shareholder’s business and its association with that of the exporting company,

(v) the requirement for shareholder investment in the exporting company, or its size, use or when required,

(vi) the due date by which such dividends would have to be distributed.

These are but some examples, amongst others, which illustrate the absence of any controls on the flow of such dividends.

Against this background it seems to me that one can only conclude that the unrestricted scope and nature of the exemption, over such a period of time, was part of a deliberate policy supporting the total exemption of such profits from tax: this at the corporate and individual level. In such circumstances it would seem impossible to hold that the purpose of the relief could be said to have been either abused or misused in this case.

Looking at McCann and applying it to ESR relief, it is very difficult to see how the instant transaction could be regarded as being in any way offensive to the encouragement of domestic employment, or the promotion of exports manufactured in this country. Unquestionably Mitchelstown was a qualifying company and its reserves, qualifying profits. For whatever reason Mitchelstown could not distribute these: vaguely we are told that it did not have sufficient funds to do so. Unless some use could be made of these reserves, the intended statutory benefit would have been lost. Such benefit was just as important an element of the scheme as was relief at company level. It could not be doubted but that it was also an economic driver, relative to employment, manufacture and exports. How therefore, can it be said that the distribution of such profits, was a step sought to be prevented by the legislative policy of the scheme or that it undermined its rationale. On the contrary, it can be stated that it is in the interest of this rationale, to encourage investment in export companies by passing on the benefit of ESR reserves. As above mentioned (para.96) it is quite immaterial in my view, whether the investor is or is not another export company. Likewise, if the nature of its business was crucial, many entities, within a group system, would have been disentitled. Therefore, I cannot see how this distribution could be said to have circumvented the purpose of the measure.

Finally, there are two further matters which I wish to comment upon. In their decision the Appeal Commissioners decided to treat the phrase “misuse or abuse” as separate concepts and gave examples of what might fall within one area rather than the other. Whilst undoubtedly on one reading of subs.(3)(b), such a distinction is required, nonetheless I am not convinced that this is the most correct way of applying the provision. It seems to me that the critical point will be whether or not when viewed against this measure of assessment the transaction is a “misuse or abuse” of the provision in question. Such an exercise may best be served by adopting a unitary or single approach. However, as a resolution of this issue would have no bearing on the decision which I have arrived at, I will defer offering a concluded view until the same becomes necessary. These remarks equally apply to any detailed assessment of what constitutes “abuse or misuse”, either having a separate or combined meaning, as it is clear to me that by whatever yardstick I might apply to such provision, the conclusion would be identical to that arrived at.

Secondly, some criticism has been levelled at the Appeal Commissioners for their statement which appears at para.(xxix) of the case stated. This paragraph, which is reproduced at para.23 of this judgment, might be apt to suggest that by virtue of McGrath the requirement of subs.(3)(b), to look at the purpose of the ESR legislation, could be ignored. I do not believe that this is what was intended as specific mention is made of that “purpose requirement” of the subsection. Whichever, it is quite clear from that statutory provision, as stated on a number of occasions previously, that the purpose of the relieving measure must be considered.

Canadian Gaar
In conclusion I should say a word about the Canadian Garr. The general anti-avoidance provision, in Canada is contained in s.245 of the Income Tax Act 1985. The relevant portions of which read as follows:-
“(1) [Definitions] In this section

‘tax benefit’ means a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act:

…

‘transaction’ includes an arrangement or event.

(2) [General anti-avoidance provision] Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction.

(3) [Avoidance transaction] An avoidance transaction means any transaction

(a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or

(b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.

(4) [Where s. (2) does not apply] For greater certainty, subsection (2) does not apply to a transaction where it may reasonably be considered that the transaction would not result directly or indirectly in a misuse of the provisions of this Act or an abuse having regard to the provisions of this Act, other than this section read as a whole.

(5) (Determination of tax consequences] Without restricting the generality of subsection (2),

(a) any deduction, exemption or exclusion in computing income, taxable income, taxable income earned in Canada or tax payable or any part thereof may be allowed or disallowed in whole or in part,

(b) any such deduction, exemption or exclusion, any income, loss or other amount or part thereof may be allocated to any person,

(d) the tax effects that would otherwise result from the application of other provisions of this Act may be ignored,

in determining the tax consequences to a person as is reasonable in the circumstances in order to deny a tax benefit that would, but for this section, result, directly or indirectly, from an avoidance transaction.

…

248…

(10) [Series of transactions] For the purpose of this Act, where there is a reference to a series of transactions or events, the series shall be deemed to include any related transactions or events completed in contemplation of the series.”

Whilst the tax payer suggests that as against s.86 of the Act of 1989 this provisions is identical, it is clear that this is not so. Some of the differences are as follows:-

(a) Under Irish law a tax advantage may occur even if the tax payer would not have undertaken an alternative transaction: in other words the “do nothing” argument will not, of itself, prevail in this jurisdiction. Or as above concluded, it is not necessary to establish a norm or standard by which a reduction, avoidance or deferral of a tax charge is measured. This is the effect of the inclusion of the underlined wording in the definition of “tax advantage”. (para. 68

supra

)

(b) In Canada by virtue of the definition of “tax benefit” it would appear that such a standard is necessary. See

McNicoll v. R.

[1997] 97 D.T.C. 111 (119 Bonner T.C.J.)

(d) Under Canadian law a transaction is an avoidance transaction under s.245(3) if it results in a tax benefit unless the transaction may reasonably be considered to have been undertaken for

bona fide

purposes other than to obtain a tax advantage. If it is an avoidance transaction, the tax benefit is denied under s.254(2). However, such withdrawal will not result if the transaction was not directly or indirectly a misuse of the provision of the Act or an abuse of the provisions of the Act, read as a whole. In other words to deny the benefit, the avoidance transaction must be an abuse or a misuse of the income tax code.

(e) Section 86 differs in the way in which it applies the misuse or abuse provision. Before, or at least as part of forming an opinion, under s.86(2), regard must be had to subs.(3)(b), if in play, which as we know contain the abuse/misuse provision. So, whereas it is the tax benefit which may be saved under the abuse/misuse provision of Canadian law, it is transaction itself which may be saved under s.86.

(f) Moreover, in Ireland the misuse/abuse exception applies only to limited circumstances being those set out in subs.(3)(b). Consequently where the subsections are not in play, a transaction may be an avoidance transaction simply because it gives rise to a tax advantage and its main purpose was to secure such advantage.

(g) The wording of the more general s.245(4) may be contrasted with the specific wording of s.86(3)(b): the former reads:-

“…where it may

reasonably be considered

that the transaction would not result directly or indirectly in a

misuse of the provisions of this Act or an abuse having regard to the provisions of this Act, other than this section, read as a whole.”

with subs.(3) reading:-

“…the transaction was undertaken or arranged

for the purposes of obtaining the benefit of any relief, allowance or other abatement

provided by any provision of the Acts and that transaction would not result directly or indirectly in a

misuse of the provisions or an abuse of the provisions having regard go the purposes for which it was provided.”

(h) As can therefore be seen the test under s.245(4) is one of reasonableness whereas under s.86(3)(b) the Revenue must be satisfied of the matters therein specified, and finally;

(i) There exists in Canada, unlike in this jurisdiction an Explanatory Note to Legislation Relating to Income Tax issued by the Minister for Finance, which whilst not binding as to interpretation, is frequently used as an aid to it.

The above are some of the differences between the legislative provisions of each country. As such, it must be recognised that the Canadian case law is directed towards the specific provisions of its jurisdiction whereas when dealing with the provisions of s.86 this Court is likewise so directed. Consequently, caution must be exercised in any direct application of Canadian law to the situation presenting in this case.

In conclusion, I am therefore satisfied that the purpose of the ESR legislation, as it applied to dividends, has not been violated or undermined by the transaction, the subject matter of this judgment.

Judgment of O’Donnell, J. delivered the 14th day of December 2011.

1 This case has its origins in a complex series of transactions which were completed in the short period between the 5th December, 1991, and the 24th January, 1992. However the root of the issue goes back even further.

2 In 1958 the State sought to encourage the manufacture of products for export by introducing an Export Sales Relief Scheme (“ESR Scheme”) whereby profits earned from qualifying exports would be exempt from corporation tax. Furthermore, dividends declared from such profits would also be relieved from income tax in the hands of shareholders. To this basic scheme there was one critical addition. From the outset it was recognised that the incentive in respect of dividends could be significantly devalued where the shares in an exporting company were held in a group structure by other companies. Accordingly, it was part of the scheme to ensure that the tax benefit of the scheme would be capable of being received by the ultimate individual shareholder. Thus, if income was received by way of dividend from an ESR company, a dividend declared in turn from such income would also be entitled to tax relief in the hands of that shareholder and so on until it came into the hands of an individual. The income, it was said, was “franked income” and retained its tax relieving status no matter how many companies it passed through.

3 It is to be presumed that the incentive scheme was successful in promoting exports. Certainly it was common place for companies during that time to set up specific exporting companies to ensure that the profits from such activity were isolated and that there could no dispute about the extent of tax relief available. One such company was Mitchelstown Export Company Ltd. (hereafter “Mitchelstown”), a subsidiary of the Dairygold Group. In late 1991, Mitchelstown had ESR reserved of IRŁ1.2 million which I understand to mean that it had generated profits from qualifying exports in that amount. However, for reasons which were not explained in these proceedings, Mitchelstown was not in a position to declare a dividend. Therefore, its shareholders or ultimate shareholders could not make use of the export sales relief to receive a tax free dividend. This state of affairs was particularly significant in late 1991 because Export Sales Relief was due to be phased out from the end of January, 1992.

4 While Mitchelstown, for its part, had a difficulty in exploiting its ESR reserves, there were many companies among the two companies at issue in these proceedings, O’Flynn Construction Limited (“OFCL”) the principal shareholders which were the taxpayers in this case, Michael O’Flynn and John O’Flynn, and another company O’Brien and O’Flynn Limited (“OBOFL”) which had profits capable of being distributed as dividends to their shareholder but in circumstances in which tax would become payable on such dividends in the hands of the shareholders. This state of affairs created a form of arbitrage opportunity for any person who could devise a scheme which would allow the export sales relief accumulated by Mitchelstown to take effect and provide tax relief to the distributable profits of companies such as OBOFL and OFCL, to the mutual benefit of the individuals, and sometimes companies. Thus it was that over the period of December, 1991, and January, 1992, three substantial businesses in the Munster region took a number of intricate steps to implement a tax avoidance scheme.

