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Thursday, 7 Dec 2006

Chapter 2.10 — Management of Tax Appeals.

Mr. F. Daly (Chairman of the Revenue Commissioners) called and examined.

Item No. 8 on our agenda concerns the 2005 Annual Report of the Comptroller and Auditor General and Appropriation Accounts: Vote 8 — Office of the Appeal Commissioners; Vote 9 — Office of the Revenue Commissioners; chapter 2.7 — international aspects of Revenue operations; chapter 2.8 — VAT and e-commerce; chapter 2.9 — assessment and collection of capital gains tax; and chapter 2.10 — the management of tax appeals.

Witnesses should be aware that they do not enjoy absolute privilege. The attention of members and witnesses is drawn to the fact that, as and from 2 August 1998, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act 1997 has granted certain rights to persons who are identified in the course of the committee's proceedings. These rights include: the right to give evidence; the right to produce or send documents to the committee; the right to appear before the committee either in person or through a representative; the right to make a written and oral submission; the right to request the committee to direct the attendance of witnesses and the production of documents; and the right to cross-examine witnesses. For the most part, these rights may only be exercised with the consent of the committee. Persons being invited before the committee are made aware of these rights. Any persons identified in the course of the proceedings who are not present may have to be made aware of these rights and provided with a transcript of the relevant part of the committee's proceedings if the committee considers it appropriate in the interests of justice.

Notwithstanding this provision in the legislation, I remind members of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the House or an official, either by name or in such a way as to make him or her identifiable. Members are also reminded of the provisions in Standing Order 156 that the committee shall also refrain from inquiring into the merits of a policy or policies of the Government, or a Minister of the Government, or the merits of the objectives of such policies.

I wish to welcome Mr. Frank Daly, chairman of the Revenue Commissioners, and Mr. John O'Callaghan, an appeal commissioner with the Office of the Appeal Commissioners. I call on Mr. Daly to introduce his officials.

Mr. Frank Daly

Thank you, Chairman. I am accompanied by Mr. Paddy Molloy, principal officer, head of our statistics branch, Mr. Liam Irwin, deputy secretary in our strategic planning division, Mr. Paddy O'Shaughnessy, principal officer, PAC/Comptroller and Auditor General liaison officer, and Mr. Tom Dowling, assistant principal officer and administrative budget manager. Our senior press officer, Dave Coleman, is in the public gallery.

Will the officials from the Department of Finance introduce themselves?

Mr. David Denny

I am from the organisation, management and training division of the Department of Finance.

Mr. Paddy Barry

I am from the budget and economic division of the Department of Finance.

I ask the Comptroller and Auditor General to introduce Votes 8 and 9 and chapters 2.7 to 2.10, inclusive. Chapters 2.7 to 2.10 read:

2.7 International Aspects of Revenue Operations

In an open economy and in an era of rapid and extensive movement of persons, goods, investments and services across national frontiers, the international aspects of Revenue's operations have extended far beyond the traditional customs area to become an important element of the administration of all taxes. While the customs area retains importance both in the prevention of criminal activities, and through a shared responsibility for the external frontier of the EU, Revenue also ensures that effective tax administration is maintained through the development of double taxation agreements, information exchange, the implementation and operation of relevant EU Directives, participation in EU Working Groups, and ensuring that Irish tax administration interests are reflected in the taxation policies of the EU, the OECD and the World Customs Organisation.

I examined some aspects of Revenue's operations that have a strong international element and, in particular, considered the extent to which Revenue is systematically and efficiently making full use of the provisions and arrangements in those areas in order to optimise the assessment and collection of taxes and duties. The areas reviewed were Double Taxation Agreements (DTAs), Mutual Assistance for Direct Taxes and for Recovery of Claims, and VAT Carousel Fraud.

Double Taxation Agreements

Section 826 of the Taxes Consolidation Act 1997 contains the legislation under which Ireland's DTAs or tax treaties are negotiated and subsequently ratified by the Irish Government. Generally, the agreements cover income tax, corporation tax and capital gains tax. Ireland has presently DTAs in force with 44 countries. New treaties with Argentina, Egypt, Kuwait, Malta, Morocco, Singapore, Tunisia, Turkey, Ukraine and Vietnam are under negotiation. Existing treaties with Cyprus, France, Italy and Korea are in the process of re-negotiation, and procedures to bring into force a new treaty with Chile and a protocol amending the existing treaty with Portugal were completed by Ireland in December 2005.

DTAs are predominately based on the OECD Model Tax Convention on Income and Capital and are drawn up to eliminate double taxation and to clarify situations where a taxpayer might find himself subject to taxation in more than one country. Generally, the agreements provide that the taxpayer will only be taxed in one country or, if both countries retain the right to tax, the taxpayer is entitled to a tax credit in the country of residence against tax paid in the other country. The agreements counter any harmful effects that double taxation would otherwise bring to the exchange of goods and services and the movement of capital. The agreements also provide for the exchange of information between the tax authorities to prevent tax avoidance or evasion.

Where a DTA does not exist with a particular country, there are unilateral provisions within the Irish Taxes Acts, which allow credit relief for tax paid in other jurisdictions in respect of certain types of income (e.g. dividends and interest). The Direct Taxes Interpretation and International Division (DTII) of Revenue is responsible for dealing with all enquiries in respect of DTA matters.

Although most of Ireland's DTAs are based on the OECD model, all of them contain non-standard provisions. Examples of non-standard provisions include

Ireland – Australia: contains rules for taxing gains on assets specifically referred to in the agreement.

Ireland – Estonia: the residence of a business entity is to be decided by mutual agreement between the countries. The terms of the agreement may not apply to such and entity if agreement cannot be reached.

Ireland – Switzerland: a partnership organised under the laws of Switzerland is deemed to be resident in Switzerland. A partnership organised under the laws of Ireland is not provided for.

Ireland – Spain: the country in which a company is resident has the right to tax gains on the disposal of its shares by a resident of the other country provided the shareholder had at least a 25% interest in the company in the year preceding disposal.

The Accounting Officer informed me that in the context of globalisation of business, it is Government policy to continue to expand Ireland's network of DTAs. The network has already been substantially expanded — from 23 DTAs in 1994 to the 44 that are now in force. Ireland has signed and completed the ratification process in respect of a 45th country and DTAs are being negotiated with ten other countries. In addition, first round negotiations will take place with a further three countries this autumn. Revenue has also recently re-negotiated its treaty with Portugal and is currently re-negotiating four other existing DTAs. He pointed out that it should, however, be understood that DTAs are a bilateral process.

In relation to regular review of DTAs, he stated that existing DTAs are kept under general review. Where identified problems arise, consideration is given to requesting negotiations with the other country to amend the treaty. Where weaknesses are identified in one treaty, others which contain similar provisions are reviewed also. He pointed out that this is a rolling process. Portugal is an example of a case where Ireland proposed amending the treaty to avoid the non-taxation of capital gains. Another is the UK treaty which was amended by a protocol in 1998 to reflect various domestic law changes.

