1. Why was a new offshore provision introduced by this year’s Finance Bill?
Following revelations in the “Panama Papers” of major worldwide tax evasion in April 2016 (which included certain Irish Resident account holders), the Minister for Finance announced on budget day, 12 October 2016 that this year’s Finance Bill would tackle offshore tax evasion and restrict the opportunity for offshore defaulters to use the Revenue’s voluntary disclosure regime with effect from 1 May 2017. This measure will apply to all Irish taxes and to disclosures made from 1 May 2017.
2. What is the impact of the new offshore provision?
The new provision as passed by the government precludes an Irish taxpayer from availing of the possible benefits of a “qualifying disclosure” to Revenue (as set out below) where it relates directly or indirectly to undeclared or incorrectly declared income or assets outside Ireland:
The penalty for underpaid Irish tax will be substantially increased (potentially increased to 100% of any underpaid Irish tax). The increased penalty rate will apply not only to the offshore default but to any onshore default which is disclosed to Revenue at any time post 1 May 2017;
The taxpayer’s name and settlement details will be published by Revenue in the quarterly list of tax defaulters;
Moreover, a taxpayer will be unable to obtain an assurance that the matter will not be referred to the Direction of Public Prosecution (“DPP”) for investigation with a view to criminal prosecution.
3. Has the risk of prosecution for tax offences increased since the introduction of the new offshore provision?
Whilst the Minister for Finance announced on Budget Day following the introduction of a similar provision in the UK Finance Act this year, that a new strict liability criminal offence would be introduced to facilitate the prosecution of serious cases of offshore tax evasion, this has not materialised.
However, the absence of a new strict liability provision will have little effect in reality as, in practice where it is not possible to make a qualifying disclosure, it is then open to the Revenue Commissioners to refer the matter to the DPP in all cases. The Revenue criteria for the types of tax offences which are most likely to be prosecuted are set out in the Revenue Audit Code of Practice.
The Courts recommended sentencing guidelines for serious tax evasion indicate a custodial sentence of 3 or more years. This is a matter for the individual Judge but cognisance will be taken of the maximum potential sentence of 5 years on conviction on indictment and/or a fine of up to €126,970 (for each offence which is at the discretion of the Judge). The Court penalties on conviction are paid in addition to penalties to Revenue which relate to the amount of tax underpaid.
4. What does offshore mean in the context of the new provision?
It is critical to recognise that “offshore” in the context of the new provision is not limited to tax haven jurisdictions such as Jersey, Guernsey, Isle of Man, Cayman Islands etc. but applies to any undisclosed source of income or gains outside Ireland i.e where there is a failure to report non-Irish income or gains correctly by an Irish resident. The critical points being that offshore is any jurisdiction outside Ireland and the new provision can apply where the offshore matter is actually reported on the Irish tax return but is inaccurate.
5. What automatic new information will be provided to the Irish Revenue Commissioners in 2017 regarding Irish Residents by foreign Revenue authorities?
The introduction of this provision is intended to coincide with information which will be passed to Irish Revenue in relation to offshore income and gains under the EU Council Directive on mandatory automatic exchange of information which becomes effective after 1 January 2016 with the first exchanges of information by September 2017. 101 jurisdictions have committed to exchange information to date.
This new provision forms part of the OECD common reporting standard and is in addition to the Foreign Account Compliance Act and the EU Directive on administrative cooperation in the field of taxation which became effective on 1 January 2014.
Future initiatives include the establishment of compulsory registration of beneficial ownership of corporates and trusts. It is anticipated that this will be introduced during 2017 also.
It is clear that Revenue authorities will be receiving new and incisive material regarding Irish residents non-Irish assets whether held in the name of the Irish resident or not.
6. What steps are recommended to be taken before 1 May 2017?
There is a once off opportunity for Irish residents to make a qualifying disclosure in relation to offshore matters provided it is done before May 2017. Assuming the normal conditions for a qualifying disclosure are satisfied, this will mean that all of the advantages associated with this course of action are available. In particular, the level of penalties in respect of unpaid tax will be reduced to potentially 10% and the matter will not be referred to the DPP for investigation with a view to criminal prosecution by Revenue.
Many of those who might otherwise be unable to come forward may now do so with certainty regarding the outcome, assuming of course that a full and complete disclosure is made with payment or an arrangement to pay. Clearly, the Revenue authorities have approved this course of action and this implies that all parties are working towards an early finalisation of what normally can be a complex and protracted matter.
7. Are there any other advantages of making a qualifying disclosure before 1 May 2017?
One of the less obvious implications of the new offshore provision (in addition to potentially 100% penalties and risk of prosecution), is that it will prevent a qualifying disclosure being made in respect of ordinary Irish taxes where a non-reported offshore matter is part of the disclosure. In effect, treating an Irish tax underpayment in the same way as an offshore default with very limited exemptions.
8. Will there be exemptions from the new offshore provision?
It is not the intention at this point to introduce specific exemptions in the legislation but there may be guidelines published in 2017 which will form part of the Revenue Audit Code of Practice which would indicate the appropriate treatment in cases of genuine error. It is likely that if such a provision is introduced that it will only apply in cases where the amount of the error is nominal as opposed to being measured by reference to the taxpayer’s turnover.
9. What action is recommended for Irish tax payers both individual and corporate?
It is recommended that taxpayers who have business or investments outside Ireland review their offshore tax filings to ensure that Irish income tax or gains are properly reported so they have an opportunity to correct their tax affairs prior to 1 May 2017.