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DIRT Look-Back Audit Report

Report to the Committee of Public Accounts of Dáil Éireann under Section 904B (inserted by Section 68 of the Finance Act 2000) of the Taxes Consolidation Act 1997

Revenue Commissioners
31 October 2000


CONTENTS

  • Introduction
  • Results of Look-Back Audits
  • Audit Approach and Methodology
    • General
    • Sampling
    • Declaration Forms
    • The "primary facts" approach to absent or incomplete declarations
  • Interest and Penalties
    • Interest
    • Penalties
  • Appendix: Further Details of Audit Methodology

1. Introduction

1.1 Section 904B (inserted by Section 68 of the Finance Act 2000) of the Taxes Consolidation Act 1997 requires the Revenue Commissioners to make a report, before 1 November 2000, to the Committee of Public Accounts of Dáil Éireann on the results of the look-back audits of financial institutions recommended by the Committee in the First Report of the Parliamentary Inquiry into DIRT.

1.2 Section 904B also provides that the report may contain specified details in respect of each audit and such further particulars as the Revenue Commissioners consider fit.

1.3 This report is made to the Committee of Public Accounts in accordance with the aforementioned provisions.

1.4 Chapter 2 sets out the results of the audits for each of the financial institutions involved, fulfilling the statutory obligation under section 904B. The remainder of the report contains some supplementary material which may be of assistance to the Committee. Chapter 3 and the Appendix give an outline of the general audit approach and methodology, including the approach taken in the case of absent or incomplete declarations; and Chapter 4 sets out the interest and penalties regime which applied to the DIRT look-back audits.


2. Results of the Look-Back Audits

2.1  The purpose of the DIRT look-back audits was to examine the DIRT compliance of each of the 37 DIRT-remitting financial institutions (or "deposit-takers") for the 13 tax years 1986/87 to 1998/99 and to recover any DIRT underpaid together with interest and penalties.

2.2 The total amount of liabilities determined as a result of these look-back audits is £173,292,786, which has been paid in full.  This figure is made up of: tax £70,566,547; interest £99,658,239; and penalties £3,068,000.

2.3  The relevant details in respect of individual institutions are given in the Tables on pages 5 and 6.

2.4  All the audits have now been completed with the exception of two (those of IIB Bank Ltd and Guinness and Mahon (Ireland) Limited) where finality could not be reached because liability may depend on the outcome of wider investigations (into the Ansbacher Accounts).  Payments on account have been made by the two institutions concerned and are included in the figures reported above.

2.5  In the case of the completed audits, payment in full of the amounts arising in respect of tax, interest and penalties has been made to Revenue.

Table 1 - Results of DIRT Look-Back audits

 Deposit-Taker/Group

Tax

 Interest (note 1)

Penalties (note 2)

Total

ABN AMRO Bank N.V.

£8,338

£8,454

£30,000

£46,792

ACC Bank plc

£7,511,000

£9,958,500

£431,500

£17,901,000

*Allied Irish Banks Group

£34,579,432

£55,076,758

£388,000

£90,044,190

An Post - Post Office Savings Bank

£46,521

£65,345

£26,500

£138,366

*Anglo Irish Bank Group

£0

£0

£0

£0

Bank of America N.T. and S.A.

£0

£0

£0

£0

*Bank of Ireland Group

£12,746,882

£17,253,118

£500,000

£30,500,000

Bank of Scotland (Ireland) Ltd

£27,753

£42,536

£15,500

£85,789

Banque National de Paris S.A.

£0

£0

£0

£0

Barclays Bank plc

£925

£230

£6,500

£7,655

Chase Manhattan Bank Ireland plc

£0

£0

£0

£0

Citibank N.A.