The Accounting Officer pointed out that each country, including Ireland, adapts the OECD model to its own domestic laws and policies and that the provisions that are ultimately included come about through a process of negotiation. All of Ireland's DTAs depart to varying degrees from the OECD model but it should be borne in mind that the OECD model is only that – a model – and that there is also a UN model tax convention. All of the examples of non-standard provisions illustrate the point that departures from the models reflect the domestic tax laws and policies of the countries concerned. Ireland proposes several departures from the OECD model in tax treaty negotiations. For example, it is Revenue policy to seek an exemption from source taxation of aircraft leasing income because of the large aircraft leasing industry in Ireland and a zero rate of withholding tax on interest payments, because of the open nature of Ireland's economy and the location of international banking and treasury businesses in Ireland. He stated that the agreement with Switzerland contains the provision regarding partnerships because Switzerland, unlike Ireland, treats a partnership as a separate entity from the partners. The definition of partnership was, therefore, included to protect Switzerland but does not in any way undermine the Irish tax position. The language in the capital gains article of the Spanish agreement reflects the UN model tax convention which is the model the Spanish use.

Tax Information Exchange Agreements

In 2000 the OECD called on countries with tax haven characteristics to cooperate with OECD work in combating tax evasion by exchanging information with tax authorities in OECD countries based on a model Tax Information Exchange Agreement (TIEA). Revenue is currently negotiating TIEAs with the Isle of Man, Jersey, Guernsey, the Cayman Islands, and the British Virgin Islands. If these negotiations are successful the agreements will provide for the exchange of bank information on request, as well as information on the beneficial ownership of companies, partnerships and trusts. The Accounting Officer informed me that consideration would be given to agreeing TIEAs with other jurisdictions in the light of experience with the current negotiations.

Mutual Assistance – Direct Taxes

DTII is responsible for the exchange of information between Revenue Authorities under the provisions of Double Taxation Agreements and also under the EU Directive 77/799/EEC as amended, which provides for mutual assistance (exchange of information) in relation to direct taxation. Exchange of information requests to Revenue relate to issues such as

Is the individual/company resident in Ireland for tax purposes?

What taxes are they registered for?

What tax have they paid?

Do they own any property in Ireland?

How many employees does a company have?

Who are the directors and shareholders of a company?

Contract verification

Bank information.

Details of requests are logged on to a database and DTII search Revenue's systems to obtain the required information. If the requested information is not readily available, the details are requested by DTII from the liaison officer in place in each District and the liaison officer provides the requested information to DTII for forwarding to the requesting country. Requests issued by Ireland are forwarded by various sections of Revenue through the liaison officers to DTII who forward the request to the other country. Details of the extent of the exchange of information in the years 2003 to 2005 are set out in Table 11.

Table 11 Direct Taxes Requests for Information 2003 – 2005


Requests Received

Requests Issued


Completed In Year

Cases Open


Completed In Year

Cases Open



























Information is also exchanged automatically and spontaneously between countries. Spontaneous exchanges occur where the tax authorities of one country believe that they have information that would be of assistance to another country. Certain routine information is exchanged automatically between countries e.g. information relating to taxpayers with addresses in another country who receive a refund of Irish withholding tax (e.g. professional services withholding tax, relevant contracts tax and dividend withholding tax). The level of automatic and spontaneous exchanges of information in relation to Direct Taxes in the years 2003 to 2005 are set out inTable 12.

Table 12 Number of Automatic and Spontaneous Exchanges 2003 – 2005




























I asked the Accounting Officer whether he considered that the volume of automatic and spontaneous exchanges of information received by Revenue was consistent with the level of economic activity by Irish residents abroad as indicated by Revenue's recent major investigations, its examination of property abroad and general economic reporting. In response, the Accounting Officer stated that the level and extent of spontaneous reports received from treaty partners is dependent on the knowledge and skills of revenue officials in these jurisdictions and the extent to which those officials can readily identify Irish residents engaged in business transactions within these jurisdictions. In general, business transactions are conducted through corporate vehicles and it may not be apparent from the more complex transactions, where there may be a number of corporate vehicles, that the ultimate ownership lies with Irish residents. The recent Revenue investigation in relation to offshore accounts focussed on subsidiaries and affiliates of Irish financial institutions which had operations outside the State. In the main, these subsidiaries and affiliates had operations in what were traditional tax havens and exchanges of information would not have occurred with these jurisdictions. Revenue has recently initiated a series of meetings with a number of these jurisdictions with a view to concluding tax information exchange agreements. Overall, while the level of spontaneous reports received may not appear significant, the reports received are of a high quality and are considered a useful tool in ensuring compliance with the tax code. Revenue's experience, which is also the experience of other OECD members, in receiving automatic exchanges of information is that the accuracy and usefulness of the information received varies from country to country. Often, insufficient detail in the information provided prevents Revenue from using the information properly. The types of information held by revenue authorities in OECD countries varies and therefore, some information which would be of interest to Revenue may not be held by those countries. Other countries do not engage in automatic exchanges of information yet. Efforts are being made at OECD level to improve the exchange of information system. In May 2006 the OECD released a manual to provide practical assistance to officials dealing with exchange of information for tax purposes and to help member countries in designing or revising national manuals. Also, a sub-group of the OECD Working Party on Tax Avoidance and Evasion was set up to improve the technical and operational aspects of exchange of information for direct taxes. Two current topics being addressed are

Increasing the efficiency of exchange of information processes and to ensure exchange of information can be used more effectively in a compliance context

Monitoring the OECD standards for automatic exchange and identifying new types of information to be exchanged automatically.

He stated that Revenue is confident that the recommendations from the aforementioned work will enhance the effectiveness of the exchange of information system among OECD members.

The Accounting Officer informed me that Revenue in the past did not automatically exchange bank information with treaty partners and therefore, in relation to the bogus non-resident accounts, would not have provided such details to other jurisdictions. However, following the implementation of the EU Savings Directive, Revenue is now providing bank information to Ireland's EU treaty partners relating to interest arising in the State on or after 1 July 2005.

Mutual Assistance – Recovery of Claims

EU Directive 76/308/EEC, as amended, provides for the exchange of information in respect of, and the recovery of, claims made by other member states in respect of debts due to that State for VAT, income and capital taxes, import and export duties, etc. Directive 2002/94/EEC sets out the detailed rules for implementing the provisions of Directive 76/308/EEC.

These mutual assistance arrangements are designed to ensure

cross-border provision of any information that would be useful in the recovery of claims

instruments and decisions, including those of a judicial nature, that relate to a claim and/or its recovery are notified to addressees in other member states

member states that have exhausted the means of recovery of uncontested claims in their own state can recover the claim in other member states as appropriate.

