Covidien Ltd v The Revenue Commissioners

• Jurisdiction: Ireland
• Court: Court of Appeal (Ireland)
• Judge: Ms. Justice Hyland
• Judgment Date: 31 March 2025
• Neutral Citation: [2025] IECA 75
• Docket Number: Court of Appeal Record Number: 2024/130

Between/

Covidien Limited

Respondent/Respondent

and

The Revenue Commissioners

Appellant/Appellant

[2025] IECA 75

Butler J.

O'Moore J.

Hyland J.

Court of Appeal Record Number: 2024/130

THE COURT OF APPEAL

NO REDACTION NEEDED

JUDGMENT of Ms. Justice Hyland delivered on the 31 day of March 2025

Introduction

1 This appeal arises from a case stated of 28 July 2022 following a Determination of the Tax Appeal Commissioner (“TAC”) made on 29 April 2022. In the introduction to the case stated, it is identified that the core issue in the appeal is whether the respondent to this appeal (hereafter “Covidien”) was liable to VAT on foot of assessments of VAT made by the appellant (hereafter “Revenue”) between 26 August 2015 and 16 March 2017 in respect of the periods from 1 July 2011 to 31 December 2014 inclusive. The total amount of VAT assessed by Revenue in respect of the said periods was €45,936,982.00. Covidien appealed against the said assessments by notices of appeal. The TAC upheld the appeal. At the request of Revenue, a case was stated to the High Court. The High Court (Nolan J.) upheld the conclusion of the TAC ( [2024] IEHC 92). Revenue have appealed against that decision to this court. It should be emphasised that Revenue has already permitted deductibility in respect of some input VAT. However, Covidien claims full deductibility i.e. that the entirety of the input VAT it incurred should be deductible. Revenue argues that partial deductibility is appropriate.

Case Stated

2 The case stated is in the following terms:

“ The respondent having requested me to state and sign a case for the opinion of the High Court in accordance with s.949AQ of TCA 1997, in relation to my Determination dated 29 April 2022, the questions of law for the opinion of the High Court are:-

• (i) Was I correct in law in my approach to issues of fact on the one hand and issues of law on the other, and, in particular, in my identification of material findings of fact in my Determination?

• (ii) Was I correct in law in identifying as the relevant issues for determination those contained in paragraph 287 of my Determination?

• (iii) Was I correct in law in the approach taken in paragraphs 289 to 333 inclusive of my Determination to addressing and answering the following questions of law:-

  • (a) What is an economic activity for VAT purposes?

  • (b) What is an economic activity giving rise to right to deduct for VAT purposes?

  • (c) What are the appropriate legal considerations when determining whether (i) ongoing costs comprising input costs of supplied made to the Appellant by THGLP and other foreign and domestic service providers, (ii) costs incurred in relation to Project Jameson, and (iii) costs incurred in relation to the Medtronic Transaction had been used for the purposes of taxable output transactions?

• (iv) Was I correct in law concluding that the Appellant was at all material times wholly engaged in economic activity for VAT purposes?

• (v) Was I correct in law in considering that the receipt of a single composite service from THGLP and the supply of a single composite service by the Appellant was relevant for the purposes of ascertaining the level of input VAT deductible by the Appellant?

• (vi) Was I correct in law in concluding that there was a direct and immediate link between the entirety of the input costs suffered by the Appellant on the supply of services it received from the THGLP under the THGLP Agreement and the supply of taxable management services by the Appellant under the Service Agreement to the four Service Recipients and, through them, to the other 84 legal entities connected to the Service Recipients?

• (vii) Was I correct in law in concluding that the Appellant was entitled to deduct VAT inputs it incurred in respect of services it received in relation to Project Jameson?

• (viii) Was I correct in law in concluding that the Appellant was entitled to deduct VAT inputs it incurred in respect of services it received in relation to the Medtronic transaction?”

3 The Determination giving rise to the case stated followed a nine day hearing before the TAC, in the course of which he heard evidence from four witnesses on behalf of Covidien: Mr. Oldaker, of Medtronic PLC; Ms. Ciampi of Medtronic PLC; Mr. Brodie, a tax partner with PWC; and Mr. Ranalow, a partner with Arthor Cox Solicitors LLP. Following that oral evidence and on the basis of the documents before him, the TAC made certain material findings of fact set out later in this judgment. At para. 31 of his Determination, he identified that five issues were required to be determined in order to decide the appeal. He arrived at certain conclusions in respect of each of those issues. Again, these are set out below and discussed in their appropriate context.