£0

£0

£0

£0

EBS Building Society

£1,291,862

£1,329,818

£183,500

£2,805,180

First Active plc

£1,222,358

£1,314,115

£136,500

£2,672,973

GE Capital Woodchester Bank Ltd

£1,956,890

£2,410,281

£259,500

£4,626,671

*ICC Group

£103,265

£63,693

£30,000

£196,958

IIB Bank Ltd (note 3)

£13,230

£18,416

£2,500

£34,146

Irish Nationwide Building Society

£2,170,077

£1,977,423

£292,500

£4,440,000

*Irish Life and Permanent Group (note 4)

£3,714,797

£3,645,269

£233,000

£7,593,066

*National Irish Bank Group

£2,291,363

£2,774,137

£184,500

£5,250,000

Pfizer International Bank Europe

£0

£0

£0

£0

Scotiabank (Ireland) Ltd

£0

£0

£0

£0

TSB Bank

£1,200,691

£1,367,809

£181,500

£2,750,000

*Ulster Bank Group

£1,681,163

£2,352,337

£166,500

£4,200,000

Westdeutsche Landesbank (Ireland) plc

£0

£0

£0

£0

Totals

£70,566,547

£99,658,239

£3,068,000

 £173,292,786

* The seven Groups listed above comprise nineteen individual deposit-takers in total.  Table 2 contains details of the liabilities for the individual deposit-takers in each Group.  These liabilities have been included in the Group aggregates in Table 1 above. 

Note 1  Statutory interest, which was 15% p.a. up to March 1998 and 12% thereafter, was charged on DIRT arrears due.

Note 2  Civil penalties were charged on deposit-takers by reference to accounts individually identified by Revenue auditors as wrongly exempted from DIRT for 1994/95 and subsequent years.  This was in accordance with the relevant law (which imposes a six-year time limit on the principal civil penalty relevant to DIRT non-compliance) and with legal advice (that the penalty concerned - a £500 penalty for each failure to deduct DIRT from an interest payment - could not be charged by extrapolation from the samples of accounts examined).  The penalties set out above reflect the concentration on the years 1994/95 to 1998/99.

Note 3  This audit has not been completed and the amounts shown are payments on account.  Finality could not be reached because liabilities may depend on the outcome of wider investigations (into Ansbacher accounts).

Note 4  Please refer to Note 3 which also applies to the amounts in respect of Guinness and Mahon (Ireland) Ltd included in the figures for the Irish Life and Permanent Group.

Table 2: Details of Individual Results Included in Group Totals in Table 1

Deposit-Taker

Tax

Interest

Penalties

Total

Allied Irish Banks plc

£20,073,994

£35,091,968

£191,500

£55,357,462

AIB Finance Ltd

£14,505,438

£19,984,790

£196,500

£34,686,728

AIB Capital Markets plc

£0

£0

£0

£0

AIB Group

£34,579,432

£55,076,758

£388,000

£90,044,190

 

 

 

 

 

Anglo Irish Bank Corporation plc

£0

£0

£0

£0

Anglo Irish Corporate Bank Ltd

£0

£0

£0

£0

Ansbacher Bankers Ltd (note 1)

£0

£0

£0

£0

Anglo Irish Bank Group

£0

£0

£0

£0

 

 

 

 

 

Bank of Ireland Ltd

£10,011,655

£14,150,842

£275,500

£24,437,997

Irish Civil Service Building Society

£2,415,003

£2,630,820

£196,500

£5,242,323

Bank of Ireland Finance Company Ltd

£193,754

£305,070

£21,500

£520,324

Investment Bank of Ireland Ltd

£126,470

£166,386

£6,500

£299,356

Bank of Ireland Group

£12,746,882

£17,253,118

£500,000

£30,500,000

 

 

 

 

 

ICC Bank plc

£97,226

£62,100

£26,500

£185,826

ICC Investment Bank Ltd

£6,039

£1,593

£3,500

£11,132

ICC Group

£103,265

£63,693

£30,000

£196,958

 

 

 

 

 

Irish Life and Permanent plc

£3,683,088

£3,610,412

£206,500

£7,500,000

Guinness and Mahon (Ireland) Limited

£31,709

£34,857

£26,500

£93,066

Irish Life and Permanent Group

£3,714,797

£3,645,269

£233,000

£7,593,066

 

 

 

 

 

National Irish Bank Ltd

£1,671,341

£1,937,074

£141,500

£3,749,915

National Irish Investment Bank Ltd

£620,022

£837,063

£43,000

£1,500,085

National Irish Bank Group

£2,291,363

£2,774,137

£184,500

£5,250,000

 

 

 

 

 

Lombard & Ulster Banking Ltd

£916,858

£1,234,736

£78,000

£2,229,594

Ulster Bank Ltd

£764,305

£1,117,601

£88,500

£1,970,406

Ulster Bank Markets Ltd

£0

£0

£0

£0

Ulster Bank Group

£1,681,163

£2,352,337

£166,500

£4,200,000

Note 1  Ansbacher Bankers Ltd is an Irish-registered company separate from the Grand Cayman bank, Ansbacher Cayman Ltd.  Ansbacher Bankers Ltd is not associated with “Ansbacher accounts”.