Requests for Information Relating to Claim Recovery

Under Article 4 of the EU Directive, a member state may make a request for information relating to the recovery of its claim in another member state. When Revenue receives a request they are obliged by the Directive to provide any information, which would be useful to the applicant authority in the recovery of its claim. However, Revenue is not obliged to supply information

which it would not be able to obtain for the purpose of recovering similar debts, or

which would disclose any commercial, industrial or professional secrets, or

the disclosure of which would be liable to prejudice the security of or be contrary to the public policy of the state.

Requests for information are received in a central liaison office known as VIMA. The requesting state provides the name and address of the person to whom the information to be provided relates and the nature and amount of the claim in respect of which the request is made. The details are recorded on a database and an acknowledgement is forwarded to the other member state. The details of the request are forwarded to the relevant area of Revenue to obtain the information requested. When the requested information has been collected, the details are supplied to VIMA who forward the data to the requesting state's central liaison office office.

Requests for information to another Member State generally arise from a Revenue audit. The request is sent through VIMA to the other member state's central liaison office and all details are recorded on a database. When the reply is received the details are forwarded by VIMA to the relevant Revenue office.

The number of requests for information received and issued in relation to recovery of claims in each of the last three years is set out in Table 13.

Table 13 Requests for Information for Recovery 2003 – 2005
















I sought the observations of the Accounting Officer on the low level of requests for information for recovery issued by Revenue (as reflected in Table 13) and requests for information in relation to direct taxes (Table 11). In reply, the Accounting Officer stated that low awareness and the length of time involved are factors that may influence the number of requests. In order to increase awareness, Revenue issued exchange of information guidelines on its internal website in October 2004 and followed this up with a series of talks to staff in the Dublin area in late 2004 and early 2005. A number of liaison officers have also been appointed throughout the organisation to promote and facilitate the use of the exchange of information system. It is hoped that this will, over time, lead to greater use of exchange of information under treaties. Although the numbers have not increased significantly as yet, a marked improvement in the quality of the requests being drawn up at local level has been noted. Unnecessary and incomplete requests for information have been reduced and the requests are now more focused and targeted. The Accounting Officer recognises that more work needs to be done to promote the exchange of information and Revenue is examining ways to further heighten awareness internally. A high priority is being given by the OECD to assisting countries in obtaining timely and high quality information from treaty partners. One of the initiatives the OECD has taken is to set up a secure website for competent authority staff dealing with exchange of information matters containing, for example, country-specific information, current list of competent authorities, useful public website links in each country and a guide to sources of information in each country. The use of this website will help to reduce unnecessary or incomplete requests by making as much information as possible available in each country. Other areas being given priority include (i) the implementation of streamlined procedures and, where appropriate, standardising procedures and forms and (ii) the greater use of information technology. Ireland participates at OECD level on all of these issues and has contributed to the secure website.

Requests for Claim Recovery

Under Article 6 of the EU Directive, at the request of a member state, the requested state shall recover claims in accordance with the laws, regulations or administrative provisions applying to the recovery of similar claims arising in that member state.

The Collector General is the competent authority in Ireland for issuing requests for recovery to other member states, and to collect debts on behalf of other member states. Prior to May 2006, incoming requests were received via VIMA but the Collector General now receives the cases directly from the other member state.

Requests for Recovery Received by Revenue

Requests for recovery received are recorded on a database. A demand in writing is then issued to the taxpayer and the sum outstanding becomes due and payable seven days from the date of the issue of the demand. If the written demand is unsuccessful, the Collector General forwards the case to the Revenue sheriff for collection. If the debt remains uncollected, the Collector General can sue for the debt in the District or Circuit courts. Details of requests received for recovery of claims and of cases recovered in each of the last three years are set out in Table 14.

The apparent low success rate in recovery of claims is considered by the Collector General to be due to

increasing mobility of taxpayers within the EU states

lack of communication between the taxpayer and the requesting authority regarding his/her movements

lack of communication between the local tax office and the head office in the applicant country leading to incorrect claims for recovery.

Table 14 Requests Received for Recovery of Claims 2003 – 2005




% of Value Recovered





























Note: 182 cases were closed in the year 2005 at the request of the requesting authority following the intervention of the Collector-General. These cases consisted of uncollectible tax of €3,484,868.

In a sample of 16 cases examined, 8 cases had a time lag of at least one month between the Collector General receiving the request and the issuing of the demand letter to the taxpayer. A further sample of 15 cases, which were forwarded to the Revenue Sheriff in 2005, were examined. In five of these, no response had been received from the sheriff at the beginning of April 2006. In most other cases, the Collector General's office had to contact the Revenue Sheriff for a reply. Delays in waiting for the translation of foreign documents were also noted. Information on the number of open cases, number with sheriff, etc. is not readily available from the database and at present is extracted manually. Some requests received dating from 1999 remain open.

As I was concerned that the low recovery rate and the delays noted might indicate that Revenue was not fully meeting its obligations, I sought the views of the Accounting Officer. The Accounting Officer informed me that he is satisfied that Revenue is meeting its obligations in relation to requests to recover tax on behalf of other countries in a satisfactory manner. He noted that the two years (2003 and 2004) for which EU comparisons are available show that Revenue recovered 24% and 12%, respectively, of tax requested compared to an EU average of about 1% and 2%. Even with the fall in collection performance for 2005, Revenue will still probably be around the EU average for that year. The recovery rate in cases where Revenue is requested to recover tax on behalf of other countries needs to be viewed in the context of the nature of the claims involved

Cases have first of all been subject to all appropriate/available collection activity by the requesting State. The cases therefore have already resisted all attempts at collection.

Information in relation to addresses is not accurate in many cases.

Requests for recovery of estimated amounts are received and these often end up with no liability when returns are submitted.

Many of the taxpayers who are the subject of these claims tend to move regularly between States and while they may have resided in Ireland at some point, they may have moved elsewhere by the time the claim for recovery is received.

In relation to delays in cases where recovery is requested, the Accounting Officer said that the Collector General's Division, on receipt of claims carry out checks to ascertain as much information on the taxpayer as possible in order to make the best decision on the course of action to take in individual cases. In three of the eight cases Revenue had to revert to the applicant State for clarification prior to issuing the demand for payment. In general, demands are issued in the vast majority of cases within a month of receipt of the request. It may also have been the case that internal Revenue arrangements as regards claims recovery could have added to the timespan for processing of claims recovery requests. The fact that all claims and correspondence concerning claims are now transacted directly between the applicant authority and the Collector General's Division will help to minimise delays in processing cases.

Requests for Recovery Issued by Revenue

A report of non-resident cases with tax outstanding of greater than €20,000 is prepared quarterly. The April 2006 report contained 282 cases and total tax outstanding of €25m. The Debt Management Unit ensures that all avenues open to them have been exhausted in the attempt to collect the debt and appropriate cases are then forwarded via VIMA to the tax authority of the appropriate member state for enforcement.

