Revenue Commissioners v Covidien Ltd

• Jurisdiction: Ireland
• Court: High Court
• Judge: Mr. Justice Nolan
• Judgment Date: 11 April 2024
• Neutral Citation: [2024] IEHC 192
• Docket Number: [2022/110 R]

Between

The Revenue Commissioners

Appellant

and

Covidien Limited

Respondent

[2024] IEHC 192

[2022/110 R]

THE HIGH COURT

JUDGMENT of Mr. Justice Nolan delivered on the 11 ^th day of April, 2024

Introduction

1 . This judgement concerns a case stated for the opinion of the court pursuant to Section 949AQ of the Taxes Consolidation Act 1997 (as amended), in relation to a determination of the Tax Appeal Commissioner (“TAC”) dated the 28 ^th of July 2022. The matter relates to an appeal as to whether Covidien Ltd (“the taxpayer”) was liable for VAT on foot of assessments for VAT made by the Revenue Commissioners (“Revenue”) between the 26 ^th of March 2015 and the 16 ^th of March 2017, in respect of periods from the 1 ^st of July 2011 to the 31 ^st of December 2014 inclusive. The total amount of VAT assessed by Revenue in respect of the said periods was €45,936,882, full details of the various assessments were set out in the second paragraph of the determination of the TAC.

2 . The TAC found the taxpayer received a single composite supply of services from an entity known as Tyco Healthcare Group LP (“Tyco”), but rather confusingly referred to in the determination as THGLP, and that those services were used in their entirety for the purpose of the taxpayer's economic activity. He further found that the planning and execution of, what was known as “Project Jameson”, constituted economic activity on the part of the taxpayer and had a direct and immediate link to the taxpayer's taxable output supplies and in turn to its direct and indirect subsidiaries and that therefore the taxpayer was entitled to a full 100% deduction in respect of VAT as it occurred on the costs of the services it received in relation to that project. Finally, he found that the taxpayer was entitled to a full 100% deduction in respect of the VAT it incurred and the cost of services it received in relation to a transaction known as “Medtronic”. On that basis, he allowed the taxpayer's appeal from the VAT assessments made by Revenue.

3 . There was also a fourth series of transactions relating to VAT incurred by the taxpayer which related to Irish and other suppliers, which although before the TAC, he never dealt with.

4 . It is from his determination that Revenue now appeals.

Background

5 . From June 2009 until January 2015, the taxpayer was Irish incorporated and an Irish resident ultimate holding company of a group of companies known as the Covidien Group. The taxpayer's ordinary shares were listed on the New York stock exchange (“NYSC”) and were registered within the United States Securities and Exchange Commission.

6 . 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 (a) medical devices, (b) medical supplies and (c) pharmaceuticals. At all material times the taxpayer held 100% of the share capital of a number of companies including the Covidien Group Holdings Ltd (“CGHL”) and 100% of the share capital of USSC Medical GmbH, a company registered in Germany. From June 2013 until the end of March 2016, the taxpayer held 100% of the share capital of Covidien Belgium BVBA. From July 2012 until April 2014, it held 100% of the share capital of Covidien JJE Plc, an Irish registered company. The taxpayer had no other direct subsidiaries.

7 . CGHL was a company incorporated in Bermuda and resident in Ireland for tax purposes. It was formally the NYSC – listed parent of the Covidien Group, which became Irish tax resident by moving its central management and control to Ireland in late 2008.

8 . During the periods under the appeal, the taxpayer carried out the following two main activities:-

• (a) As the parent of the Covidien Group, it directly or indirectly held shares in all of the subsidiaries of the Covidien Group. This comprised approximately 300 subsidiaries, although there was some controversy over the exact number, the majority of which were owned directly or indirectly by CGHL; and,

• (b) It also provided management services to four of its indirect subsidiaries, namely Nellcor Puritan Bennett Ireland, Mallinckrodt Medical Imaging Ireland, Mallinckrodt Medical BV and Covidien AG, all known as “the Service Recipients”. Again, rather confusingly, these entities were referred to throughout the case as the four Foreign Principal Entities or FPEs, however in order to avoid confusion, I shall refer to them as defined in the agreements namely the Service Recipients.

