In September 2010, Matheson Ormsby Prentice responded to the request by the Revenue Commissioners for submissions on the draft Mandatory Disclosure of Certain Transactions Regulations 2010 (the “Draft Regulations”), to be issued under Chapter 3 of Part 33 of the Taxes Consolidation Act 1997 (“TCA”). We also commented on the draft guidelines on the mandatory disclosure regime (the “Draft Guidelines”).
The following is a summary of the points which we made in our submission.
Constitutionality of Legislation
Chapter 3 of Part 33 TCA gives wide latitude to the Revenue Commissioners to issue secondary legislation. Indeed, unless and until the Revenue Commissioners issue secondary legislation, there is effectively no requirement for mandatory disclosure.
The authority to issue delegated legislation is permissible only where the legislation clearly sets out the principles and policies, and leaves the application of such principles to be decided by the executive. The width and breadth of the authority of the Revenue Commissioners to issue regulations would appear to offend Article 15.2.1 of the Constitution, which states that: “The sole and exclusive power of making laws for the State is hereby vested in the Oireachtas: no other legislative authority has power to make laws for the State”. The ability of the Revenue Commissioners to specify both the tax advantage and the transaction in which such tax advantage arises, appears to go beyond application and sets policy.
Lack of Certainty
Certainty and convenience are of crucial importance in the enactment and application of tax legislation. Recent international experience has shown that certainty is a powerful driver in determining where businesses locate, and an important influence in foreign direct investment. The impact of uncertainty in the Irish tax system is magnified through the application of FIN 48 to entities preparing accounts in accordance with US GAAP.
There is considerable uncertainty as to what types of transactions would be caught by the obligation to disclose. The classes of transactions specified in the Draft Regulations are really without meaningful limitation. It is unclear whether straightforward corporate transactions, such as group reorganisations, joint ventures or return of value to shareholders, and run-of-the-mill financing techniques, such as leasing and securitisation, would fall foul of the mandatory disclosure obligation.
We made certain recommendations which we felt would improve the certainty of the legislation, and thus make it easier for tax-compliant businesses to operate in Ireland.
Administrative Burden and Cost of Compliance with Draft Regulations
We noted the profusion of third party reporting requirements, listed the statutory provisions requiring third party reporting and noted that there is scope for rationalisation of these reporting requirements. For example, section 811 TCA (general anti-avoidance provision), section 811A TCA (protective notification) and section 955 TCA (expression of doubt) operate in the same sphere in which the Draft Regulations could be expected to apply. The costs of compliance with this legislation, both from the point of view of the taxpayer and the direct administrative cost for the tax authority, must be quantified.
Legal Professional Privilege (LPP)
LPP is a common law concept, recognised also under the European Convention on Human Rights. Solicitors are statutorily identified as officers of the court, and regulated accordingly.
Not all material passing between solicitor and client is subject to LPP. To summarise a complex area of law: there must be a communication between lawyer and client, not involving a third party; it must be made in the lawyer’s professional capacity i.e. involve legal (rather than investment or financial) advice. The factual background to a transaction is unlikely to be privileged; only the legal advice passing from the lawyer to client will be privileged.
In the context of the exemption from mandatory disclosure for LPP, the Draft Guidelines do not address the fundamental point about LPP. This is that LPP belongs to the client, rather than to the lawyer. Preserving the power of the lawyer to claim LPP, while failing to provide for the lawyer’s client to claim LPP, is a very ineffective defence of LPP.
We noted that this point is now accepted by the HM Revenue & Customs, operating under similar legislation in the United Kingdom.
Retrospective Nature of Draft Regulations
The Draft Regulations specify that the start date is 3 April 2010 i.e. the date of enactment of the Finance Act 2010.
Thus the mandatory disclosure regime is retrospective in effect. We noted that this raises issues of legal certainty and the constitutionality of a provision which affects vested rights. We submitted that the mandatory disclosure regime should operate as from the date its detailed provisions are published in the form of regulations.