Details of request for recovery sent to other member states in the years 2003 to 2005 are set out in Table 15. Issues noted from an examination of procedures and cases were

A relatively small number of requests are issued to other member states

Many of the cases forwarded by the Collector General's to other member states are based on estimated liabilities. In a sample of 10 cases from 2004, the total sum requested was €1,148,648 and €991,329 of this liability was based on estimated figures. As at April 2006, €100,345 of this estimated liability was collected, the estimated amounts have been reduced by €794,467, and €96,517 remains outstanding.

One of the cases reviewed from the quarterly report of outstanding taxes was in respect of an Australian resident who owed €247,208. This amount was written off. Revenue is unable to use the authorities in non-EU countries to collect outstanding amounts on their behalf. While provision was made in this regard in the OECD model tax convention, Revenue has obtained legal advice to the effect that the inclusion of the provision as set out in the model convention would not be constitutional in Ireland.

Table 15 Requests Issued for Recovery of Claims 2003 – 2005




% of Value Recovered





























An EU Commission Report in 2006 concluded that although there has been a significant increase in the use of mutual assistance for recovery of claims, a substantial gap remained between the amounts for which assistance is requested and the amount actually recovered. Aggregate figures for the EU show that percentage of recovery requests satisfied were 1.13% in 2003 and 1.82% in 2004.

The Accounting Officer informed me that the 282 non-resident cases on the April 2006 quarterly report included all foreign-based registrations and not just those in the EU. Subsequent examination of each case in the context of caseworking will determine the suitability of the case for any particular type of recovery action. For example, examination will show the availability of RCT offsets, subsequent payment of the debt, case having ceased trading prior to the period covered by an estimate of liability by Revenue. Examination of a sample of 50 of the larger liability cases in the listing of 282 indicated that less than 10 of these have the potential for referral for collection under mutual assistance. Cases are selected for caseworking intervention each month by reference to the returns due for the previous month or by reference to the quantum of the tax debt. Priority attention is given to the cases with the largest debt or potential debt. Mutual assistance requests must be preceded by the deployment by Revenue of available collection avenues. In 2005, 349 non-resident cases were referred for solicitor enforcement and in 2004, 372 cases were so referred. In the final analysis, a decision on whether to make a mutual assistance request is made on a case by case basis and will depend on the size of the debt, an assessment of the reliability of available information about address etc. in the foreign jurisdiction and an assessment of the likelihood of success.

In relation to the high level of estimated liabilities included in the sample of cases examined, the Accounting Officer stated that the tax collection system is structured around ensuring, to the greatest extent possible, that where a taxpayer fails to file a return, Revenue makes an estimate of the liability using the best information at its disposal, and undertakes appropriate collection measures to effect recovery. Of their nature, therefore, non-compliant cases will in many instances display an element of estimated liability. Frequently cases respond to the issue of estimates by filing returns and making payment. He said that it is worth noting that of the 10 sample cases examined, one case accounted for 45% of the total amount referred for recovery and 52% of the total estimated amount referred thereby skewing the sample to a very significant extent. It was eventually established that this case never traded and the case was cancelled with estimates discharged on receipt of "Nil" returns. There is much greater difficulty with foreign cases in establishing whether the entity is currently trading, as no local knowledge or sheriff information is available (a feature in resident cases).

The Accounting Officer informed me that Revenue was aware of the likelihood of a constitutional difficulty with the "assistance in collection of taxes" article of the OECD model. The 2002 update to the OECD model added this new optional article, and prior to finalisation of the model, Revenue sought legal advice from the Attorney General. The Attorney General raised concerns about the removal of the jurisdiction of the Irish courts in relation to examining the substance of the foreign tax claim. A footnote to the article is included in the model, partly in response to comments Revenue made, to the effect that in some countries, national law, policy or administrative considerations may not allow or justify the type of assistance envisaged under the article or may require that this type of assistance be restricted, e.g. to countries that have similar tax systems or tax administrations or as to the taxes covered, and for that reason, the article should only be included where each State can agree to provide assistance in the collection of taxes levied by the other State. Given the constitutional difficulty, Revenue has not sought to include the article in its treaties. Other OECD countries also do not include the new Article for similar reasons.

Missing Trader Intra-Community (Carousel) Fraud

Revenue's Carousel Fraud Team (CFT) is designated as a liaison department in accordance with Article 3 of European Council Regulation (EC) 1798/2003 for the purpose of the direct exchange of information in relation to suspected VAT fraud, particularly Missing Trader Intra-Community or Carousel fraud. Carousel fraud involves a trader carrying out business in high-value low-bulk goods (e.g. computer chips and mobile phones) with transactions in the business taking place over a short period. The transactions are often quite complex with the goods passing through a number of businesses within the EU in a circular fashion, and maybe even returning to the original trader, thereby giving rise to the term "carousel".

The CFT undertakes visits to selected businesses to discover potential missing traders and conduit traders, to investigate current trading for exchange of information purposes, to carry out pre-registration checks on high-risk cases and to be proactive in deterring evasion and fraud. The CFT uses VIMA to verify the validity of VAT numbers. The activities of CFT in 2005 included

Research into 211 cases, identifying cases suitable for field visits or referral to the appropriate region

Conducting 93 field visits in known risk sectors for the purpose of gathering intelligence and monitoring the activities of known conduit traders

The issue of 177 items of spontaneous information to other member States under Mutual Assistance and receiving 95 requests for assistance. The exchange of information in the years 2003 to 2005 is set out in Table 16.

The UK Revenue and Customs compiles estimates of the VAT lost from fraud, avoidance and other non-compliance i.e. the VAT gap. The estimated level of attempted carousel fraud in 2004-05 was put at between stg£1.12 billion and stg£1.9 billion out of a total estimated VAT loss of stg£11.3 billion. Equivalent figures for Germany were €2.1 billion lost to carousel fraud out of a total loss of €17 billion. A similar exercise is not carried out in Ireland. While carrying out such estimates is inherently difficult and a relatively untested area, an assessment of possible losses allows the risks to be assessed, and strategies developed to tackle those risks.

Companies can register in Ireland solely as conduit traders that acquire goods from other member states at the zero VAT rate and supplying them on, also VAT-free, to an intending missing trader in another member state. The action open to Revenue in these cases is to cancel the VAT registration. There is an ongoing risk that the trader will set up under a different name and obtain a new VAT registration number.

The largest case of outstanding taxes written off by Revenue in 2004 (€5.58m) was in respect of a liability arising as a result of a carousel fraud. Revenue received information under mutual assistance arrangements in relation to the supply of computer components to an Irish company. Following an initial Revenue meeting with the company, the company went into liquidation. A Section 23 estimate was raised but the debt was subsequently written off. The Criminal Assets Bureau (CAB) also carries out investigations in relation to carousel fraud cases. A CAB settlement of €3m in respect of a liability arising from a carousel fraud was noted in media reports in 2006.