9 . In order to provide the management services to the Service Recipients, the taxpayer entered into an agreement effective as of the 26 ^th of September 2009 (“the first service agreement”) with a company within the Covidien Group namely Tyco. It then entered a second agreement with the service recipients also dated the 26 ^th of September 2009 (“the second service agreement”). The costs incurred by the taxpayer in carrying on the two activities set out above arose in all of the VAT periods the subject of the appeal before the TAC and were referred to as “ongoing costs”.

10 . In 2013, the Covidien Group was restructured by means of a spin-off of the group's nuclear medicine business and pharmaceutical business into a newly formed company, Mallinckrodt Plc, which had been established for that purpose. This restructuring was Project Jameson. The costs incurred by the taxpayer in relation to Project Jameson are relevant to the assessments for the VAT periods from November-December 2012 to July-August 2013 inclusive, January-15 2014 and May-June 2014. This is the second series of transactions which form part of this appeal.

11 . On the 26 ^th of January 2015, by virtue of a transaction agreement dated the 15 ^th of June 2014, the taxpayer was acquired by Medtronic Plc, the Medtronic transaction. This acquisition was affected by means of a cancellation scheme of arrangement under Section 72 of the Companies Act 1963, approved by the High Court and by the taxpayer shareholders. Costs incurred by it in relation to the Medtronic transaction are relevant to the assessments for the VAT periods from July-August 2014 to November-September 2014 inclusive. This is the third series of transactions which form part of this appeal.

12 . Following an audit carried out by Revenue, it determined that only partial VAT recovery by the taxpayer was allowable in respect of ongoing costs, and none of the VAT inputs arising in relation to Project Jameson and the Medtronic transaction were recoverable.

13 . The assessments for VAT are the subject of this appeal which were duly raised by the Revenue. It contends that the assessments of VAT were raised in accordance with the approach used by the taxpayer when undertaking a detailed annual exercise in order to determine the appropriate quantum of costs attributable to the provision of the management services to the Service Recipients.

The Hearing

14 . The hearing before the TAC took 9 days. Both parties were represented by very eminent senior counsel who also appeared before me. The TAC heard from four witnesses who had intimate knowledge of the taxpayer and its relevant operations outside the US. Further, the TAC had the benefit of 32 lever arch files, the two full-service agreements, the structure of all the companies, a cost centre analysis, very large board packs prepared for the various board meetings in Dublin together with reports prepared by PwC and Mayer Brown. He also had written submissions from both sides. I will return to the evidence.

Material Findings of Fact

15 . The TAC made the following material findings of fact:-

• (a) The evidence of Mr. Oldaker and Ms. Campi (two of the four witnesses who gave evidence) in relation to the manner in which the business of the Covidien Group was conducted was correct. The evidence which he accepted as correct was summarised in paras. 296 to 299 of the determination.

• (b) Decisions were made by the Board of the taxpayer in relation to all aspects of the Covidien Group's business were then actioned by the executive officers and the appropriate personnel in the relevant subsidiaries.

• (c) There was a detailed and ongoing involvement of the taxpayer's board in the management of the Covidien Group as a whole and in relation to specific projects, and initiatives within the Covidien Group.

• (d) The taxpayer was at all material times actively engaged in the management of all aspects of the business of the Covidien Group and was an active holding company.

• (e) Through the first service agreement and the second service agreement, the taxpayer was providing management services, not only to the four Service Recipients, but also to the 84 subsidiaries who are connected to them.

• (f) The evidence before the TAC did not support a finding that the taxpayer was engaged in non-economic activity.

• (g) The taxpayer was not just a passive holding company but was instead at all material times actively engaged and directly and indirectly involved in the management of its subsidiaries and sub subsidiaries.

• (h) The taxpayer's engagement and involvement in managing those companies was for the purposes of the exploitation of its holdings in those companies for the purpose of obtaining income therefrom on a continuing basis.

• (i) The taxpayer received a single composite supply of services from Tyco.

• (j) There was a direct and immediate link between the input costs suffered by the taxpayer on the single composite supply of services it received from Tyco through the first service agreement and the supply of management services by the taxpayer to the four service recipients and their 84 subsidiaries through the second services agreement.

• (k) The services received by the taxpayer from Tyco in the first service agreement were used in their entirety for the purposes of the taxpayer's economic activity.

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