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Complex Tax Issues

Complex Tax Issues. Conor Kennedy Law Library. Property as a means to evaluate and impose taxation. Window type tax Land taxes, custom and excise duties, stamp duties, probate and other death duties Creates & transfer personal wealth Property investment Use of trusts. Introduction.

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Complex Tax Issues

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  1. Complex Tax Issues Conor Kennedy Law Library

  2. Property as a means to evaluate and impose taxation. Window type tax Land taxes, custom and excise duties, stamp duties, probate and other death duties Creates & transfer personal wealth Property investment Use of trusts Introduction

  3. Governments grip on property : Income Tax Corporation Tax Value Added Tax Stamp Duty Capital Gains Tax Capital Acquisitions Tax Forms of Taxation

  4. Commercial viability McGrath Case S.811 TCA ‘97 to address certain tax avoidance Constitutionality Purpose of Investment

  5. Ownership of assets in a corporate or personal capacity Common practice for companies to acquire properties Cost of obtaining funds through salary was unusual Income Tax rates were in excess of 60% Evolution of Property Ownership

  6. Lowering of the personal tax rates S.23 type reliefs Huge appreciation in the value of property Exasperated by double charge to Capital Gains Tax Evolution of Property Ownership

  7. Commercial viability Tax as a factor in structuring investments Level and rate of stamp duty VAT Capital Gains Tax Inheritance tax issues Use of trusts Property Transactions

  8. Double charge to Capital Gains Tax Surcharge on undistributed company profits Director’s fees limited to 7.5% - 12.5% Make the investment less marketable No stamp duty relief Annual costs of servicing a company Property Ownership

  9. Capital allowances on industrial buildings Income and wealth enjoyed by individuals Property Ownership

  10. Lower rate of Stamp Duty Personal guarantees For reasons of confidentiality To protect the property against litigation Corporate Ownership

  11. Holding Companies • CGT Exemption • Shares held in EU or treaty countries • Must hold at least 5% • Interest held for at least 12 months • Greater value not derived from land in State • Credit for foreign taxes on dividends • Entitlement to “pool” credits

  12. Company Reorganisations • Three party Swap • Transfer trade to Newco • Consideration = Shares in Newco • Same identity of ownership • Subsequent disposal

  13. Tax issues • Stamp & Capital Duty (S.80 SDCA 1999) • Share reorganisation (S.587 TCA 1997) • Corporation Tax Relief (S.615 TCA 1997) • Income Distribution (S.130 TCA 1997) • Tax Neutral

  14. Availability of capital allowances Property must be relatively self financing Tax breaks shoring up the potential shortfall Capital Allowances

  15. A trade carried on in either a mill factory or similar premises A dock undertaking The growing of fruit, vegetables or other produce in the course of a trade The trade of hotel keeping Intensive production of cattle and other livestock Operation or management of an airport, where the structure is an airport Section 268 Buildings

  16. Operation or management of a registered nursing home Operation or management of a convalescent home for the purpose of medical and nursing care Operation or management of a qualifying hospital Qualifying sports injury clinics Qualifying mental health centres Section 268 Buildings

  17. Tax incentive areas Leased industrial buildings Clawback of allowances Deemed Industrial Buildings

  18. Expenditure incurred in qualifying period Construction, conversion or refurbishment Qualifying areas 100 per cent of qualifying expenditure excluding site cost Relief against all rental income Clawback of relief Section 23 Type Relief

  19. Minimising Tax Costs • Capital Allowances • Plant & Machinery • Definition • Functional test • Setting in which trade carried on

  20. Minimising Tax Costs • S.311 TCA 1997 • Apportion expenditure on commercial property • Extract value from plant & machinery • Formula Plant x Purchase Price – Land Building Cost

  21. Qualifying Type Assets • Gas, electrical, cold water and sewage systems. • Heating, ventilation and air conditioning systems. • Storage systems, display equipment, counters and cold rooms. • Furniture and sanitary ware. • Escalators and lifts. • Sound insulation. • Telecommunications and surveillance systems. • Alarms and sprinkler systems. • Moveable partition walls. • Displays, signs and advertising hoardings. • Consultants fees. • Carpeting. • Blinds and canopys.