Table 16 Carousel Fraud Team — Exchanges of Information 2003 – 2005


Requests Received

Requests Issued

Spontaneous Exchanges Issued


Cases Open


Cases Open

























In response to my enquiries as to whether he felt that an estimate of VAT losses would assist Revenue in combating fraud including carousel fraud, the Accounting Officer stated that VAT is the single largest yielding tax and the measures taken by Revenue to safeguard this yield reflect its importance to the Exchequer. The focus is on preventing VAT losses in the first place and responding strongly where prevention does not work. The measures employed by Revenue include audit, sectoral projects, regional special compliance units and a specialist VAT anti-avoidance unit, as well the Carousel Fraud Team. He has no doubt that the targeted deployment of resources in support of these measures represents their most efficient and effective use.

While it may be the case that an accurate estimate of VAT losses could be informative, it is also his view that there would be little point in producing an estimate, that would at best be unreliable and at worst misleading, just for the sake of having one. He concurs with the view that this is a relatively untested area and an inherently difficult one for making estimates.

The Accounting Officer informed me that the issue of carousel fraud was viewed seriously by Revenue and this was evidenced by the existence of the Carousel Fraud Team. He informed me that between 2003 and 2005, 21 conduit traders' VAT numbers were cancelled by Revenue. In relation to taking action against those involved in the case of carousel fraud where €5.8m was written off, he said that the company principals, both foreign nationals, were not resident in the State. One of the directors was known to have an address in Liberia, the other director was believed to be in Antwerp but their exact whereabouts were unknown. The question of pursuing the principals was considered and the decision, based on all of the known facts and the perceived costs of doing so, was that a recovery was unlikely to be effected. Revenue could, and would, recommence activity in this case should circumstances change to an extent that successful prosecution/collection of the debt becomes a possibility. He said that while it is somewhat reassuring that the write off case came to light as far back as 2000 and in the intervening years no further VAT losses have been identified, Revenue has no intention of lessening its focus on carousel fraud. Revenue's success in this area is likely to be due to a number of factors, including the pro-active nature of the Carousel Fraud Team's activities and improved and enhanced exchange of information. Active participation in the Missing Trader Intra-Community international networks, including European Carousel Network, keeps Revenue abreast of current developments and threats in this sphere. He understands that the reported €3m CAB settlement does not involve the recovery of VAT defrauded in the State.

2.8 VAT and e-Commerce


VAT is an indirect tax on consumer spending. Traders registered for VAT collect the tax on behalf of the Revenue Commissioners on the supply of goods and services to their customers. Each registered trader in the chain of supply charges VAT on their sales and is entitled to deduct from this the amount of VAT charged to them on their purchases. Therefore, the tax is charged on the value added at each stage of the production and distribution cycle. The final consumer effectively pays the VAT as part of the purchase price. Traders are required to register with Revenue where their annual turnover exceeds €27,500 in the case of services and €55,000 in the case of goods. The legislation governing VAT is contained in the Value Added Tax Act, 1972, as amended. In 2005, the net amount of VAT collected by Revenue was over €12 billion.


Electronic commerce or ‘e-commerce' is generally understood to mean the buying and selling of goods and services over the internet. Goods and services may be supplied business-to-business or between a business and a consumer. Usually, payment is also made on-line, mainly by credit or debit card. The types of transaction involved in e-commerce are

Ordering of physical goods for delivery by traditional means

Ordering of services (e.g. airline flights) where the supplier provides the service in the traditional form

Ordering, and delivery of "virtual" or "digitised" goods and services over the internet (e.g. software, music, video).

OECD/EU Principles and Guidelines

The OECD Ministerial Conference in Ottawa in 1998 agreed that the principles applying to the taxation of traditional trading should also apply to e-commerce. In July 1998, the EU endorsed a number of guidelines drawn up by the EU Commission as a means of ensuring that the EU's VAT system would continue to function in the world of e-commerce. These guidelines are

No new taxes will be levied on e-commerce but existing taxes, particularly VAT, should be adapted

The on-line supply of digitised products will be treated as the supply of services

Services consumed in the EU should be taxed in the EU, regardless of their origin or means of supply. Services supplied by EU traders for consumption outside the EU are not to be subject to EU VAT, but VAT on related inputs would be deductible

The VAT system must be enforceable

Electronic invoicing should be allowed within the EU, subject to agreed rules

Electronic VAT declarations and payment should be possible.

Revenue Working Group on e-Commerce

In June 1999, an extensive report on Electronic Commerce and the Irish Tax System was prepared by an Electronic Commerce Working Group in Revenue. The report, which was published, identified the tax issues arising from the increased use of e-commerce and considered Revenue's likely responses. The report addressed the impact of e-commerce on all taxes and duties and considered how the internet might be used to improve tax administration. The report stated that VAT was the one tax where action would be required to protect the tax yield, and that e-commerce issues had an immediacy in the area of VAT as compared with other taxes.

The report also

outlined ‘the fundamental issues for the taxation of e-commerce' as

the identification of a transaction,

the identification of the parties to a transaction, (especially the taxpayer)

verification of the details of a transaction,

for VAT, the identification of the correct rules, rates, calculation and remittance to the correct taxing authority,

the generation of an audit trail;

indicated that, because of the technologies and the global nature of e-commerce, it may be necessary to adapt the procedures and techniques needed to effectively collect and administer these taxes',

considered that Revenue would need to constantly monitor developments in the service provision sector so as to identify new businesses and other internet value-added services.

The on-line supply of digitised goods and services (e-services) to private customers was identified as presenting the greatest challenge. The ‘place of supply' determined where VAT was chargeable and the general rule for services at that time was that tax was due in the place where the supplier was established (see Table 17) which dated from an era when services were generally not traded across borders. No VAT was chargeable by 3rd country (i.e. non-EU) businesses supplying e-services to EU consumers.

Table 17 Supply of e-Services — Business to Private Consumers (pre July 2003)

Supplier Established in

Customer Resident in

Place of Taxation





Other EU State



3rd Country

Zero Rated

Other EU State


Other EU State

3rd Country



Objectives and Scope of Audit

There has been a continuing growth in the level of e-commerce both within the country and across EU and international borders. The proper taxation of trade in that area presents particular difficulties to Revenue authorities generally due to aspects of e-commerce such as the absence of a physical business presence or even of the necessity for physical transfer of goods. The objectives of the audit were to examine Revenue's approach to addressing these issues and ensuring an adequate level of tax compliance in that segment of economic activity. Particular questions raised included

the extent of e-commerce in Ireland including the volume of e-commerce trade, number of participating businesses, VAT proceeds from e-commerce transactions, whether there has been any overall impact on the tax base

how Revenue activity has matched up with the challenges and requirements set out in the 1999 e-commerce Working Group Report

the impact of EU initiatives

whether current compliance procedures were considered adequate including

the extent of Revenue audits in this area, and

evidence of any increase in postal importations related to e-commerce activity.