The Scheme
5 The scheme in this case was devised with some ingenuity and implemented with a precision which at a technical level is undoubtedly admirable. One of the features of a tax avoidance scheme such as this is that although it is presumably explained in some detail to the participants in order to encourage them to take part, only the mechanics of the transaction are disclosed to the Revenue. When this case made its way before the Appeal Commissioners, the tax payers and their advisors did not go into evidence. Accordingly, it is not always clear what exactly was involved in some of the steps, or why each individual step was taken. However, in sum, more that 40 individual steps were taken over a period of 50 days and the end result, as intended, was that the two companies OBOFL and OFCL, reduced their profit by making capital contributions to other companies (which contributions were later written off), while the shareholders of both companies received tax relieved dividends from other entities. The Dairygold Group, for its part, was, at the end of the transaction, better off by IRŁ117,668.

6 This case proceeded to some extent on the basis that since what was planned and executed here was a tax avoidance scheme, the only question was whether or not it contravened s.86 of the Finance Act 1989 (“the Act of 1989”), and for that purpose it was said, it was not necessary to understand in any detail how the scheme worked. That course has considerable attraction, but it seems to me that in order to resolve the question of the validity of the scheme by reference to the provisions of s.86, it is necessary to seek to understand the scheme at least in broad detail. Accordingly I have sought to set out in this judgment my understanding of what is a quite intricate scheme. It follows from what has already been observed as to the limited evidence available, that it may be that I have misunderstood some aspects of the scheme. Any observations made by me in relation to the purpose of any particular step are inferences drawn by me, perhaps inaccurately, from the surrounding circumstances, and are not derived from any explanation proffered by the tax payers. Nevertheless it appears useful to set out my understanding of both the mechanics of the scheme and its purpose.

7 As mentioned already, a key component in this scheme, indeed the genesis of the scheme itself, was the fact that although Mitchelstown had ESR reserves, it was not able itself to exploit them. We were informed that this had something to do with the corporate structure of the Dairygold Group. That may well be the case, but a component of the difficulty seems to have been the fact that Mitchelstown did not itself have cash with which to pay any dividend it might declare by reference to the ESR reserves. The first part of the scheme appears therefore to have been designed to provide funds that would permit Mitchelstown to declare and pay a dividend to a company (in this case Twingrove) which could then be isolated from the Dairygold group, and used as a vehicle to permit the payment of the ESR dividend to the ultimate intended beneficiaries.

The First Phase of the Scheme
8 On the 5th December, 1991, a company, Wilcrest Holdings Ltd., issued share capital to Dairygold Co-Operative Society Ltd. and borrowed an unsecured loan from this company in the sum of IRŁ1,996,467. The logic of this particular figure is not apparent from the information available to this Court. It does appear that it is common case in tax avoidance schemes to avoid round numbers whether from a form of superstition, or to add an air of verisimilitude to the transaction. However, it may be easier to understand the scheme if the figure here is understood as effectively a round figure of IRŁ2million. On the same day, Wilcrest also established three companies, Twingrove Investments Ltd. (“Twingrove”), Gatesville Investments Ltd. (“Gatesville”) and Dalemount Investments Ltd. (“Dalemount”) for IRŁ100 each. It may be useful to say at this point that Twingrove is the company into which the Mitchelstown dividend was to be paid and then paid onwards to the ultimate beneficiaries namely the directors of OBOFL and OSCL, and that Gatesville was to be the vehicle through which OBOFL would introduce funds into the transaction, and Dalemount was to perform that function for OFCL.

9 On the 9th December, 1991, Wilcrest agreed to lend IRŁ665,489 each to Twingrove, Dalemount and Gatesville to finance the acquisition by these companies of share capital in Mitchelstown. Accordingly within a period of four days Wilcrest disposed of the entirety of the money it had borrowed as an unsecured loan from Dairygold lending a third of that sum to each of Twingrove, Dalemount and Gatesville.

10 The following day, the 10th December, 1991, Mitchelstown resolved to issue shares to Twingrove, Dalemount and Gatesville for approximately IRŁ666,000 each being the amount lent to those companies by Wilcrest. The par value of the shares was IRŁ6,666 (again approximately) and the shares were thus issued at a premium of IRŁ99 per share. Pausing at this stage of the transaction, Mitchelstown had IRŁ2 million in cash and ESR reserves of IRŁ1.2 million.

11 On the 16th December, 1991, Mitchelstown resolved to pay a dividend of the shares issued to Twingrove alone in the sum of IRŁ1.2 million and a cheque issued to Twingrove on that date. Two days later on the 18th December, 1991, at an EGM of Mitchelstown, it was resolved to redeem the shares issued to both Gatesville and Dalemount at par and to redeem the shares issued to Twingrove at a premium of IRŁ99 per share. The shares were redeemed on this date. At this point in the transaction Twingrove had IRŁ1.2 million in ESR dividends and the IRŁ666,000 (odd) by way of redemption of the share capital. It also owed IRŁ666,000 to Wilcrest. It no longer owns shares in Mitchelstown; its period as a shareholder in that company lasting eight short, but extremely profitable days. Gatesville and Dalemount however, have fared rather worse. They owe IRŁ666,000 to Wilcrest, no longer have shares in Mitchelstown, and only have the sum of IRŁ6,666 by way of redemption of the share capital in Mitchelstown.

12 On the 18th December, 1991, Twingrove agreed to make interest free loans of €658,834 to both Dalemount and Gatesville. The effect of this is to put both those companies in funds which together with the IRŁ6,666 repaid for the redemption of the shares in Mitchelstown, will allow those companies to repay their debt to Wilcrest of IRŁ666,000 approximately, respectively.

13 On the same day it was resolved by Twingrove that it would repay IRŁ547,821 of its outstanding loan to Wilcrest Holdings Limited. This left a shortfall of IRŁ117,668 owing by Twingrove to Wilcrest. Twingrove now has no cash at all, owes Wilcrest Ł117,668 but has ESR reserves of IRŁ1.2million and the debts due by Gatesville and Dalemount.

14 On receipt of the loans from Twingrove, both Gatesville and Dalemount resolved to pay their outstanding loans to Wilcrest Holdings Ltd. Those companies now owe approximately IRŁ658,834 each to Twingrove.

15 On the 19th December, 1991, following a board resolution passed on that date, Wilcrest Holdings resolved to repay the sum of IRŁ1,878,799 to Dairygold Cooperative Society Ltd. This leaves a shortfall owing to Dairygold of IRŁ117,668, which mirrors the IRŁ117,668 retained by Mitchelstown.

16 This concluded the first phase of the transaction which occurred wholly within the Dairygold Group. By the end of 1991, therefore, the position is that Dairygold had engaged in loan transactions which had been almost fully repaid but leaving a balance of IRŁ117,668 due to Dairygold. This sum would in due course be paid by monies provided by the beneficiaries of the scheme. Mitchelstown, for its part, no longer had its ESR reserves, but has just less than one tenth of that figure in cash i.e. IRŁ117,668. Wilcrest owes Dairygold IRŁ117,668. Twingrove owes that sum to Wilcrest, has no cash, but now holds IRŁ1.2 million in ESR reserves. Gatesville and Dalemount owe effectively IRŁ666,000 to Twingrove.

17 The major object of this phase of the transaction appears to have been to put Mitchelstown in funds to pay an ESR dividend to a company, Twingrove, which could then be isolated and used to pay the dividend on to the intended ultimate beneficiaries. By the introduction of the cash lent by Dairygold to Wilcrest, the dividends have been flushed out of Mitchelstown and into Twingrove. By the mechanism of redeeming the Wilcrest and Gatesville shares at par, the redemption of the Twingrove shares at a premium, and the payment of the dividend to Twingrove, and a subsequent loan by Twingrove to Dalemount and Gatesville, a debt has been created, owed by both companies, the repayment of which will create a route to allow the introduction of cash from OBOFL and OFCL, which can fund the payment of the dividend by Twingrove.

Phase Two
18 The second phase of the transaction involved procuring the payment of dividends to three shareholders in OBOFL. This part of the transaction is not itself the subject matter of these proceedings. It is necessary however to briefly sketch the steps taken because they established the trail ultimately followed in the case of OFCL and by the tax payers Michael O’Flynn and John O’Flynn.

19 On the 15th January, 1992, the three shareholders in OBOFL applied for and were allotted 1,000 shares in a new company Camril Ltd.

20 On the same date (15th January, 1992) Camril offered to acquire the shareholding in Wilcrest Holdings from Dairygold Cooperative Society for IRŁ1,000 and in addition undertook to put Wilcrest Holdings in funds to the sum of ŁIRŁ117,668 to enable it to repay the outstanding loan to Dairygold Cooperation Society Ltd. This allowed Dairygold to exit from the transaction.

21 On the 17th January, 1992, a loan of that sum (IRŁ117,668) was advanced by the three shareholders in OBOFL who by now were also shareholders in Camril, to that company. On the same day Camril advanced a loan of IRŁ117,668 to Wilcrest which then discharged the outstanding loan to Dairygold.

22 Accordingly on the 17th January, 1992, the Dairygold end of the transaction was almost complete. Dairygold had been fully paid all the sums it had lent, and Mitchelstown was better off to the tune of IRŁ117,668. The Mitchelstown ESR had now been used by the payment of the dividend to Twingrove. In effect the Dairygold Group had “sold” the ESR reserves of IRŁ1.2 million for close to IRŁ120,000 in cash. In due course the shareholders in OBOFL/Camril would be reimbursed as to 50% of that amount by OFCL. The next step would be to secure the introduction of funds into the structure which had been established, which would allow the payment of the dividend from Twingrove up to Wilcrest and on to Camril and out to the shareholders in Camril who were also the shareholders in OBOFL.

23 On the 15th January, 1992, the three shareholders in OBOFL had been appointed to the boards of Gatesville, Dalemount, Twingrove and Wilcrest Holdings. On the following day at a board meeting of OBOFL Ltd. it was resolved to offer to Wilcrest holdings IRŁ100 for the share capital in Gatesville Ltd. It was also resolved, should the offer be accepted, to make an immediate capital contribution of IR€658,834 to Gatesville. Because this part of the transaction is not the subject matter of this appeal, it is not clear what occurs in respect of this money. However, in the subsequent transaction involving OFCL, that capital contribution was ultimately written off by the company OFCL, and it is to be assumed that the same occurred in the case of OBOFL.

24 On the 16th January, Gatesville agreed to repay its outstanding loan of IRŁ658,834 to Twingrove Investments Ltd. This had the effect of repaying the loan to Twingrove and putting Twingrove in funds to pay a dividend of IRŁ600,000 (being one half of the ESR reserves) and also to allow repayment of the sum of IRŁ58,834 (which appears to be one half of the IRŁ117,668 received by the Dairygold Group). In due course this same route was to be followed by the OFCL money so that the shareholders in OBOFL will be reimbursed to the tune of IRŁ58,834 and thus the cost of the IRŁ117,668 benefit obtained by Mitchelstown will then have been shared equally between the OFCL and OBOFL interests.