  22. Two aspects of the legislation Land dealers and individuals who purchase land for speculative profits 20% rate Any work which does not constitute construction Construction of houses will be liable to Income Tax at the marginal rate Property Developers

  23. Dealings with Revenue • Kinsella v The Revenue Commissioners • Legitimate Expectations • Glencar Exploration • Representation • Identifiable person actually affected • Expected to abide • Keogh v Criminal Assets Bureau

  24. Revenue’s Annual Report 2006 • Tax Receipts €45.5 billion • 14 tax schemes challenged • Special Investigations now at €2.28 billion • Revenue audits - €691.8 million • 4,127 comprehensive audits • 176,064 assurance checks • 601 tax defaulters published • 7 convictions for serious tax evasion

  25. Revenue Audit Findings • Large Cases Division • Residency of Companies • Film investments • Property based investments • Property owned companies • Liquidations • S.806 & EU Treaty

  26. General Audit Issues • Pubs • Irish Independent article • Compliance issues in 50% of Dublin pubs • New methodology • Unfounded Allegations • Licence agreements • Finance Act 2007 • S.4(5) VATA 1972 • S.10(3) VATA 1972

  27. Licence Agreements Example • Build cost €275 per sq ft • Apartment 1,000 sq ft • Cost €275,000 • Sale Price €475,000 • Land Price €175,000 • VAT liability €20,815 per apartment • Unforeseen cost to the landowner

  28. Internal Review • What is it? • Jurisdiction • “Revenue’s handling of his or her tax or customs affairs or decisions made by a Revenue official …” • Publication • Discrimination • Proportionality • Appeal Commissioners • Human Rights issues

  29. Revenue’s Lifestyle Profile

  30. Revenue’s Asset Reconciliation € • Estimated Funds 2005 291,664 • Estimated Return @ say 3% 8,750 • Where is it?

  31. Risk Analysis • Late filing • Screening • Risk • Evaluation • Analysis • Profiling • Enormous database • Crest • VRT • Rental • Stamp duty • CGT

  32. Risk Analysis • Screening 3 - 4 times a year • In-depth profile • Behavioural profiling • Substitution effect • RCT issues • Double dip (treble) • EU Savings Directive – 1st tranche of information • All tax head audit • Seek adjournment

  33. Public Accounts Committee • Comptroller & Auditor General Report • Extending Tax Information Exchanges • Mutual Assistance • Information exchanged • Automatic • Spontaneous • Capital gains risks • Correlation with stamp duty information • Substitution effect • Stamp duty clawback • Miscellaneous

  34. Constituents of a Business • Definition ? • Trade or Business • American Leaf • Korean • Noddy Subsidiary Rights • Cadbury Ireland • Relevance • S.600 TCA 1997 • S.97 CATA 2003 • VAT • Reconstructions • Trade • Badges • 12.5% CT Rate • Substitution Effect

  35. Finance Act 2007 • CGT – Sale of business assets/ shares in family trading companies • BES Improvements • VAT – Waiver of exemption • Offshore funds • Revenue Powers

  36. Professional Negligence • Duty of care • Breach of duty • Plaintiff suffered loss • Damage caused by that breach

  37. Professional Negligence • Competency of the practitioner • Hurlingham Estates v Wilde & Partners • Letters of engagement • Sample Letter 1 – Tax Advisor • Sample Letter 2 – Accountant • Sample Letter 3 – Solicitor • Information omitted

  38. Agent Mistake • Rowland v HM Revenue & Customs • Reasonable Excuse • Relied on agent • Vicarious liability • Employer main beneficiary • Better position • Implement safer practices • Absorb losses • Offers better protection to claimant

  39. Revenue Penalties • The ‘Code of Practice for Revenue Auditors’ • 9.1 provides that: A tax return prepared and delivered on behalf of a taxpayer by some other person acting on his or her behalf is treated in all respects as if it had been made by the taxpayer. The taxpayer’s statutory responsibility to complete and file a correct return cannot be devolved to his or her agent. • 9.5 provides … the taxpayer cannot devolve the responsibility of making the correct return to an agent. If all relevant matters have not been brought to the attention of the agent, the taxpayer has not taken due care.

  40. Finance Act 2005 • S.142 amends S.1078 TCA 1997 • Revenue Offences – 3rd party implications • “knowingly concerned in the fraudulent evasion of tax” • “ … is reckless as to whether or not the person is concerned in facilitating the fraudulent evasion of tax ….”

  41. Revenue’s Annual Report 2007 • Tax Receipts €47.2 billion • Tax schemes challenged • Special Investigations now at €2.414 billion • Revenue audits - €736 million • 3,900 comprehensive audits • 237,000 assurance checks • 14 convictions for serious tax evasion

  42. Future Developments New VAT on Property Regime Property leases exempt from tax Option to tax New Buildings Old Buildings Capital Goods Scheme More Tax Avoidance Schemes challenged New Commission of Taxation Refinement of profiling

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