The audit comprised a review of reports and papers, informal consultation with Revenue officials, and formal correspondence with the Accounting Officer. A transaction-based review of VAT collected that relates to e-commerce is not possible as VAT returns show a business's total VAT without differentiation between traditional trading and e-commerce.

The responses and comments of the Accounting Officer relating to particular points raised in this chapter have been added to the relevant sections of the chapter. His overall summary response on the Revenue approach to VAT and e-commerce, and on the risk that e-business poses to VAT revenues, has been included at the end of the chapter.

Extent of e-Commerce in Ireland

There are no exact figures for the level of e-commerce trading in Ireland. The Central Statistics Office's (CSO) Information Society and Telecommunications Report 2005 contains material on how information and communications technologies are being used in Ireland, in the home and in business. The report uses data from the CSO's Census of Industrial Population, Annual Services Inquiry and Quarterly National Household Survey. The results of the surveys show

In 2005, sales using e-commerce accounted for 27% of total manufacturing turnover. In the services sector, sales via e-commerce accounted for 16% of turnover. By applying these details to the value of turnover in the manufacturing sector (€108 billion) and in the services sector (€103 billion), this would indicate e-commerce sales of the order of €46 billion.

Over half of businesses have made some purchases using e-commerce. The percentage of total purchases made in this way has increased from 6% in 2004 to 10% in 2005. This remains small relative to the percentage of sales by e-commerce.

In the 12 months to June 2005, over 587,000 people had ordered goods or services over the internet for private use. The most common internet purchases by households are travel and holiday accommodation, films and music and tickets for events.

Irish enterprises are more likely to sell online than their EU counterparts.

In its budget submission 2006, ICT Ireland noted that the European spend on business-to-consumer electronic transactions would grow to €200 billion in 2006 and that Ireland would account for €400m of that.

In response to audit questions on Revenue's estimate of the volume of e-commerce trade, the impact on the tax base, expected VAT proceeds, and the number of unregistered e-commerce traders identified, the Accounting Officer pointed out that as there is no distinction for VAT purposes between e-commerce and other commerce, estimates of the type mentioned in the question are not required to be made. Based on the ICT estimate the VAT liability at final consumer level would be significantly below €80m for 2006. At a "macro" level the continued strength of the VAT yield year on year gives no reason to suspect any negative effect on the tax base.

He stated that while Revenue does not differentiate between businesses with or without e-commerce trading activities, Revenue's Special Compliance Units continue to monitor actively all aspects of hidden economy activity and register cases for taxes as appropriate. The units focus on identifying businesses not fully registered with Revenue, and have an intelligence gathering function involving a range of initiatives, e.g. surveillance, door-to-door enquiries, third-party information matching, newspapers, internet information and external databases.

Supply of e-Services from External Suppliers to EU Consumers

The VAT rule for supplies by non-EU businesses to EU consumers gave non-EU suppliers a competitive advantage over their EU counterparts. In addition, as suppliers of e-services do not need to be located near their customers, there was an increasing risk that the supply of these services from outside the EU would increase. To counteract this, EC Directive 2002/38/EC was introduced with effect from July 2003 and provided that where a non-EU business supplies e-services to a EU private consumer, the place of supply will be the place where the customer resides. The effect of this is that non- EU businesses are required to register in every EU country where they have private customers. An optional electronic services scheme (the scheme) was introduced at the same time allowing such non-EU businesses to register in one EU country and to account for and pay in that country the VAT on all its supplies to EU private customers. The rate of VAT is the rate in the country in which the customer resides. On-line returns are submitted providing a breakdown of supplies to customers in each EU country. The EU country of registration distributes the VAT collected to the other member states in accordance with the returns.

At present there are six overseas traders registered in Ireland under the scheme and one other trader has ceased registration. From the commencement of the scheme to the end of 2005, €17.7m was paid to Revenue by suppliers. Of this, €0.3m was in respect of VAT on supplies to Irish customers and the remaining €17.4m was in respect of supplies to customers in other member states and was paid over to those states by Revenue (with almost half going to the UK). In turn, a total of €1.4m was paid to Revenue by seven other member states under the scheme (77% of which was from the UK). The total Irish VAT received by Revenue under the scheme to the end of 2005 was therefore €1.7m. In total, there are over 900 overseas traders registered under the scheme throughout the EU. Under the terms of the scheme, traders are required to maintain proper records of all transactions and make those records available, on request, to Revenue by electronic means. No checks have been carried out to date by Revenue on those records. It is not clear what sanctions are available to Revenue against those who fail to comply with the terms of the scheme and whether interest and penalties can be imposed.

The Accounting Officer indicated that the six cases registered in Ireland were actively monitored for payments and returns compliance by the Collector General's Division. Further checks were being considered in consultation with Revenue's Computer Audit Services Branch. With regard to the "S special S scheme" introduced under the provisions of EU Council Directive 2002/38/EC, no unregistered businesses (all of which would be located outside the EU) trading in Ireland had been identified by Revenue. There was little doubt but that the "Sspecial Sscheme" has had a significant positive impact on VAT compliance by such businesses in the EU generally. While only six businesses are currently registered under the Scheme in Ireland, some 900 businesses have registered in the EU, and Ireland currently receives more VAT from other Member States than it receives net for itself from businesses registered under the Scheme here. On the question of whether the amount of €1.7m VAT collected under the special scheme is consistent with the level of supplies of e-services by non-EU businesses to Irish consumers, he said that while absolute measures were not available here, comparison was a useful proxy evaluation measure. In this regard the Irish net receipts did not seem unreasonable when compared to the net €59m received in the UK under the Scheme for the same period, given the sizes of the respective economies and having regard to the different broadband penetration rates.

Commission Report on e-Services Scheme for External Suppliers

The July 2003 directive that switched the ‘place of supply' rule for private customers was introduced on a temporary basis for three years. In May 2006, the EU Commission adopted a report to the Council on the operation of the Directive concluding that it had achieved its objectives and operated in a satisfactory manner, and proposed to extend its application beyond June 2006 to 2008. Among the issues noted in the Commission Report were

the market for downloads and on-line services has matured and become more sophisticated since the Directive was adopted and that sales of digitally distributed music are reported to have tripled during 2005.

in addition to the amounts collected under the scheme, VAT collected from businesses which opted to establish within the EU are likely to have been significant. The amount is difficult to quantify as businesses opt to set up in the EU for a variety of reasons and it is not possible to identify VAT receipts from particular services. While the rate of VAT in particular countries may have been a factor in the selection of the EU country in which to locate, some businesses appear to have chosen their place of establishment for other reasons.

there was little indication that a significant number of overseas businesses availed of the option of registering in every EU country where they have customers.

a further effect on VAT collected was that existing EU businesses no longer had any incentive to move their operations outside the EU to protect their competitive position.

tax administrations should handle the issue of EU consumers circumventing systems to avoid payment of VAT in the context of materiality and proportionality.

there were no problems reported by tax administrations in verifying the correctness of returns but this may be because the provisions relating to examining records have not been used on a systematic basis.

