Originally published in International Tax Review (1 April 2012).
In December 2011, the Irish Supreme Court delivered its judgments in the first case before it on the Irish general anti-avoidance rule (the "GAAR"). Although the GAAR was introduced in 1989, the decision in O'Flynn Construction Ltd and others v Revenue Commissioners is the first time the Supreme Court has considered it.
The Supreme Court held, by a three to two majority, that the transactions carried out by the taxpayer infringed the GAAR. The court upheld the argument of the Revenue Commissioners that the use of specific relief provisions by the taxpayers amounted to a misuse or abuse of those provisions, having regard to the purpose for which the relief was provided.
Background to the GAAR
The GAAR was introduced in 1989, soon after the Supreme Court had declined to follow the doctrine of fiscal nullity enunciated by the House of Lords in its decisions in Ramsay v Revenue Commissioners and Furniss v Dawson . The Irish GAAR is modelled on the Canadian GAAR and contains similar, although not identical, provisions. In fact the differences between the Canadian and Irish provisions, and in particular, the differences in statutory interpretation, were specifically highlighted in both the majority and dissenting judgments in the O'Flynn case.
Facts of the O'Flynn case
The taxpayers in the O'Flynn case sought to avail of the export sales relief, since defunct in Ireland, whereby profits earned from qualifying exports would be exempt from corporation tax. Simplified greatly, the taxpayer developed a scheme – which involved over 40 steps – whereby a construction company, lacking a background in export sales, paid a tax free dividend out of its distributable reserves by availing of bought-in export sales relief.
The nub of the case was whether the transaction fell within an exception for transactions which were:
"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".
In short, was the use of the export sales relief provisions by taxpayers not involved in export a misuse or abuse of the relief having regard to the purpose for which the relief was provided?
Decision of the court
The majority decision of the Supreme Court...