25 Accordingly, on the 17th January, 1992, Twingrove resolved to repay the sum of IRŁ58,834 to Wilcrest Holdings Ltd. and to pay a dividend of IRŁ6,000 per share to Wilcrest Holding Ltd. On the same day Wilcrest resolved to repay the IRŁ58,834 it had just received to Camril Ltd. Again on the same day the 17th January, 1992, Wilcrest declared a dividend of IRŁ600 per share. It might be recalled that the shareholder in Wilcrest is now Camril, a vehicle for the shareholders in OBOFL. At a board meeting of Camril held on the same day the loan of IRŁ58,834 received from Wilcrest, was repaid to the three shareholders and on the same day a dividend of IRŁ590.59 per share was declared resulting in a dividend payment of IRŁ19,667 to each of the shareholders. The balance of IRŁ10,000 was paid to OBOFL to cover administrative expenses.

26 This concludes the second phase of the scheme. At this stage Twingrove now has IRŁ600,000 in ESR reserves left. It has no cash, but it is owed IRŁ658,834 by Dalemount. OBOFL is worse off to the tune of IRŁ658,834 being the cost of its written off capital contribution to Gatesville. For their part the three shareholders in OBOFL have received almost IRŁ200,000 each in tax relieved dividends paid by Camril.

Phase Three
27 The third phase of the transaction follows what is by now a familiar route. On the 22nd January, 1992, Michael O’Flynn and John O’Flynn, the principals in OFCL, replaced the shareholders of OBOFL as directors of Dalemount, Twingrove and Wilcrest respectively. It is no longer necessary to be a shareholder in Gatesville which has served it purpose. On the same day a new company, Magmac International Ltd., a company controlled by Michael O’Flynn and John O’Flynn offered Camril IRŁ1,000 for its shareholding in Wilcrest Holdings Limited. In addition it undertook to put Wilcrest in funds to discharge the outstanding loan of IRŁ58,834 owed to Camril.

28 On the 23rd January, 1992, a loan of IRŁ58,834 was advanced by OFCL to Wilcrest Holdings Ltd. On the same day Wilcrest discharged its outstanding loan to Camril Ltd. This has the effect of paying the OFCL a fifty percent share of the IRŁ117,668. Again, on the 23rd January, OFCL offered Wilcrest IRŁ100 for its shareholding in Dalemount Investment Ltd. On the same day a board resolution was passed by OFCL that the company would make a capital contribution of IRŁ658,834 in Dalemount Ltd. should its offer be accepted. The following day, on the 24th January, Dalemount Investments received a capital contribution of IRŁ658,834 from OFCL.

29 On the same day, the 24th January, 1992, Dalemount repaid the outstanding amount of IRŁ658,834 to Twingrove Investments Ltd. Twingrove held a board meeting on the same day and repaid the outstanding loan of IRŁ58,834 owed to Wilcrest Ltd. On the same day Wilcrest repaid the outstanding loan owed to OFCL. Again, on the same day, Twingrove resolved to pay a dividend of IRŁ6,000 per share. The only shareholder in Twingrove and beneficiary of the dividend was Wilcrest which same day resolved to pay a dividend of IRŁ600 per share to its shareholder now Magmac International Ltd. in succession to Camril (the OBOF vehicle) and Dairygold. On the same day, the 24th January, 1992, Magmac resolved to pay a dividend of IRŁ596 per share to its shareholders, being John and Michael O’Flynn, who are also, and not coincidentally, the shareholders in OFCL. In addition, Magmac made a payment of IRŁ4,000 to cover the administrative expenses of OFCL.

30 By this stage, the 24th January, 1992, the shareholders in OFCL who were also shareholders in Magmac International Ltd, had received a dividend of almost IRŁ300,000 each. The documents disclosed in Court do not record when they became shareholders in Magmac, but the shareholders in OBOFL had become shareholders in Camril only on the 15th January, 1992, and it seems unlikely that the O’Flynns were shareholders in Magmac for any longer period. By contrast OFCL had paid out €658,834. Of that, €58,834 represented one half of the IRŁ117,668 which was in effect Mitchelstown’s fee for sale of its ESR reserve. The accounts of OFCL record the fate of that capital contribution as follows (Document reference no.: 1039271): -

“The company acquired the issued share capital of Dalemount Investments Limited being 100 shares of Ł1 each. The company also made a capital contribution to Dalemount Investments Limited of Ł658, 834. That company used these funds to repay other debts which it had. At year end, the capital contribution to Dalemount Investments Limited had diminished in value. The Directors, therefore, have taken the prudent step of writing off a large portion of the contribution.”

31 In the event therefore, IRŁ658,000 was written off. As it happened the 1992 accounts also record the further history of the dividend monies. It was recorded that both Michael and John O’Flynn were in receipt of a dividend from Magmac International Ltd. which they lent to the company as they had no immediate needs for the funds and the company was able to use the funds to reduce its banking requirements. Accordingly, each dividend of IRŁ298,000 appears in the accounts as a director’s loan in that sum by each of the directors to the company. Accordingly, the money itself came back to the company, but in the period of three days it had changed character from being profits of the company distributable to its shareholders, to a debt owed by the company to its directors which could in due course be paid without attracting tax.

32 This is quite a complex transaction carried out over a short period of time. If the contributions to pay the sum of IRŁ117,668 are ignored, and we focus solely on the payment of a dividend to Magmac, then the transaction can be simplified somewhat. Dairygold used funds to move the ESR dividend from Mitchelstown into a vehicle, Twingrove, and in doing so also created a debt due by another company Gatesville to Twingrove. A further company Wilcrest becomes a shareholder in Twingrove and thus entitled to receive a dividend from it. Then a company is created or acquired (Magmac), the shareholding in which is held by the two shareholders in the OFCL. OFCL then lends almost IRŁ600,000 to Gatesville (and then writes off the debt). Gatesville uses the money to discharge its existing debt to Twingrove. Twingrove then uses that money to declare and pay a dividend to its shareholder Wilcrest which then in turn pays the dividend to Magmac which then pays a dividend to its shareholders, being also the shareholders in OFCL. Simplified even further, in essence the scheme involved a company (OFCL) lending money and then writing off the loan, which permitted another company to pay ESR tax relieved dividends to the shareholders in OFCL.

33 It is possible to admire the ingenuity with which the scheme was devised and efficiency with which it was executed but lament the fact that such skills are put to use for the sole objective of avoiding tax. The reason each party was able to become involved in this scheme, and why companies and advisors were able to devote time and considerable sums of money to the scheme, was that in effect, if successful it would be paid for by the tax avoided by the shareholders in OFCL. It is probably unnecessary to observe that the scheme is entirely artificial. It has no commercial logic. Its only purpose was to permit an ESR dividend to be paid to the shareholders in the company that supplied the original funds. The artificiality of the scheme is not in any way denied by the tax payers. Indeed, they put the matter with disarming bluntness:

“In the transactions here, Mitchelstown sold these reserves to the appellant company, for cash. The shareholders in the appellant company, who are the individuals … then received ESR dividends … the ultimate effect of the transaction was that the shareholders of the appellant company received ESR dividends originally earned by Mitchelstown but purchased by the appellant company.”

34 This was undoubtedly the commercial reality of the transaction. It is, however, worth noting at least two things: first, at no stage of the transaction did the appellant company (OFCL) deal directly with Mitchelstown; and second, not one of the steps in this transaction could constitute “a sale” by any party, at least as a matter of law. Notwithstanding the artificiality of the scheme, the appellant tax payer says that it was perfectly lawful. In the end, franked dividends earned legitimately by an ESR company, passed through a series of companies to the shareholders in Magmac and the appellants herein. Nothing (the Appellants contend) in the ESR scheme required that the shareholders receiving such dividends should be shareholders at any time in the ESR earning company, or indeed be shareholders in the related company, at the time when the profits were earned.

35 It was common case in this appeal that, absent the provisions of s.86 of the Act of 1989, the scheme here complied with the legislation creating the ESR relief and was perfectly lawful. The question which occupied the Appeal Commissioners, the High Court and this Court in turn, is whether s.86 and in particular s.86(3)(b) permitted the Revenue Commissioners to form the opinion that the transaction was a tax avoidance transaction which could be disallowed.

36 Section 86 of the Act of 1989 provides as follows: -

“86. -(1) (a) In this section—

“the Acts” means—

(i) the Tax Acts,

(ii) the Capital Gains Tax Acts,

(iii) the Value-Added Tax Act, 1972 , and the enactments amending or extending that Act,

(iv) the Capital Acquisitions Tax Act, 1976 , and the enactments amending or extending that Act,

(v) Part VI of the Finance Act, 1983, and the enactments amending or extending that Part, and

(vi) the statutes relating to stamp duty,

and any instrument made thereunder;

“business” means any trade, profession or vocation;

“notice of opinion” means a notice given by the Revenue Commissioners under the provisions of subsection (6);

“tax” means any tax, duty, levy or charge which, in accordance with the provisions of the Acts, is placed under the care and management of the Revenue Commissioners and any interest, penalty or other amount payable pursuant to those provisions;

“tax advantage” means—

(i) a reduction, avoidance or deferral of any charge or assessment to tax, including any potential or prospective charge or assessment, or

(ii) a refund of or a payment of an amount of tax, or an increase in an amount of tax, refundable or otherwise payable to a person, including any potential or prospective amount so refundable or payable,

arising out of, or by reason of, a transaction, including a transaction where another transaction would not have been undertaken or arranged to achieve the results, or any part of the results, achieved or intended to be achieved by the transaction;

“tax avoidance transaction” has the meaning assigned to it by subsection (2);

“tax consequences” means, in relation to a tax avoidance transaction, such adjustments and acts as may be made and done by the Revenue Commissioners pursuant to subsection (5) in order to withdraw or deny the tax advantage resulting from the tax avoidance transaction;

“transaction” means—

(i) any transaction, action, course of action, course of conduct, scheme, plan or proposal, and

(ii) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable or intended to be enforceable by legal proceedings, and

(iii) any series of or combination of the circumstances referred to in paragraphs (i) and (ii),

whether entered into or arranged by one person or by two or more persons:-

(I) whether acting in concert or not, or

(II) whether or not entered into or arranged wholly or partly outside the State, or

(III) whether or not entered into or arranged as part of a larger transaction or in conjunction with any other transaction or transactions.

(b) In subsections (2) and (3), for the purposes of the hearing or rehearing under subsection (8) of an appeal made under subsection (7) or for the purposes of the determination of a question of law arising on the statement of a case for the opinion of the High Court, the references to the Revenue Commissioners shall, subject to any necessary modifications, be construed as references to the Appeal Commissioners or to a judge of the Circuit Court or, to the extent necessary, to a judge of the High Court, as appropriate.

