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Revenue Commissioner Sets out 'Acceptable Limits' Of Tax Planning

by Jason Gorringe,, London

20 November 2003

In a speech delivered to the KPMG tax conference earlier this month, Irish Revenue Commissioner Michael O’Grady advocated a more conciliatory approach between tax professionals and the Revenue, although he warned that the government will continue to enact legislation in order to close tax loopholes.

“I should reassure you at the outset that I don’t intend to make a US or UK-style attack on Irish tax professionals for any lack of ethics in tax planning,” Mr O’Grady told the delegates.

He continued: “I noticed a recent article in the Financial Times written by Loughlin Hickey, KPMG’s head of tax in the UK in which he appealed for a collaborative approach between Revenue, tax practitioners and business in addressing tax avoidance issues, as he feared a deteriorating relationship between Revenue and business/tax professionals on this issue could ultimately damage corporate investment in the UK.”

The Revenue Commissioner went on to argue that in Ireland too, proactive tax avoidance ultimately achieves nothing and “is essentially about transferring resources to the avoider and away from everybody else.”

“Consider an extreme example: if all taxpayers were clients of KPMG and all bought the same scheme which reduced their tax bills by the same percentage, Charlie McCreevy would have no choice but to increase tax rates for everyone in order to maintain the same revenue. Therefore we’d all be back where we started, except that we’d in fact be worse off because tax planning is very expensive,” he observed.

Nevertheless, he recognised the role of tax professionals “in solving problems and opening doors for inward investment to this country”, a fact that he suggested has “not been fully appreciated.”

“This is tax planning of a highly constructive nature”, he added.

Still, Mr O’Grady warned that a continual search to find loopholes in tax legislation will eventually lead to tougher legislation being enacted by the government.

“In broad terms, what is objectionable to Revenue is an attitude that regards the tax code as fair game to be combed through for gaps or unanticipated effects,” he said.

“Essentially, under this general ‘attitude’, a piece of tax legislation is not seen as an authoritative expression of legitimate policy arrived at via the democratic process; rather it is seen as material to be worked on, regardless of the policy behind it."

“It seems to me that if tax avoidance continues to be a major problem, with significant Exchequer leakage, it is inevitable that there will be some ratcheting up of both legislative and administrative counter measures,” the Commissioner announced.

O’Grady speculated that possible counter measures that the Irish government could use may include automatic disclosure to Revenue by both promoters and users of certain defined categories of ‘tax shelter’, similar to the system used in the United States.

“The second possibility is civil penalties (and criminal sanctions) for taking ‘an abusive tax position’. This type of penalty is part of the New Zealand tax code and is aimed at preventing spurious claims of legality in the context of tax avoidance”, explained the Commissioner.

“We would, of course, like to see a change of attitude among tax advisers and their clients in relation to tax avoidance. We feel that if corporate and social responsibility means anything, it means working within the spirit as well as the letter of our tax laws”, concluded Mr O’Grady.

The full text of Michael O'Grady's tax planning speech can be found in the Tax News Resources Section.

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