3. Audit Approach and Methodology

General

3.1  The look-back audits were carried out by Revenue staff using the powers contained in Section 904A of the Taxes Consolidation Act 1997.   This legislation, which was enacted in the Finance Act 1999, gave Revenue the necessary power, for the first time, to undertake audits of this kind.  All the institutions cooperated with the audit programme.

 

3.2  The reliability of the DIRT returns made by deposit-takers in relation to accounts from which DIRT was deducted, including Special Savings Accounts, was reviewed as part of the audits.  The primary focus of the audits, however, was on accounts which were treated as DIRT-exempt - particularly on grounds of non-residence - and on whether interest payments in respect of those accounts were properly made without deduction of DIRT.

 

3.3  In accordance with the provisions of Section 904A of the Taxes Consolidation Act 1997, the audits were principally based on the examination of samples of accounts.  However, for the purposes of reviewing deposit-takers’ procedures for DIRT compliance, instructions to staff, internal audit reports and other sources of information were also examined and many interviews of the deposit-takers’ personnel were conducted.

Sampling

3.4  The samples of accounts examined were selected using statistical methods.   Further details of the sampling methodology and of the calculation of DIRT liability from the sample results are given in the Appendix.

 

Declaration Forms

3.5  Declarations by account holders are required for the purposes of entitlement to exemption from DIRT or to the reduced DIRT rate applicable to Special Savings Accounts.   From the start of the audit programme it was apparent that it would have been unreasonable, particularly in the context of look-back audits addressing a period of thirteen years back to 1986, to pursue DIRT in respect of deficiencies in the completion of forms where those deficiencies did not affect the key elements of a declaration. 

 

3.6  As experience was gathered in the first audits of the types of deficiencies concerned, guidelines relating to declaration deficiencies (which have already been supplied to the Committee of Public Accounts) were drawn up, in consultation with the auditors, to ensure consistency in this aspect of the DIRT audits.  These guidelines also stated that, as audits progressed, each deposit-taker would be given an opportunity to respond to and comment on the emerging results in its case, including the implications of all documentary deficiencies.

        

The “primary facts” approach to absent or incomplete             declarations

3.7  As the audit work advanced, the question of the appropriate response to the absence of declarations arose.  Representations on this issue were received from IFSC and domestic banks.  Specifically, the issue was whether auditors should seek DIRT in respect of accounts for which there were not acceptable declarations but in respect of which the auditors were satisfied that the non-resident status or other DIRT-exempt status claimed for the depositor was genuine.

 

3.8  Following examination of the issue, Revenue decided that a common-sense approach was warranted and that where

 

  • the deposit-taker was unable to provide acceptable declaration forms for accounts in the sample examined by Revenue auditors, but 
  • the auditors were satisfied that the non-resident status or other DIRT-exempt status claimed for the accounts was genuine, 

the Revenue auditors would not treat those genuine accounts as liable to DIRT.

 

3.9  This approach focused on the substance of the account being examined - the reality or facts underlying the treatment of the account by the deposit-taker as DIRT-exempt (non-resident, charity etc.). It was, accordingly, referred to as the "primary facts" approach to the absence of acceptable declarations. Revenue auditors decided whether an acceptable declaration had been provided by reference to the standards set in regard to documentary deficiencies.

 

3.10  In deciding whether an account, for which an acceptable declaration had not been provided, was genuinely belonging to a non-resident, auditors considered all records and information which the deposit-taker had been in possession of during the period in which it was paying interest on the account without deduction of DIRT. Auditors also considered the replies of the deposit-taker to queries the auditors had raised in relation to the records and information they had examined.  It was not sufficient for the deposit-taker to show that the auditors had failed to find an unexplained indication of bogusness for a non-resident account for which a declaration had not been provided.  Where the auditors disputed the authenticity of the non-resident account, the onus was on the deposit-taker to satisfy the auditors that the account was genuine.