(2) For the purposes of this section and subject to subsection (3), a transaction is a “tax avoidance transaction” if, having regard to any one or more of the following, that is to say—

(a) the results of the transaction,

(b) its use as a means of achieving those results, and

(c) any other means by which the results or any part of the results could have been achieved,

the Revenue Commissioners form the opinion that—

(i) it gives rise to, or, but for this section, would give rise to, a tax advantage, and

(ii) the transaction was not undertaken or arranged primarily for purposes other than to give rise to a tax advantage,

(3) Without prejudice to the generality of the provisions of subsection (2), in forming an opinion in accordance with that subsection and subsection (4), as to whether or not a transaction is a tax avoidance transaction, the Revenue Commissioners shall not regard the transaction as being a tax avoidance transaction if they are satisfied that—

(i) was undertaken or arranged by a person with a view, directly or indirectly, to the realisation of profits in the course of the business activities of a business carried on by the person, and

(ii) was not undertaken or arranged primarily to give rise to a tax advantage,

Provided that, in forming an opinion as aforesaid in relation to any transaction, the Revenue Commissioners shall have regard to—

(I) the form of that transaction,

(II) the substance of that transaction,

(III) the substance of any other transaction or transactions which that transaction may reasonably be regarded as being directly or indirectly related to or connected with, and

(IV) the final outcome and result of that transaction and any combination of those other transactions which are so related or connected.

(4) Subject to the provisions of this section, the Revenue Commissioners, as respects any transaction, may, at any time—

(a) form the opinion that the transaction is a tax avoidance transaction,

(b) calculate the tax advantage which they consider arises, or which, but for this section, would arise, from the transaction,

(c) determine the tax consequences which they consider would arise in respect of the transaction if their opinion were to become final and conclusive in accordance with subsection (5) (e), and

(d) calculate the amount of any relief from double taxation which they would propose to give to any person in accordance with the provisions of subsection (5) (c).

(5) (a) Where the opinion of the Revenue Commissioners that a transaction is a tax avoidance transaction becomes final and conclusive they may, notwithstanding any other provision of the Acts, make all such adjustments and do all such acts as are just and reasonable (in so far as those adjustments and acts have been specified or described in a notice of opinion given under subsection (6) and subject to the manner in which any appeal made under subsection (7) against any matter specified or described in the notice of opinion has been finally determined, including any adjustments and acts not so specified or described in the notice of opinion but which form part of a final determination of any appeal as aforesaid) in order that the tax advantage resulting from a tax avoidance transaction shall be withdrawn from or denied to any person concerned.

(b) Subject to, but without prejudice to the generality of paragraph (a), the Revenue Commissioners may—

(i) allow or disallow, in whole or in part, any deduction or other amount which is relevant in computing tax payable, or any part thereof,

(ii) allocate or deny to any person any deduction, loss, abatement, relief, allowance, exemption, income or other amount, or any part thereof, or

(iii) recharacterize for tax purposes the nature of any payment or other amount.

(c) Where the Revenue Commissioners make any adjustment or do any act for the purposes of paragraph (a), they shall afford relief from any double taxation which they consider would, but for this paragraph, arise by virtue of any adjustment made or act done by them pursuant to the foregoing provisions of this subsection.

(d) Notwithstanding any other provision of the Acts, where—

(i) pursuant to subsection (4) (c), the Revenue Commissioners determine the tax consequences which they consider would arise in respect of a transaction if their opinion, that the transaction is a tax avoidance transaction, were to become final and conclusive, and

(ii) pursuant to that determination, they specify or describe in a notice of opinion any adjustment or act which they consider would be, or be part of, the said tax consequences,

then, in so far as any right of appeal lay under subsection (7) against any such adjustment or act so specified or described, no right or further right of appeal shall lie under the Acts against that adjustment or act when it is made or done in accordance with the provisions of this subsection or against any adjustment or act so made or done that is not so specified or described in the notice of opinion but which forms part of the final determination of any appeal made under the said subsection (7) against any matter specified or described in the notice of opinion.

(e) For the purposes of this subsection an opinion of the Revenue Commissioners that a transaction is a tax avoidance transaction shall be final and conclusive—

(i) if, within the time limited, no appeal is made under subsection (7) against any matter or matters specified or described in a notice or notices of opinion given pursuant to that opinion, or

(ii) as and when all appeals made under the said subsection (7) against any such matter or matters have been finally determined and none of the appeals has been so determined by an order directing that the opinion of the Revenue Commissioners to the effect that the transaction is a tax avoidance transaction is void.

(6) (a) Where, pursuant to subsections (2) and (4), the Revenue Commissioners form the opinion that a transaction is a tax avoidance transaction, they shall immediately thereupon give notice in writing of the opinion to any person from whom a tax advantage would be withdrawn or to whom a tax advantage would be denied or to whom relief from double taxation would be given, if the opinion became final and conclusive, and the notice shall specify or describe—

(i) the transaction which in the opinion of the Revenue Commissioners is a tax avoidance transaction,

(ii) the tax advantage, or part thereof, calculated by the Revenue Commissioners which would be withdrawn from or denied to the person to whom the notice is given,

(iii) the tax consequences of the transaction determined by the Revenue Commissioners, in so far as they would refer to the person, and

(iv) the amount of any relief from double taxation calculated by the Revenue Commissioners which they would propose to give to the person in accordance with subsection (5) (c).

(b) Section 542 of the Income Tax Act, 1967 , shall, with any necessary modifications, apply for the purposes of a notice given under this subsection, or subsection (10), as if it were a notice given under that Act.

(7) Any person aggrieved by an opinion formed or, in so far as it refers to the person, a calculation or determination made by the Revenue Commissioners pursuant to subsection (4) may, by notice in writing given to the Revenue Commissioners within 30 days of the date of the notice of opinion, appeal to the Appeal Commissioners on the grounds and, notwithstanding any other provision of the Acts, only on the grounds that, having regard to all of the circumstances, including any fact or matter which was not known to the Revenue Commissioners when they formed their opinion or made their calculation or determination, and to the provisions of this section—

(a) the transaction specified or described in the notice of opinion is not a tax avoidance transaction, or

(b) the amount of the tax advantage, or the part thereof, specified or described in the notice of opinion which would be withdrawn from or denied to the person is incorrect, or

(c) the tax consequences specified or described in the notice of opinion, or such part thereof as shall be specified or described by the appellant in the notice of appeal, would not be just and reasonable in order to withdraw or to deny the tax advantage, or part thereof, specified or described in the notice of opinion, or

(d) the amount of relief from double taxation which the Revenue Commissioners propose to give to the person is insufficient or incorrect.

(8) The Appeal Commissioners shall hear and determine an appeal made to them under subsection (7) as if it were an appeal against an assessment to income tax and, subject to subsection (9), all the provisions of the Income Tax Act, 1967 , relating to the rehearing of an appeal and the statement of a case for the opinion of the High Court on a point of law shall apply accordingly with any necessary modifications:

Provided that on the hearing or rehearing of the appeal—

(a) it shall not be lawful to go into any grounds of appeal other than those specified in subsection (7), and

(b) at the request of the appellants, two or more appeals made by two or more persons pursuant to the same opinion, calculation or determination formed or made by the Revenue Commissioners pursuant to subsection (4) may be heard or reheard together.

(9) (a) On the hearing of an appeal made under subsection (7) the Appeal Commissioners shall have regard to all matters to which the Revenue Commissioners may or are required to have regard under the provisions of this section and—

(i) in relation to an appeal made on the grounds referred to in paragraph (a) of subsection (7), they shall determine the appeal, in so far as it is made on those grounds, by ordering, if they, or a majority of them—

(I) consider that the transaction specified or described in the notice of opinion, or any part of that transaction, is a tax avoidance transaction, that the opinion, or the opinion in so far as it relates to that part, is to stand good, or

(II) consider that, subject to such amendment or addition thereto as the Appeal Commissioners, or the said majority of them, deem necessary and as they shall specify or describe the transaction, or any part of it, specified or described in the notice of opinion, is a tax avoidance transaction, that the transaction, or that part of it, be so amended or added to and that, subject to the amendment or addition, the opinion, or the opinion in so far as it relates to that part, is to stand good, or

(III) do not so consider as referred to in clause (I) or (II), that the opinion is void,

(ii) in relation to an appeal made on the grounds referred to in paragraph (b) of subsection (7), they shall determine the appeal, in so far as it is made on those grounds, by ordering that the amount of the tax advantage, or the part thereof, specified or described in the notice of opinion be increased or reduced by such amount as they shall direct or that it shall stand good,

(iii) in relation to an appeal made on the grounds referred to in paragraph (c) of subsection (7), they shall determine the appeal, in so far as it is made on those grounds, by ordering that the tax consequences specified or described in the notice of opinion shall be altered or added to in such manner as they shall direct or that they shall stand good,

(iv) in relation to an appeal made on the grounds referred to in paragraph (d) of subsection (7), they shall determine the appeal, in so far as it is made on those grounds, by ordering that the amount of the relief from double taxation specified or described in the notice of opinion shall be increased or reduced by such amount as they shall direct or that it shall stand good.

(b) The provisions of this subsection shall, subject to any necessary modifications, apply to the rehearing of an appeal by a judge of the Circuit Court and, to the extent necessary, to the determination by the High Court of any question or questions of law arising on the statement of a case for the opinion of the High Court.

(10) The Revenue Commissioners may, at any time, amend, add to or withdraw any matter specified or described in a notice of opinion by giving notice (hereafter in this subsection referred to as the “notice of amendment”) in writing of the amendment, addition or withdrawal to each and every person affected thereby, in so far as the person is so affected, and the foregoing provisions of this section shall apply in all respects as if the notice of amendment were a notice of opinion and any matter specified or described in the notice of amendment were specified or described in a notice of opinion:

Provided that no such amendment, addition or withdrawal may be made so as to set aside or alter any matter which has become final and conclusive on the determination of an appeal made with regard to that matter under subsection (7).

(11) Where pursuant to subsections (2) and (4), the Revenue Commissioners form the opinion that a transaction is a tax avoidance transaction and, pursuant to that opinion, notices are to be given under subsection (6) to two or more persons, any obligation on the Revenue Commissioners to maintain secrecy or any other restriction upon the disclosure of information by the Revenue Commissioners shall not apply with respect to the giving of the notices as aforesaid or to the performance of any acts or the discharge of any functions authorised by this section to be performed or discharged by them or to the performance of any act or the discharge of any functions, including any act or function in relation to an appeal made under subsection (7), which is directly or indirectly related to the acts or functions so authorised.

(12) The Revenue Commissioners may nominate any of their officers to perform any acts and discharge any functions, including the forming of an opinion, authorised by this section to be performed or discharged by the Revenue Commissioners and references in this section to the Revenue Commissioners shall, with any necessary modifications, be construed as including references to an officer so nominated.