Factual background

4 From June 2009 until January 2015 Covidien Ltd. (formerly Covidien PLC) was the Irish incorporated and resident holding company of the Covidien Group (the “Group”). The Covidien Group was at all material times a global healthcare products group and manufacturer of medical devices and supplies. During the periods under appeal, it operated in three market segments, namely medical devices, medical supplies and pharmaceuticals.

5 Covidien's shares were listed on the New York Stock Exchange and it was registered with the SEC. Covidien held 100% of the share capital of Covidien Group Holdings Ltd and 100% of the share capital of USSC Medical GMBH. From June 2013 until end March 2016, Covidien held 100% of the share capital of Covidien Belgium BVBA. From July 2012 until April 2014 Covidien had beneficial ownership of 100%held of the share capital of Covidien JJE Public Ltd. Covidien has no other direct subsidiaries. Covidien's offices were situated in Dublin in respect of the period July 2011 to December 2014.

6 The board of Covidien consisted of one executive director and various independent non-executive directors. Covidien had approximately 5 employees who supported the board of directors. The vast majority of the other services, which Covidien required to manage its shareholding in Covidien Group Holdings Ltd., and the group beneath it, were supplied by a related entity, Covidien LLP, formerly known as Tyco Healthcare Group LP (THGLP or Tyco, hereafter referred to as “Tyco”). Tyco is located in the U.S.A. and since 2007 has been responsible for Covidien's US operations and also functioned as a shared services centre for the Covidien Group.

7 There were two written agreements in place for the provision of services by Tyco to Covidien. The first agreement was between Tyco as supplier and Covidien as recipient pursuant to which Tyco agreed to provide certain services specified in that agreement to Covidien (the “ Services agreement”). The second agreement was between Covidien, as supplier and four indirect subsidiaries (the “ Management Services agreement”), being Nellcor Puritan Bennett Ireland, Mallinckrodt Medical Imaging Ireland, Mallinckrodt Medical BV and Covidien AG (the four service recipients or “FSR's”), which between them own all of the intellectual property rights for the non-US parts of the Covidien Group (Tyco owning the US rights)).

8 Pursuant to the Management Services agreement between Covidien and the four FSRs, Covidien supplied the FSRs with a composite supply of services set out in Article 3 of the agreement, including corporate executive, business development, human resources, internal audit, finance, tax, legal, treasury, operations and any other activities respecting any other matter relating to Covidien's business. Article 3 also provided that the services shall include only those activities that provide a benefit to the service recipient i.e. provide an increment of economic or commercial value that enhances the service recipient's commercial position or is reasonably anticipated to do so. The fee is set out at Article 4 and it states that the service recipients shall collectively pay to Covidien a service fee equal in amount to Covidien's total services costs incurred in connection with providing the services to the service recipients, defined as “ total services costs”, plus a markup of 10%. Under Article 4.1(c), total services costs shall be equal to the sum of direct costs and indirect costs.

9 It is further provided that costs incurred by Covidien in connection with activities that provide no benefit to service recipients shall not be considered in the calculation of total services costs for the purposes of computing the fee under the agreement. There is a distinction drawn between direct costs i.e. those identified directly with particular activities, and indirect costs, which include costs with respect to utilities, occupancy, supervisory and clerical and other overhead burdens of the departments, and other overhead costs.

10 It is recorded in the Determination that it was common ground between the parties that the consideration which Covidien received from the service recipients was less than the consideration which Covidien paid for the supply it received from Tyco (para. 142). Submissions were made at the hearing by counsel for Revenue that Revenue had allowed a 40% deductibility on the input tax imposed on Tyco's services but refused the 100% deductibility contended for by Covidien. No issue was taken with that summary of the facts by counsel for Covidien. It appears from supplemental submissions made by Revenue during the course of the hearing before the TAC that Covidien incurred input VAT on management services pursuant to the Services agreement. The VAT exclusive fee for the services was approximately $76 million. Covidien provided management service to the FSRs pursuant to the Management Services agreement in respect of which a fee of approximately $29 million was charged. At paragraph 142 of the Determination the TAC recites the following...