 


 

4. Interest and Penalties

 

Interest

4.1  Statutory interest was charged on DIRT arrears paid by deposit-takers for each of the tax years 1986/87 to 1998/99 included in the look-back audit.  The interest was charged from the original “due dates” for payment of the DIRT by the deposit-takers. The monthly rate of interest for each month up to March 1998 is 1.25% which is an annual rate of 15%.  The monthly rate from March 1998 is 1% which is an annual rate of 12%.

 

4.2  By virtue of the 13-year look-back nature of the DIRT audits, in addition to the DIRT arrears paid, deposit-takers were required to make unusually large payments of interest.  Interest effectively trebled (299%) the payment due in respect of DIRT arrears for the year 1986/87.  For each £1m. DIRT arrears paid by a deposit-taker in respect of the period from 1986/87 to 1991/92 - the period during which non-compliance was worst in most institutions - £2.6m. was paid when interest is included.

 

Penalties

4.3  Civil penalties were charged on deposit-takers in accordance with the law and the legal advice available to Revenue.  

 

4.4  Under the law the penalty for failure to deduct DIRT is not calculated by reference to the amount of DIRT arrears found to be due; it is a fixed amount “per instance” for each failure to deduct tax from a payment made.  The penalty is payable at the rate of £500 for each instance of interest being incorrectly credited to an account or paid by the financial institution without DIRT being deducted.  The penalty was applied on the basis of not more than two interest payments or creditings per account per year.

 

4.5  There is a statutory prohibition on the commencement of court proceedings for recovery of this penalty more than six years after the year in which the non-compliance arose.  Because of this six-year time limit the penalties recovered as a result of the DIRT audits were largely confined to the years from 1994/95 to 1998/99.

 

4.6  There is a separate penalty of £500 for each year in which a negligently incorrect DIRT return is made.  The six-year time limit did not apply to this penalty.

 

4.7  As regards the “per instance” penalties (referred to in paragraphs 4.4 and 4.5) charged for failure to deduct DIRT, Senior Counsel advised that it was extremely unlikely that a court would impose penalties in the absence of direct evidence of each particular instance of the failure to deduct DIRT for which a penalty was sought:  estimation of penalties by means of extrapolation from the evidence of a sample of deposits to the entire deposit book of a deposit-taker would not suffice and would be rejected by the courts.  “Per instance” penalties were sought accordingly in respect of accounts which were included in the samples and which were individually identified as incorrectly treated as exempt from DIRT and auditors obtained the amount, in place of court proceedings for penalties, which Revenue had been advised would be the maximum imposed or confirmed by the courts.

 


 

Appendix: Further Details of Audit Methodology

 

1.  Sampling

As it was decided to compute liabilities by reference to samples at two different dates, the audit work programme, for all but the smallest deposit-takers, was divided into two phases relating to the two samples.

 

1.1  First Period (1986/87 to 1991/92)

The first phase of the examination of accounts treated as DIRT-exempt, which was aimed at calculating the DIRT underpaid, if any, for the years 1986/87 to 1991/92, was in most cases based on a sample of accounts of the deposit-taker taken at a date in 1989/90; in a few audits, a later date was taken.

 

All information available to the deposit-taker in respect of the sampled accounts was examined to enable proportions of misclassification and amounts of  DIRT underpaid to be calculated. The DIRT underpaid for each year in the period was then calculated as described at 2. below.

 

1.2  Second Period (1992/93 to 1998/99)

The second phase was aimed at calculating the DIRT underpaid, if any, for the period 1992/93 to 1998/99. In general, samples from 1995 accounts formed the basis for calculating liability for the period. Some  accounts which had already been examined in the first phase reappeared in samples for the second phase.  A final, relatively small, sample was also examined at a date in 1998/99.

 

1.3  Selection of Samples

Accounts were selected for examination from lists of DIRT-exempt accounts as follows:

 

The DIRT-exempt accounts at the sample dates were stratified by value, for example, accounts with balances over £100,000; accounts with balances between £50,000 and £100,000; and so on. The size of the sample of accounts selected from each stratum was decided in each audit by reference to the number of accounts in, and the value of, the stratum.

 

In general, all accounts in the highest stratum of DIRT-exempt accounts by value were examined - while samples of 50% in the next stratum, 25% in the next stratum again and lower percentages in the lower strata were also examined.  Where the sample was less than 100% of the stratum of accounts concerned, the selection was generated by computer software designed to ensure randomness.   In most audits the lowest strata were excluded from the sampling exercise because the total value of accounts in those strata was relatively insignificant.