The EU Council further extended application of the Directive to December 2006.

EU Internal Supply of e-Services

While there is no gap in the VAT coverage of supplies from EU businesses to EU consumers, there is an issue as to which country receives the VAT. VAT is a consumption tax and the principle is that the VAT should be a charge in the place of consumption. As can be seen from Table 17, the place of taxation for supplies between EU countries is the country where the supplier is established. Following the introduction of the 2003 scheme, overseas businesses set up operations in the EU and chose to locate in countries with low VAT rates, and now pay VAT in that country. It was apparent that EU businesses also chose to locate in member states with low VAT rates in order to compete more effectively.

A Commission proposal in 2005 sought to address this issue by making such services taxable in the member state where the customer is established. This would mean that the influence of VAT rates on the place of supply would be neutral, as the service would be taxed at the rate applicable in the state of consumption. The Commission had already proposed a "one stop shop" mechanism to allow businesses use a single VAT number for all EU supplies and make VAT declarations to a single electronic portal from which they would be transmitted to the relevant member states. This would make it easier for businesses to meet their obligations when they become liable for VAT in a member state where they are not established. It is understood that discussions of these proposals is continuing at EU level.

Physical Goods Ordered over the Internet

Goods, including goods ordered over the internet, imported into Ireland from outside the EU are liable to VAT and Customs Duty at the point of importation. However, relief is available for consignments with a value not greater than €22 and gift consignments where the value of the gift does not exceed €45. Separate reliefs are available for travellers who import goods on return from abroad. Revenue staff are permanently based in mail centres to monitor mail imports from countries outside the EU in order to detect contraband and ensure that correct VAT and import duties are paid. Packages are examined on a sample basis to establish that the correct amount of VAT and duty has been paid. The addressee is required to pay all amounts due before the package is released. However, as customs legislation does not provide for the imposition of civil penalties, there would appear to be little deterrent to those who might order package sized goods from overseas suppliers who describe items incorrectly or underdeclare the value of goods to help their customers evade tax.

The low-value reliefs are provided for practical reasons to avoid the need to collect small amounts of tax from private consumers. However, the effect is that goods ordered over the internet from a non-EU supplier are more competitive than those purchased locally. The report of the 1999 Revenue Working Group noted that the small packages relief distorted competition and that this distortion would be exacerbated by the expected increase in the volume of small packages and it may, therefore, be necessary to re-evaluate the relief.

The Accounting Officer confirmed that he was, in general, satisfied with the existing procedures in this area. It is an area that was kept under regular review both from a staffing and procedures viewpoint. He said that the Revenue Internal Audit Branch was conducting an audit of postal importations this year and, obviously, the results of that audit would inform Revenue thinking on the systems and processes currently in place. He had no evidence to suggest that the absence of penalties in addition to seizure of goods was seen as aweakness in the existing enforcement system. However, he added that Article 22 of the revised Customs Code being discussed by the EU at the moment foresaw the inclusion of a range of administrative penalties in all Member States to deal with any breach of community customs legislation. Revenue had established an internal Working Group to prepare the ground in this area, and will be in a position to introduce whatever measures are required if and when the new code enters into force in late 2006 or in 2007.

Equally, he had no evidence to suggest an information gap with regard to public awareness of the possibility of seizure in misdeclaration cases. He considered that any person and, in particular, any commercial operator who knowingly misdeclared the value or nature of their consignment for tax or duty purposes would have an expectation of the goods being seized in the event of detection. Finally, he confirmed that no increase in the abuse of low value/small package relief had been noted relating to e-commerce activity.

e-Commerce and Tax Compliance

The 1999 Report noted that e-commerce presented challenges in terms of detecting those who tried to remain outside the tax system and those who join the system but do not disclose the full extent of their activity. The report made a number of suggestions with regard to how Revenue might identify e-commerce activity and the parties to such transactions. It considered that Revenue needed to actively look for indications as to whether existing businesses were involved in e-commerce. Websites may be set up offshore or offshore websites might front onshore businesses. Revenue needed to encourage voluntary disclosure of websites; it was proposed that a change in tax forms might ask about e-commerce and obtain details of e-commerce activities. Other possibilities included a requirement that tax numbers be displayed on websites, that stronger proofs of identity be required before domain names were assigned, and that Revenue would consult with other tax authorities in relation to their work in identifying e-commerce activities. The Report also referred to the technical expertise that would be required in order to access the detailed records of e-commerce transactions. That included staff resources and training devoted to computer audit, and access to a means of decrypting data.

Revenue's Computer Services Unit is attached to the Large Cases Division and currently has a complement of 10 staff. The Unit is available to provide training and to assist on audits in all Revenue Divisions.

In relation to the adequacy of current compliance procedures in regard to e-commerce, the Accounting Officer stated that Revenue's compliance activities focused on risk and in that regard he was satisfied as to their adequacy. Given the expected growth in e-commerce, Revenue fully appreciated the need to keep a critical eye on this area.

He pointed out that Revenue assessed major risk in the context of its Annual Risk Programme. Any risks included in this programme also identified clear courses of action to deal with the risk. Materiality and proportionality were relevant concepts in this regard. VAT on e-commerce (with a theoretical maximum tax at risk of significantly less than €80m) was not included in the current annual risk programme and that was indicative of the present assessment. Current assessment included the view that it was necessary to be very active on the international front and that was being done. It was an area, however, that was subject to ongoing review.

E-commerce activities were also monitored by the Special Compliance Units in the course of projects that focused on identifying cases in the hidden economy. The results of their findings to date had not highlighted any areas of major concern in relation to e-commerce transactions.

Furthermore Revenue assessed individual risk through its programme of audit screening by expert auditors, and more recently through the use of the new risk analysis tool, currently being rolled out and available in four pilot districts for over a year, and the sectoral projects initiated in the Regions. In addition, Revenue pursued the filing and payment risks through their returns and payments compliance programmes. In all programmes there was constant risk assessment. Revenue carried out over 14,000 audits in 2005. In an audit all aspects of a business (traditional and electronic) are reviewed as appropriate.

He also referred to the pending availability for examination by Revenue of internet tools from the EU Commission Project Group, to current consideration of further research in the area, and to the continuing expansion of e-audit capabilities through the increase in the use of its Computer Audit Services Branch, the provision of high quality training and the recruitment of a specialist e-Auditor. He noted that the Computer Audit Services Branch had assisted in 82 cases since its establishment almost three years ago.