(13) This section shall apply as respects any transaction where the whole or any part of the transaction is undertaken or arranged on or after the 25th day of January, 1989, and as respects any transaction undertaken or arranged wholly before that date in so far as it gives rise to, or would, but for this section, give rise to—

(a) a reduction, avoidance or deferral of any charge or assessment to tax, or part thereof, where the charge or assessment arises by virtue of any other transaction carried out wholly on or after a date, or

(b) a refund or a payment of an amount, or of an increase in an amount, of tax, or part thereof, refundable or otherwise payable to a person where that amount, or increase in the amount, would otherwise become first so refundable or otherwise payable to the person on a date,

which could not fall earlier than the said 25th day of January, 1989, as the case may be.”

37 This is a provision of almost mind-numbing complexity. As will become apparent the core issue in this case is the interpretation of s.86(3)(b), and in particular whether the transaction here can be said to result directly or indirectly in the “misuse or abuse” of the ESR provision having regard to the purposes for which it was provided. However, those words require to be put in their statutory context, something which in turn necessitates a consideration of the pre-existing case law. Furthermore, the issue must be analysed in its factual context. Accordingly, it is necessary to trace a number of factual and legal steps by which it can be said the issue presents itself for resolution by this Court.

38 On the 12th August, 1997, an Officer of the Revenue Mr. P.C. O’Laoighaire nominated under the provisions of s.86(12) of the Act of 1989, issued a notice of opinion to the taxpayers in this case that the transaction was captured by s.86. Against that opinion, the taxpayers appealed to the Appeal Commissioners. The Appeal Commissioners rejected a number of contentions put forward by the tax payer, but concluded that the transaction was entitled to the benefit of s.86(3)(b) i.e. that it was undertaken for the purposes of obtaining the benefit of export sales relief, and did not result directly or indirectly in a misuse or abuse of the provision having regard to the purposes for which it was provided. The reasoning of the Appeal Commissioners is set out in a careful and detailed statement of case stated prepared for the High Court at the request of the parties and dated the 13th July, 2005. Subsequently, the High Court (Mr Justice Smyth) rejected the taxpayers’ appeals for those portions of the Appeal Commissioners’ determinations where the Appeal Commissioners had rejected the tax payers’ claims, but allowed the Revenue Commissioner’s appeal against the Appeal Commissioners’ determination on s.86(3)(b). It is against that judgment, that the tax payers now appeal to this Court. Since all the issues which were debated in this Court are addressed in the case stated, and in particular since the Appellants here seek to reinstate the reasoning of the Appeal Commissioners on the interpretation and application of s.86(3)(b), it is necessary to consider the Appeal Commissioners’ reasoning in some detail.

The Determination of the Appeal Commissioners
39 The Appeal Commissioners first determined that the transaction was a tax avoidance transaction within the meaning of s.86(2). The results of the transaction were to deplete the assets of OFCL and to enrich the shareholders of OFCL without either the company or the shareholders incurring any tax. There were other means by which the results or at least part of the results could be achieved, most obviously by the payment of a dividend by the company to the shareholders. Subject to an argument which did not arise in this appeal, and remains to be determined, the payment of the dividend would have resulted in the company incurring a tax in the shape of Advance Corporation Tax (“ACT”). The payment of the dividend would also have involved the shareholders incurring income tax. As a result of the transaction the company and the shareholders have thus avoided a potential liability to tax, by reason of which the transaction gave rise to a tax advantage within the meaning of the section. The Appeal Commissioners further determined the transaction was entered into solely for the purposes of obtaining a tax advantage and accordingly, the negative test contained in s.86(2)(ii) was satisfied, in that the transaction was not undertaken or arranged primarily for the purposes other than to give rise to a tax advantage. But for ss.3 therefore, the Commissioners would have concluded that the transaction was a tax avoidance transaction within the meaning of the section. The High Court upheld this reasoning, but the tax payer has appealed these determinations to this Court. In my judgment, the Appeal Commissioners were entirely correct in the conclusion to which they came and I agree with their reasoning save that it seems to me that the proviso to s.86(3) applies to the formation of an opinion under s.86(2). That proviso requires the Revenue Commissioners (and on appeal the Appeal Commissioners) to have regard when forming their opinion to the form of the transaction, the substance of the transaction, and the substance of any other transaction or transactions with which that transaction may reasonably be regarded as being directly or indirectly related to or connected with, and the final outcome and result of that transaction and any combination of other transactions. Because it is included in a proviso and moreover a proviso to s.86(3) the significance of this provision might be overlooked. It seems clear however, that it requires the Revenue Commissioners in the first place to have regard both to the form and the substance of the transaction. Both those tests, when applied, support the conclusion to which the Appeal Commissioners came. The form of the transaction (or series of transactions) is highly artificial and has no commercial logic. Indeed a number of the steps that the participants were required to take to bring the scheme to fruition appear to defy commercial logic. The substance of the transaction, furthermore, is the acquisition of the Mitchelstown ESR to permit the (indirect) payment of the profits of OFCL to its shareholders without incurring the tax that would be due on a direct payment by the company to its shareholders by way of dividend. Consideration of the form and substance of the transaction can only reinforce the conclusion that this was a tax avoidance transaction within the meaning of s.86, unless it could be said to fall within ss.3.

40 The Appeal Commissioners concluded, however, that the opinion of the Revenue Commissioners was void because they, the Appeal Commissioners, considered that the provisions of s.86(3)(b) were applicable and that the transactions did not result directly or indirectly in the misuse or abuse of the provisions having regard to the purposes for which the relief was provided.

41 The careful reasoning of the Appeal Commissioners on this critical aspect of the decision commenced by observing that the transaction was clearly undertaken to obtain the benefit of ESR. They also observed that the subsection distinguished between abuse and misuse. They considered that the concept of abuse had to be construed with careful reference to the phrase “having regard to the purposes for which it was provided”. In this regard, they referred to the dictum of McCarthy J in Charles McCann v O’Culachain [1986] 1 IR 196 at p. 201 (“It is manifest that part IV of the Act of 1976 was, by tax incentives, to encourage the creation of employment within the State and the promotion of exports - naturally -outside the State objectives - of proper, social and economic kind which the State, would be bound to encourage.”) and considered that the export aspect of the export sales relief scheme was introduced for the same purpose. The Commissioners considered that a fraudulent scheme claiming relief for goods which were not exported at all, could not constitute an abuse of the scheme as s.86 only applied when a tax advantage was achieved through the use of some arrangements which considered without reference to s.86 were effective in avoiding and reducing the tax. A fraudulent scheme was not a use of the ESR scheme at all, rather than being an abuse of it. However, by contrast they considered that a scheme for transferring goods outside the country and then importing them again for sale in Ireland, would be an example of an abuse. “Misuse” was they considered a less strong concept, but an example might be diverting all expenses to the home sales of the business (which profits were taxable) and thus indirectly boosting the tax relievable profits on exports made by the same business. They observed that “the relief was not provided to enable companies to minimise profits on such home sales” and accordingly such a scheme would be a misuse of the relief. Applying this reasoning to the facts of this case, the Appeal Commissioners concluded that there had been no abuse or misuse of the export aspect of the scheme.

42 Turning then to the exemption of tax on dividends, the Appeal Commissioners observed that there was no obvious limitation on this aspect of the scheme e.g. no requirement of any payment of the dividend by any specific date or by reference to any specific period, nor to any person such as existing shareholders, or indeed even shareholders in the exporting company. The conclusions of the Appeal Commissioners on this aspect of the case deserve quotation in full (Decision of 27th April, 2000):

“(xxv) In view of the fact that no such restrictions were enacted we conclude that the comprehensive and entirely unencumbered nature of the exemption can only be considered as intentionally buttressing the total exemption of the corporate profits from tax.

(xxvi) The above comments may need qualification in connection with an ESR Dividend that was paid in substitution for some other legal entitlement foregone by the recipient: e.g. if a salary entitlement were waived and an equivalent amount was paid in the form an ESR dividend to an employee or director, that might in our view, be considered a misuse of the relief having regard to the fact that the relief was not enacted to enable employees to avoid tax on their salaries. The specific anti-avoidance legislation introduced in the 1974 Act can be taken as a confirmation of this point but, even in the absence of that legislation we would be of this point of view. To generalise it may be that the use of the tax free nature of the dividends to avoid a specific tax charged that otherwise would have arisen could be said to be a misuse, whether direct or indirect, of the relief.

(xxvii) …

(xxviii) In regard to the second component of the Export Sales Relief scheme insofar as the shareholders are concerned we are of the view that the payment of bona fide Export Sales Relief relieved profits in the present case does not amount directly or indirectly to a misuse or abuse of the relief having regard to the purposes for which the said second component was enacted and the nature of the relief afforded to those dividends.

(xxix) To conclude that there has been a misuse of the export sales relief provisions would, in our view, be to ignore the statement of the law laid down McGrath v McDermott. While it is necessary to look at the purpose for which Section 86 was enacted, in our opinion Section 86, in itself, cannot be used to abandon the clear principles of statutory construction laid out in that case. These principles of statutory interpretations set out in McGrath v McDermott prohibit us from adopting such a purposive approach.

(xxx) Accordingly, for the reasons set out above, we are precluded from forming the view that the transaction was a tax avoidance transaction by virtue of the terms of S86(3)(b) Finance Act 1989.”

43 At the request of the Revenue Commissioners the Appeal Commissioners stated the case to the High Court as to whether their conclusions on s.86(3)(b) was correct in law. At the request of the tax payers, they also stated the case as to whether (1) the transaction gave rise to a tax advantage for either the company or the individual tax payers; (2) whether the transaction was not undertaken or arranged primarily for the purpose other than to give rise to a tax advantage; and (3) whether the transaction was not arranged with a view to the realisation of profits in the course of business activities in the company pursuant to s.86(3)(a). On each of these latter three points the High Court held that the Appeal Commissioners were correct. For reasons already set out, I am satisfied that the determinations of the Appeal Commissioners on these points were correct in law. The main issue argued on this appeal therefore, was whether the Appeal Commissioners’ findings on s.86(3)(b) were correct.

44 There was some argument as to the standard of review to be applied by the High Court and the Supreme Court on appeal in circumstances where the section required the Revenue Commissioners and the Appeal Commissioners to be of an opinion. While in different circumstances that issue might become central to the Courts’ determination, it seems clear that here the issue is one as to the true interpretation of s.86(3)(b) and its application to facts in this case, which are not in dispute. Accordingly the issue is one of statutory interpretation and therefore an issue of law, and no question of deference to the findings of fact or inferences drawn by either the Revenue Commissioners or the Appeal Commissioners, arises.