 

Because of the low number of non-resident and other DIRT-exempt accounts in the smaller deposit-takers, a higher proportion of accounts was examined. In several of these deposit-takers, all DIRT-exempt accounts have been examined.

 

2. Calculations of DIRT liability based on samples

As a result of the examination of the accounts in each stratum of the sample, the proportion which the accounts incorrectly treated as DIRT-exempt bore to the total accounts in each stratum of the sample was established. The proportion of accounts incorrectly treated as DIRT-exempt for the entire sample was then calculated as an average of the proportions for each stratum of the sample, weighted in accordance with the stratum’s value.

 

These overall sample proportions were applied to the total non-resident deposit book for each tax year - with reference also to the average rate of deposit interest paid by the deposit-taker in the year and the rate of tax for the year - to calculate DIRT underpaid.1

 

3. Other Exemptions and Special Savings Accounts

Samples were taken of accounts which were treated as DIRT-exempt on the grounds that the beneficial owners were charities, companies or pension funds. Evidence of false claims to these grounds for exemption was not detected.

 

Samples were also taken of Special Savings Accounts. The examination carried out addressed     

 

  •  the existence and adequacy of the required declarations; and

  •  the adequacy of procedures to ensure that the conditions applicable to Special Savings Accounts were complied with, in particular

    • the conditions restricting withdrawal of funds2, and

    • the condition limiting the value of such accounts to £50,0003.

In general, deposit-takers had obtained adequately completed declarations in respect of their Special Savings Accounts.

 

Examination of statements in respect of the Special Savings Accounts sampled indicated that, in accordance with the first restriction4 on withdrawals from Special Savings Accounts, money was not being withdrawn within three months of the Accounts being opened.  Instructions and procedures throughout the deposit-takers examined set out the second restriction5 on withdrawals from Special Savings Accounts - that the terms of the Special Savings Account should require a minimum 30 days notice of withdrawal.  There was not evidence, arising from the audits, that the 30 days notice was being ignored.  However, deposit-takers are not required to maintain evidence that 30 days notice was being given and many deposit-takers could not provide such evidence.  The samples confirmed that deposit-takers’ systems were adequate to prevent breaches of the £50,000 limit on the value of each Special Savings Account.

 

4.  Consistency between Audits

The audit plan and work programme was essentially the same for all the DIRT audits.  Variations which arose reflected circumstances particular to the audits concerned.  Common approaches to issues arising, such as the approach to declaration deficiencies, also ensured consistency.

 

Two Senior Inspectors acted in joint management of the audits. They had regular contact with the audit teams and ensured that the audits were consistent in practice, while allowing for the particular circumstances of individual audits. Responses to problems shared by a number of audits were coordinated centrally.

 

Limited availability of complete listings of DIRT-exempt accounts from which a sample of accounts could be taken led to some variation in the dates of samples - particularly as respects the “first phase” of years audited.  In all cases, before a variation was allowed, auditors attempted to ensure, and are satisfied that, no advantage accrued to deposit-takers by virtue of a variation in sample date.

 

The audit approach to some deposit-takers was also adapted to take full account of information held by deposit-takers in respect of significant redesignations of non-resident accounts from DIRT-exempt to DIRT-paying status.


1 This process is usually referred to as “extrapolation”, i.e. a process of estimating a value for a population from the information derived from a sample. The information obtained from the sample of non-resident DIRT-exempt deposits was the proportion of accounts in the sample which were improperly designated as DIRT-exempt.  That proportion was then applied to the total interest paid (the product of the total non-resident deposit book and the average rate of deposit interest) in respect of non-resident DIRT-exempt accounts for each year relevant to the sample, generally

  • from 1986/87 to 1991/92 by reference to the first sample , and
  • from 1992/93 to 1998/99 by reference to the second sample.

The process was applied in accordance with the available information in each audit.

2 Section 264(1)(d) and (e) of the Taxes Consolidation Act 1997

3 Section 264(1)(i) TCA 1997 - £75,000 from 6 April 1999

4 Section 264(1)(d) TCA 1997

5 Section 264(1)(e) TCA 1997


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