45 The High Court found that the Appeal Commissioners were incorrect in law on this issue. The Court’s reasoning is found in a short passage in the judgment: -

“In my judgment, the transaction the subject of these proceedings- whereby export sales relieved reserves in the Dairygold Group were transferred to a company that was not engaged in the manufacture of goods for export to enable fully tax relieved dividends to be paid to the shareholders of a construction company, is completely at odds with the purpose for which the export sales relief was provided”.

46 The tax payer has appealed that determination to this Court.

The High Court Decision
47 Among the material relied upon in this appeal, is a critical commentary on the High Court decision entitled “The O’Flynn Case: Clarification of s811 TCA 1997 (Irish Anti-Avoidance)” Irish Tax Review (July, 2006) p. 37, authored by a tax professional. It makes an important point which is heavily relied upon by the Appellant, at p. 38: -

“The legislation clearly envisaged that a manufacturing company might be within a group and have corporate shareholders. It also clearly envisaged that those corporate shareholders could avail of the benefit of export sales relief when they themselves paid dividends out of reserves obtained from dividends from the exporting company.”

48 It is perhaps an overstatement to say that the legislation “clearly envisaged” this result although it clearly did not prohibit it. However, the core argument is important. Since there is no temporal or causal link between the exporting of the goods and the receipt of the dividends, it would be possible for the tax payers here to have become shareholders in Mitchelstown and to have received themselves or through their company ESR dividends. For example, if the only asset that Mitchelstown or any parent company had was the ESR reserves, then that company could have been acquired by the individual tax payers, or the relevant companies who then would have had access to the ESR, and could have received dividends which were tax relieved because of the prior export of goods by Mitchelstown assuming all the time (and this is an important point) that it would be possible to devise a method of introducing funds into the company which would allow it to pay the dividend. If such an arrangement is permissible, the argument runs, then it might be asked why is this present scheme invalid. Certainly it is said that the argument that the scheme does not exist to permit tax relief dividends to be paid to directors of property companies, is not at a minimum a sufficient reason for disallowance since it is possible to conceive of circumstances in which just that could occur entirely lawfully.

49 However, the comment is couched in a tendentious tone which, while surprising, is nevertheless instructive. It seems to reflect the frustration among tax practitioners with the uncertainties created by s.86. While criticism, even intemperate, of judicial decisions is entirely permissible, and on many occasions may offer illuminating insights, it is in my view significant, that this article makes criticisms of the High Court decision, (including for example the complaint that the High Court did not first decide on the constitutionality of the section), which any person with legal experience which extended beyond the field of tax law would immediately recognise as obviously misplaced. Tax law is a field where the mathematical virtues of clarity and precision are particularly valued, and where concepts such as “purpose”, “abuse”, “misuse” and even “tax advantage” may appear frustratingly elusive. But there are circumstances, of which this case may be an example, in which the narrow and penetrating focus which can illuminate fine points of detail can also obscure that which a broader inquiry might discern.

50 The decision in this case with the Appeal Commissioners, is both clear and concise, and is measured and temperate in its tone. However, in my judgment it contains a number of errors of law, which are traceable to its approach to statutory interpretation. In focussing sometimes minutely on the language contained in part of s.86(3)(b) the analysis misses important guides to the meaning of the subsection, resulting in an unduly constrained application of the section. In order to understand s.86(3)(b), it is necessary to place that subsection in the context of s.86 more generally, and also to understand s.86 against the background of the law which it sought to change.

51 It was common case on this appeal that it was significant that s.86 was introduced in the Act of 1989, a provision which followed shortly after the important decision of this Court in McGrath v McDermott [1988] IR 258. It is agreed, that the purpose of the section was to address the consequences of that decision, and indeed reverse it. In that case, both the High Court and the Supreme Court had refused to follow a recent development in the two famous, if controversial, cases then relatively recently decided by the UK House of Lords : Ramsay v Ireland Revenue Commissioners [1982] AC 300, and Furniss v Dawson [1984] 2 WLR 226. Instead, the courts of this jurisdiction had restated the law as set out in IRC v Duke of Westminster [1936] AC 1.

52 These cases are familiar to all tax practitioners but they require some elaboration. The Westminster case was in many ways the foundation stone for modern tax avoidance and tax mitigation strategies. The majority of the House of Lords (over the telling dissent of Lord Atkin) refused to look to the substance of a transaction in which the employees of the Duke of Westminster engaged, a scheme in which they received untaxed covenanted payments equal to the amount that they had previously received as wages. The court considered that it could only look at the legal nature of the transaction (a covenant which did not attract tax) and could not have regard to the substance of the transaction (employment which did). The principle articulated in the Westminster case, is contained in a well known passage in the speech of Lord Tomlin at pp. 19-20: -

“… it is said that in revenue cases there is a doctrine that the Court may ignore the legal position and regard what is called “the substance of the matter”, and that here the substance of the matter is that the annuitant was serving the Duke for something equal to his former salary or wages, and that therefore while he is so serving, the annuity must be treated as salary or wages. This supposed doctrine … seems to rest for its support upon a misunderstanding of language used in some earlier cases. The sooner this misunderstanding is dispelled, and its supposed doctrine given its quietus, the better it will be for all concerned, for the doctrine seems to involve substituting “the incertain and crooked cord of discretion” for “the golden and streight metwand of the law”. Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less that it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. This so called doctrine of “the substance” seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable.”

53 The Duke of Westminster’s case was considered in this jurisdiction in O’Sullivan v P Ltd (1962) 3 ITC 355, and endorsed. When this approach was coupled with the proposition that taxation (like criminal liability) was only to be imposed by clear language narrowly construed, it was perhaps inevitable that more and more artificial schemes could be produced to seek to exploit perceived loop holes in the tax code. In this progression, the tax advisor would always be one lucrative step ahead of the Revenue. While the legislature might seek to enact legislation to close the loop hole that would only be effective for the future, and then the process would begin again.

54 It appears that in the UK there was a growing discontent with this state of the affairs. In Ramsay and Furniss, the House of Lords adopted a novel approach. Without reversing or indeed appearing to question the decision in the Westminster case, the Court nevertheless concluded that in the words of Lord Fraser in Furniss at pp. 228-229:

“The true principle of the decision in Ramsay was that the fiscal consequences of a pre ordained series of transactions, intended to operate as such, are generally to be ascertained by considering the result of the series as a whole, and not by dissecting the scheme and considering each individual the dual transaction separately.”

55 This was, it was said by some, a principle of statutory interpretation i.e. that in truth the relief sought, or loss incurred, was not what the statute had meant, or was intended to mean. In taking this approach, it was notable that the courts were adopting an approach first taken in the judgment of the distinguished US Judge Learned Hand in Helvin V Gregory (1934) 69 F 2nd 501, a decision nearly contemporaneous with the decision in the Duke of Westminster’s case. For others, the cases represented a significant change in the substantive law.

56 The departure illustrated by both Ramsay and Furniss and the doubts as to whether this constituted a new departure in substantive tax law or merely a principle of statutory interpretation (or both) appears to have given rise to a series of cases and considerable debate in the UK (see, for example IRC v McGuckian[1997] 1 W.L.R.991, MacNiven v Westmoreland Investments[2003]1 A.C. 311 and, Barclays Mercantile Business Finance Ltd v Mawson [2005]1 A.C.684; a paper entitled “Ramsay 25 years on: Some Reflections on Tax Avoidance”, delivered by Lord Walker of Gestingthorpe to the Chancery Bar Association on the 23rd of March, 2004, and published in (2004) 120 L.Q.R. 412, and Prof. Judith Freedman’s article, “Interpreting Tax Statutes: Tax Avoidance and the Intention of Parliament” (2007 123 Jan L.Q.R. 53). It is not necessary however to consider here the merits of that judicial development in the common law of another jurisdiction because in McGrath v McDermott [1988] IR 258 this Court expressly refused an invitation to adopt a similar course.

57 In the High Court in McGrath, Carroll, J had pointed out that the legislature had not enacted a general prohibition of tax avoidance schemes such as has been done in Australia and Canada. She also observed that in those jurisdictions the courts had rejected the idea of judicial interference in the development of tax law by the development of a concept of fiscal nullity.

58 In the Supreme Court, Finlay CJ expressly agreed with the judgment of the High Court. At p. 276 of the report he said:

“The function of the courts in interpreting a statute of the Oireachtas is, however, strictly confined to ascertaining the true meaning of each statutory provision, resorting in cases of doubt or ambiguity to a consideration of the purpose and intention of the legislature to be inferred from other provisions of a statute involved, or even of other statutes expressed to be construed with it. The courts have not got a function to add to or delete from express statutory provision so as to achieve objectives which to the courts appear desirable.”

He concluded at p. 277: -

“In some jurisdictions such as Canada and Australia, general statutory provisions against tax avoidance have been enacted, which in cases to which they apply would, of course, affect the interpretation of specific provisions of taxation laws. In the absence of any such general provisions in our law, there are no grounds for departing from the plain meaning of these sections.”

59 McCarthy, J delivered a concurring judgment. He specifically addressed the position in the UK where it has been stated that the Westminster case had not been overruled and that Ramsay and Furniss, merely stated a principle of statutory interpretation. He observed at p. 278: -

“For myself I am unable to perform the mental gymnastics that I think necessary to conclude that WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 did not reverse Inland Revenue Commissioners v Duke of Westminster [1936] AC 1. But that is not for me …”

60 Nor is it a task for this Court, but it is worth noting that by 2004 Lord Walker of Gestingthorpe could observe, extra judicially, that it was now possible to “regard Westminster as no more than a ghost from a different age”.

61 This background, sketched albeit in broad terms, is nevertheless of considerable importance in the interpretation of s.86. At the time McGrath was being heard by the Irish courts it appeared that the UK courts, by a combination of the development in the law of statutory interpretation and the development of a concept of fiscal nullity, had freed themselves from the constraints imposed by the narrow interpretation of taxation legislation and exclusive focus on the legal concepts involved in a transaction, to the detriment of a consideration of the commercial substance of it, which had been encouraged by the decision in the Westminster case and developed an effective constraint upon tax avoidance. That development had however been achieved only at a price of some doctrinal difficulty, and also some difficulties of definition. Perhaps for those reasons, the Irish courts in McGrath considered that such a development could not be achieved by judicial development alone, but would require legislation. It is central to the question of interpretation which arises in this case that s.86 was enacted as an immediate response to the decision in McGrath and its implicit invitation, to enact a comprehensive anti-avoidance provision. Looked at against this background therefore it becomes clear that s.86 is clearly directed towards the reversal of the Westminster case in Ireland, and more.

62 Prior to s.86 the only question was whether or not the transaction came within the strict words of the statute some times literally and narrowly construed. In the case of a tax statute, if the component parts of the transaction did not come within the provision, then it was not possible to look at the substance of the transaction to contend that tax should be applied. Similarly in the case of a relief, if the transaction came within the words of the provision granting relief then the relief must be granted, no matter how contrived the scheme, nor how far removed it was from the activity sought to be encouraged by the relief. But under s.86 the potential tax benefit to a tax payer may be disallowed if the Revenue comes to the conclusion that the transaction is one designed to confer a tax advantage and constitutes a tax avoidance transaction. As the Appeal Commissioners in this case observed, the essential starting point to the application of s.86 is a determination that absent its provisions the taxation charge would not apply, or in the case of an exemption, that its benefit would be available to the tax payer, on a literal construction of the language of the relevant statute.

63 Looked at in this light, sections 86(2) and 86(3) appear to be directed towards making the difficult distinction between a commercial transaction which has been legitimately structured in such a way as to mitigate the tax view on the one hand, and a purely tax driven transaction designed to give rise to a tax advantage on the other. This is apparent from the provisions of s.86(2)(ii) and its mirror image in s.86(3)(a)(ii). The fact that any given transaction gives rise to a tax advantage is not in itself enough to disallow that benefit. Such a transaction only becomes a tax avoidance transaction if it satisfies the requirements of s.86(2). That subsection directs the Revenue Commissioners to have regard to the results of the transaction, and its uses and means of achieving those results and any other means by which part of the results could have been achieved. In considering this issue the proviso to s.86(3) requires that the Revenue Commissioners have regard both to the form and substance of the transaction. The transaction will be a tax avoidance transaction if the Revenue Commissioners (having considered the matters set out above i.e. results, use, form and substance) form the opinion that the transaction gives rise to a tax advantage and that “the transaction was not undertaken or arranged primarily for purposes other than to give rise to a tax advantage”.

64 It may be of some significance that s.86(3)(a) goes on to state positively what shall not be regarded as a tax avoidance transaction. That will arise if the Revenue are satisfied that even though the transaction could have been structured in a way which had given rise to a greater amount of tax, the transaction was nevertheless “undertaken or arranged by a person with a view, directly or indirectly, to the realisation of profits in the course of business activities of a business carried on by the person”, and “was not undertaken and arranged primarily to give rise to a tax advantage”.

65 While this does not purport to be a definitive or detailed analysis of the provisions of s.86(2) and s.86(3)(a), it is clear that the distinction sought to be made in the section between permissible tax advantage and impermissible tax avoidance, is a distinction between legitimate tax mitigation of a genuine commercial transaction on the one hand, and a transaction undertaken or arranged primarily for the purposes of giving rise to a tax advantage. This is a distinction which is more easily described than applied, but for present purposes, it is neither necessary nor desirable to explore the well travelled and heavily contested borderline between these concepts. It is sufficient for the interpretation of the critical provisions of s.86(3)(b) to observe that that is the distinction sought to be made throughout s.86.

66 In my view the background to s.86, together with its internal structure, is important in considering the true meaning and application of s.86(3)(b). That subsection cannot be treated as a stand alone provision on reliefs and benefits. It is a component part of the overall provision. Section 86 as a whole requires a consideration of whether or not the Revenue Commissioners should form an opinion that a transaction is a tax avoidance transaction, and sets out those matters to which the Commissioners should have regard in forming that opinion. Section 86(2) seeks to identify those matters which are to be treated as tax avoidance transactions. The matter could perhaps have been left at that, but s.86(3) seeks to identify positively matters which are not tax avoidance transactions. In considering paragraph (b) of subsection (3) the pattern set by s.86(2) is instructive. The starting point for the application of s.86(2) is that the transaction would not come within the taxing provision, were it not for the provisions of s.86(2) and the disallowance and re-characterisation permitted pursuant to that section, s.86(3)(b) is only capable of applying to transactions which are otherwise within the relief provision at least as literally construed. There must be use, before there can be said to be misuse or abuse. Here again, therefore, it is clear that the Westminster approach has been modified significantly. Prior to the enactment of s.86(3)(b) if a transaction came within the specific words granting relief then that was the end of the inquiry. However, it is now necessary to consider whether the transaction constitutes a misuse or abuse of that relief having regard to the purposes for which it was provided.

67 Taking this approach, it is I consider, apparent that the careful analysis of the Appeal Commissioners was too narrow, and consequently in error as a matter of law. In the first case, it is not apparent that the determination proceeded upon an appreciation of the significance of s.86 and the significant change it effected in the pre-existing law. The only passage where the Commissioners dealt with the prior law is the following short passage which is difficult to follow:

“To conclude that there has been a misuse of the expert sales relief provisions would, in our view, be to ignore the statement of law laid down in

McGrath v McDermott

. While it is necessary to look at the purpose for which s.86 was enacted, in our opinion s.86, in itself, cannot be used to abandon the clear principles of statutory interpretation laid out in that case. These principles of statutory interpretations set out in

McGrath v McDermott

prohibit us from adopting such a purposive approach.”

68 First, there is here no positive statement of the significant effect of s.86 upon the decision in McGrath v McDermott, which might be said to be the raison d’etre of the section. Second, it is curious to find McGrath being invoked for any purpose other than as illustrating the law sought to be altered by the section. The ratio decideendi of that decision was merely that it was not open to the Court by a process of development of the common law to develop a doctrine of fiscal nullity which would for example remove from a tax payer relief which was otherwise applicable on a strict reading of the enactment. That decision did not propound any statement of law relevant to the interpretation of a statutorily developed anti-avoidance measure, which the decision contemplated, and to some extent encouraged. For the same reason it cannot be said that the decision laid out “clear principles of statutory interpretation”, still less principles relevant to the interpretation of a provision designed to permit the refusal of relief otherwise permitted under the relevant code. Even if this passage is taken as a reference to the obligation of the courts to interpret and apply the specific words used by the Oireachtas, then it is not clear how that is of assistance, let alone of decisive importance, when the task is to interpret and give effect to words chosen by the Oireachtas in s.86 designed to give the court the statutory power which the Supreme Court had doubted it could develop as a matter of common law. There is in this approach, something that seems to hark back to the pre s.86 regime, rather than an acknowledgement of the significant change brought about by that provision.

69 The suggestion that the principles in McGrath preclude a “purposive approach” is also perplexing. In the first place the express words of s.86 require the Commissioners to have regard to the “purposes for which it [the relief] was provided”. Furthermore, the decision in McGrath itself expressly contemplates an approach to the interpretation of legislation that has always been understood as purposive. In that decision Finlay, CJ restated the orthodox approach to statutory interpretation at the time when he adverted to the obligation of the courts in cases of doubt or ambiguity to resort to a “consideration of the purpose and intention of the legislature” at p. 276. Indeed, if McGrath stands for any principle of statutory interpretation it implicitly rejects the contention that any different and more narrow principle of statutory interpretation applies to taxation matters. As Lord Steyn observed in the Northern Ireland case of IRC v McGukian [1997] 1 WLR 991, there has been a tendency to treat tax law, almost uniquely in the civil law as continuing to be the subject of a strict literalist interpretation. “During the last 30 years there has been a shift away from literalist to purposive methods of construction. Where there is no obvious meaning of a statutory provision the modern emphasis is on a contextual approach designed to identify the purpose of a statute and to give effect to it. But under the influence of the narrow Duke of Westminster doctrine [1936] AC 1, 19 tax law remained remarkably resistant to the new non-formalist methods of interpretation. It was said that the taxpayer was entitled to stand on a literal construction of the words used regardless of the purpose of the statute …(t)ax law was by and large left behind as some island of literal interpretation.”

70 In Barclays Mercantile v Mawson [2004] 3 WLR 1383 the House of Lords emphatically reaffirmed that the same principles of statutory interpretation applied to taxation statutes as to other non criminal statutes. Indeed, it was the realisation in Lord Steyn’s words in IRC v. McGuckian [1997] 1 WLR 991 at p. 999, that “those two features – literal interpretation of tax statutes and the formalistic insistence of examining steps in a composite scheme separately – …[which] allowed tax avoidance schemes to flourish” which led the UK Courts to insist that the same principles of statutory interpretation applied to tax statutes as to other legislation. In Ireland, however, this was something that was acknowledged at least implicitly in McGrath, and explicitly in the provisions of the Interpretation Act 2005 which embodies a purposive approach to the interpretation of statutes other than criminal legislation and made no concession to a more narrow or literalist interpretation of taxation statutes. Accordingly, the Appeal Commissioners’ conclusion that the principles set out in McGrath prohibited the adoption of a purposive approach is incorrect on a number of levels.

71 What I consider to be the unduly narrow approach taken to the provisions of s.86, and the changes effected by it, led inevitably to an erroneous application of the provision to the facts of this case. In the first instance the Commissioners offered a generalisation which might have been thought to have led to the disallowance of the relief in this case:

“To generalise, it may be that the use of the tax free nature of the dividends to avoid a specific tax charge that otherwise would have arisen could be said to be a misuse whether direct or indirect of the relief.”

72 On the facts of this case, it could be said that the tax free nature of the dividends here was used to avoid the specific tax charge that otherwise would have arisen on a distribution of the profits of OFCL. At a minimum it might be expected that the determination of the Commissioners would explain why this generalisation did not lead to the conclusion that this was a tax avoidance transaction captured by s.86. Furthermore, while it is helpful to attempt to offer some definition of the individual components “abuse” and “misuse”, and in that respect to distinguish between them, in my view, the section is best understood when those concepts illuminate each other. The statutory phrase, “misuse … or an abuse of the provision having regard to the purposes for which it was provided” is to be read as one comprehensive indication that the object of the subsection is to ensure that reliefs and benefits are only available to transactions which can be regarded as a proper and intended use of the provision. In any given case it will not matter whether that transaction is characterised as an abuse or misuse; what is important is that full effect is given to the intention of the section that only appropriate uses of the provisions get the benefit of the tax relief. It is also a telling illustration of the narrowness of the conceptual approach taken in the determination, that the examples given of abuse and misuse are themselves both limited and confusing. It is not at all apparent that to divert all expenses to taxable domestic profits of business manufacturing products for both export and the domestic market, would, even prior to s.86, have been entitled to ESR relief since the amounts claimed for such relief would not have been in respect of profits generated by the export of qualifying products. By the same token it is doubtful whether a scheme for the export and immediate reimportation of goods for sale on the domestic market, would have been entitled to the benefit of the relief since it must be at least arguable that the export was a sham. Again and at a minimum, neither example seems a particularly credible example of what the act clearly contemplates; a transaction squarely within the words of the provision granting relief but disallowable as a misuse or abuse of it. On the other hand, the suggestion that payment of ESR dividends to employees in lieu of salary would be a misuse is rather difficult to understand on the Commissioners’ approach, since it implies some broad evaluation of what is otherwise a valid application of the scheme (dividends from qualifying profits are paid to qualifying shareholders). If it is permissible to deny relief to such a transaction under s.86 then it is difficult to understand the principled distinction between this example, and the present case where although dividends are paid from qualifying reserves through to qualifying shareholders, the effect of the scheme is to permit OFCL to distribute its profits without payment of tax.

73 The absence of any clearly articulated and principled distinction between these cases, and the difficulty in suggesting any substantial content to the concepts of misuse and abuse, is telling. The approach in the determination, careful and detailed though it is, seems hampered by a tendency to hark back to the orthodoxy that existed prior to the enactment of s.86, rather than to identify and give full effect to the significant changes effected by that section.

74 The idea that any particular scheme can produce a result that the Oireachtas did not intend, is much more easily expressed than applied in practice. The legal intent of the Oireachtas is to be derived from the words used in their context, deploying all the aids to construction which are available, in an attempt to understand what the Oireachtas intended. But in very many cases, the Oireachtas will not have contemplated at all, the elaborate schemes subsequently constructed, which will take as their starting point a faithful compliance with the words of the statute. In some cases it may be that there is a gap that the Oireachtas neglected, or an intended scheme which was not foreseen. In those cases, the courts are not empowered to disallow a relief or to apply any taxing provision, since to do so would be to exceed the proper function of the courts in the constitutional scheme. In other cases the provision may be so technical and detailed so that no more broad or general purpose can be detected, or may have its own explicit anti-avoidance provision. In such a case there may be no room for the application of s.86 since it may not be possible to detect a purpose for the provision other than the basic one that the Oireachtas intended that any transaction which met requirements of the section should receive the relief. However, there are some cases of which this is one, where it may be possible to say with some confidence that though there has been compliance with the literal words of the statute, the result is not the sort of relief that the Act intended should result. In such cases, s.86 permits an evaluation of the particular transaction and a consideration as to whether it comes not just within the words, but also within the intended scheme, or is rather, a misuse or abuse of it. The fact that such an evaluation may be difficult and can create some uncertainty, is not a reason to avoid the task. Certainly in tax matters it is difficult to achieve and the desire to provide certainty to those who wish to avoid a taxation regime which applies to others similarly situated to them, is something which ranks low in the objectives which statutory interpretation seeks to achieve. The tax payer could, after all, achieve a high level of certainty, but at the price of paying tax on dividends received.

75 The assessment of the purpose of any relief involves something somewhat more sophisticated that a repetition of a general dictum from a judgment, even one delivered by McCarthy, J. The question is not what the general purpose of any scheme is - the unsurprising subject of promoting manufacture and export and therefore maintenance of employment - it is what is the purpose of this particular scheme? As Denham, J. observed, the purpose of an Act is best discerned from the words used. When recourse is had to a generalised purpose such as the encouragement of exports, there is a frustrating of ascending the levels of generalisation rather then descending towards specificity.

76 The limitations of the general approach can be seen by the fact that it can be deployed almost rhetorically on either side of this case. On behalf of the tax payer for example it might be said – and indeed was said – that the products here had been manufactured and exported, and employment generated, and that the State had agreed that profits derived from that activity would be exempt from tax and could generate tax free dividends, and therefore that the State was at no loss and got what it bargained for - tax forgone on the amount of profits in return for employment sustaining and export creating manufacture. On the other hand, it could equally be said that the transaction or transactions at issue here - the introduction of funds, first by Dairygold and then by OFCL, and a multiple declaration of dividends - had nothing to do with achieving the export of goods or the maintenance of employment. The goods had been exported and any jobs created long before the series of transactions were put in place over the Christmas period of 1991. This type of approach owes more to rhetoric than analysis and is unlikely to be particularly helpful in resolving the difficult issues in this case. In my view, the most productive source of insight into the meaning of s.86(3)(b) is the text itself, as understood against the structure of s.86 and its background.

77 Section 86(3)(b) requires the Commissioners to scrutinise the transaction and to consider whether it, while complying with the letter of the ESR provisions, may constitute a misuse or abuse of the provision having regard to the purposes for which it was provided. The transaction under scrutiny involved a company, Mitchelstown, which had ESR reserves, but could not or would not declare a dividend, entering into a complex series of transactions which at a commercial level involved the effective sale of its reserves to a company, OFCL, which used its distributable reserves to fund a dividend through Mitchelstown, the ultimate recipients of which were the individuals who were the shareholders in OFCL.

78 I have no doubt that this was a tax avoidance transaction, which could not benefit from s.86(3)(b) because it was a misuse and/or abuse of the ESR scheme. The Appeal Commissioners emphasised what they considered to be the broad nature of the relief. But it is notable, that the ESR scheme has a number of limitations. In particular, it did not override company law. Exports by themselves did not generate the tax relief. It was necessary to achieve profits before any tax could be relieved. Similarly it was only if the company was in a position to lawfully declare a dividend, that any shareholder could receive a tax free benefit. Finally, and significantly, the scheme itself made no provision for the sale or trade in export sales relief reserves.

79 In considering what constitutes a misuse or abuse of the scheme, for ss.(3)(b) the Revenue Commissioners are in my view, to have regard to those indicators which are identified in s.86 as going towards ascertaining the existence of a tax avoidance transaction. Those matters are the form of the transaction and its substance, whether it was undertaken for the realisation of a profit in the course of business activities, carried out by any person, and finally, whether it was undertaken primarily for purposes other than to give rise to a tax advantage. These are factors which the Commissioners are to take into account in determining whether a transaction which complies with the strict letter of the tax code, may nevertheless be disallowed as a tax avoidance transaction, and they are therefore important guides to whether a transaction which complies with the words of a statute providing a benefit and/or a relief, may nevertheless be disallowed as a misuse or abuse of the provisions. The determination under s.86(3)(b) is part of the general process of the formation of an opinion under s.86 and s.86(3) makes it clear that in the forming of such an opinion in accordance with the subsection, the Revenue Commissioners shall “have regard to the form of the transaction and “ the” substance of the transaction” and the other matters set out in the proviso to s.86(3). In my view, however, for the reasons already set out the Commissioners are not confined to the proviso but should also have regard to those other matters to which attention is directed under s.86.

80 Here, the form of the transaction was highly artificial and contrived. It was not the realisation of profits in the ordinary course of business activities. It was a transaction arranged primarily to give rise to a tax advantage, and the substance of the transaction was to permit OFCL to pass its distributable profits to its shareholders, without incurring tax. A scheme which allows the shareholders in a non exporting company to benefit from Export Sales Relief on the profits of the non exporting company, is surely a misuse or abuse of the scheme having regard to the purpose for which the provision is provided.

81 It is not, in my view, a valid or compelling criticism to say that the circumstances can be hypothesised where the shareholders of the domestic property company could validly receive ESR dividends from Mitchelstown. This could occur for example if OFCL or its shareholders had acquired Mitchelstown, or any company which had shares in that company. Firstly, it should be said that hypotheses are valuable as methods of debate and discussion, and in seeking to isolate and define distinctions of principle. But it must be borne in mind, that this type of reasoning by analogy has inherent limitations. It is always possible to hypothesise circumstances one degree different from the present, and to continue to elaborate until the desired result is achieved. That process of reasoning by Chinese whisper, can ultimately reach a nonsensical result. In every examination there will be the last person to pass and the first candidate to fail, and they may be much more similar to each other than to their fellow candidates but that is not a reason to alter either of the results. The process of legislation and its application may often involve drawing the lines in contested cases and the fact that there may be closely parable cases on either side of the line is not in itself a reason to alter the conclusion.

82 A bona fide purchase of a company or shareholding in a company which allows the payment of export sales relieved dividends is arguably consistent with the scheme of the relief, since the original export receives the anticipated benefit through the purchase price rather than dividends and the purchasers paying the price receives what is a valuable asset. Such a transaction may not fall within s.86 at all, since it may not give rise to any tax advantage, and may be a transaction in the normal course of business and not primarily directed to achieving a tax advantage. Here, the substance of the transaction (which s.86 permits and indeed enjoins the Commissioners to have regard to) involved the use of the profits of OFCL, which if distributed to its shareholders will attract tax, being paid by a circuitous route to those very persons without attracting tax, through a series of steps devised for the sole purpose of achieving that result. The observation contained in the judgment of the High Court may have been over broad in suggesting that the purpose of the ESR scheme was not to provide relief to a domestic property company. It may be enough however that the substance of the transaction was to use the funds of a domestic property company to pay dividends to its shareholders relieved of tax, and that such an outcome is the antithesis of the statutory scheme.

83 Finally, the Appellants urged upon the Court that since the provisions of s.86 were patterned upon the General Anti-Avoidance Rule (GAAR enacted in Canada) the Court should follow certain decisions of the Canadian Superior Courts on those provisions. Where the decisions of the Canadian courts are often of considerable assistance it does not seem to me that the patterning of s.86 (with some significant changes) on the provisions of the Canadian GAAR, can necessarily be understood as an indication that the courts should adopt the subsequent decisions of Canadian courts as a guide to the interpretation of s.86. First, there are significant differences between the provisions of GAAR and s.86. Second, and more significantly, there are also important differences of approach to the interpretation of statutes, and the ability to rely on extraneous statements as an aid to interpretation, and finally the burden of proof as to the purpose of an enactment. Furthermore, as Prof. Freedman’s article records, the Canadian jurisprudence has not itself been received with universal acclaim. It appears to me therefore that the most reliable guide to the interpretation of s.86, is to interpret it with the assistance of the canons of construction regularly employed by these courts, and by placing the text carefully in its context within s.86 generally, and against this the background of the decided cases and in particular the law which was sought to be changed by the section. When so viewed it is clear that s.86 seeks to make a decisive change in the approach to taxation schemes. In doing so it requires the Revenue Commissioners to engage in an exercise, if not of discretion, then at least of evaluation and judgment. This may be a difficult task in some cases and certainly is a distinct change of approach in tax law. This is, however, not the untrammelled discretion feared by Lord Tomlin in the Westminster case. Any such determinations by the Revenue Commissioners must be reasoned, and open to appeal to the Appeal Commissioners, who have shown themselves capable of careful scrutiny of such decisions. The decisions of the Appeal Commissioners in turn, are capable of appeal and review in the courts. In any event the fears expressed by Lord Tomlin may have been exaggerated. As Lord Walker observed, Lord Atkin’s dissent has perhaps worn better than Lord Tomlin’s invocation of the metewand of the law. But with the entry into force of s.86 of the Act of 1989 that debate became obsolete. The function of the Revenue Commissioners, and on appeal the Appeal Commissioners, and the courts, is to seek to discern the intention of the Oireachtas and to faithfully apply it to the individual case. I am satisfied that the transaction is not entitled to the benefit of s.86(3)(b), and rather, is a tax avoidance transaction within the meaning of s.86(2). It follows, that the Revenue Commissioners were correct to form that opinion, and the High Court was correct in the result to which it came. I would dismiss the appeal.

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