Summary Response of the Accounting Officer

From the information available, Revenue considered that despite the growth in e-commerce, the overall risk to VAT revenue remained relatively low, which is a conclusion that has also been drawn by other tax authorities, most notably the UK. It was noted in the audit report that the ICT 2006 budget submission estimated that Ireland's share of the European spend on business-to-consumer (B2C) electronic transactions would grow to some €400m in 2006. B2C transactions, being the final transactions in the production and distribution chain, were generally regarded as posing the greatest risk of VAT loss; with business-to-business (B2B) transactions VAT was generally passed on through the chain without any great difficulty. Thus, applying the standard rate of VAT of 21% to the ICT estimated amount of B2C electronic transactions would indicate a maximum exposure of some €80m of VAT liability. But even that relatively small amount would have to be scaled down further, when one took into account the not unreasonable assumption that much of the e-commerce business with Irish consumers was by Irish-based businesses, which were already well policed by Revenue under its standard business programs, and that a significant amount of such business would not attract a VAT liability at all; for example, sales of books, most food, medicines and children's clothing are zero-rated for VAT purposes. Thus, in the context of an estimated VAT yield of some €14 billion for 2006, the risk to VAT revenues from e-commerce was seen as relatively minor.

The internet was a genuine global phenomenon and the idea that Revenue, or indeed any other single tax administration should, or could, unilaterally resolve taxation issues that might arise in relation to it would be to ignore this international context. The focus of developments in this area must be, therefore, in multilateral arenas i.e. EU and OECD. For example, in recognition of the need to be able to detect and identify internet trade, a number of EU Member States have developed, or are in the process of developing, electronic tools to facilitate the monitoring of internet trade, the analysis of its trends and the identification of high risk websites and internet supplies. To this end, in March 2006 the EU Commission decided to set up a project group to investigate the tools and techniques available to aid in the detection of traders operating on the Internet. The project group will draft a report for the EU's Fiscalis Committee. The mandate of the group will be to examine, describe and test the existing tools more thoroughly, and to report on the extent to which the tools meet the functionality of the most efficient Internet search tool, and especially how Member States can obtain the tools. Where appropriate, the project group will work on profiles and other relevant ways to facilitate the identification of high-risk traders. Revenue applied for membership of this group in order to identify and acquire the most appropriate tool for its needs and its application had recently been accepted.

The Accounting Officer stated that Revenue would continue to work with its EU and OECD partners with a view to introducing measures and procedures, which best protected the national Exchequer. In this regard, the audit report referred to the EU Commission proposal to make services taxable in the Member State where the customer is established. This is also a principle that has been agreed at OECD level. Certainly, it is envisaged that the Commission's proposals for a "One-Stop-Shop" should facilitate greater compliance by businesses with their VAT obligations generally. These proposals would allow businesses to comply with their VAT obligations in a number of Member States through use of a single web-based portal, and would allow tax authorities access to VAT, business and transactional information across all Member States. The EU Commission's Fiscalis 2013 programme would also provide opportunities for the EU to develop co-operation with third countries, which was required to tackle the increasing international dimension of tax fraud and evasion and which would include information exchange.

He pointed out that, while the June 1999 Report of the Revenue Working Group was quite farseeing for its time, in the context of its subject matter seven years was an extremely long time. For example, at the time the Report was being completed only 14% of Irish people were connected to the Internet, and Broadband was not even mentioned. Revenue was at present exploring the potential or indeed the need for further research in this area in the light of relevant international studies already completed or ongoing, with a view to ensuring that its understanding in this important area was not found wanting.

2.9 Assessment and Collection of Capital Gains Tax

Capital gains arising on the disposal of a wide range of assets are subject to Capital Gains Tax (CGT) at a standard rate of 20%, with a 40% rate applying to disposals of certain foreign life assurance and investment products. Capital gains accruing to companies are chargeable to Corporation Tax with the exception of development land and non-trading assets of non-resident companies situated in the State. The self-assessment system applies to CGT and taxpayers must make returns without being requested to do so by Revenue.

A purchaser of certain assets where the consideration for the disposal exceeds €500,000, is obliged to withhold CGT equal to 15% of the sales proceeds and pay it over to Revenue. Tax is not required to be withheld where the vendor produces a clearance certificate from Revenue. The certificate is issued on application provided the vendor is resident, or there is no CGT payable in respect of the disposal, or that CGT payable in respect of the disposal, and previous disposals, has been paid.

Table 18 CGT Net Receipts 2001 to 2005






CGT Net Receipts






The yield from CGT for the years 2001 to 2005 is shown in Table 18. CGT receipts have more than doubled during that period, and have exceeded the annual budget forecast by an average of more than 50% over the last three years. The yield for 2005 was €1,982m which surpassed the net yield of non-PAYE Income Tax of €1,961m.

Audit Objectives and Scope

While there is an additional risk posed by the one-off nature of transactions in CGT over the repeating nature of some other taxes, this is counter-balanced by the availability for compliance activity of information obtained from applications for clearance certificates and, in the case of certain assets, of data from Stamp Duty transactions. The objectives of my audit in March 2006 were

To review the extent of Revenue consideration of the implications of the growth of CGT yield

To test a sample of cases in order to establish the adequacy of the operation of ongoing compliance activity, particularly the follow-up of clearance certificates issued

To establish the extent to which Revenue was availing of the possibility of cross-checks with Stamp Duty data.

My staff reviewed compliance procedures and examined a sample of cases in one tax district in each of the Dublin and East/South East Regions, and a unit of Large Cases Division. In addition, the question of whether a CGT liability was recorded in a selection of cases sourced from Stamp Duty transactions was examined. Documents and reports were reviewed and, together with the test results, were discussed with Revenue officials.

Internal Revenue CGT Reports

The reports of two internal Revenue reviews of aspects of CGT were examined. The first, by Large Cases Division in 2004, investigated the extent to which taxpayers may be attempting to reduce their tax liabilities by re-categorising income as gains. More recently, in February 2006, the Office of the Collector General prepared an analysis of CGT yield for Revenue's Management Advisory Committee.

Large Cases Division Analysis of CGT Taxpayers

As the CGT rate of 20% is less than the higher rate of Income Tax (42%), taxpayers could reduce their tax liabilities by re-categorising income as gains. In 2004, the Large Cases Division carried out an analysis of the largest CGT payers in 2002 and concluded that there was no evidence to indicate that such a practice was widespread.

60 cases with CGT payments of more than €1m were examined and 10 of these were audited. There were no issues arising in 35 of the 60 cases, 8 cases were found to have computational errors or to require technical adjustments with additional CGT of €2.5m being paid, and 17 cases are still under enquiry. Information has been submitted and is being examined in four of the cases under enquiry and information is awaited on relation to the other 13. In one of the four cases where information has been submitted there appears to be possible income to gain conversion.

50 cases where payments of CGT of between €250,000 and €300,000 were made were also reviewed. 11 were audited with the following results

2 cases were resolved without further enquiry

2 cases had computational errors giving rise to additional payments of €369,424

2 cases are under appeal

1 case has been recommended for consideration under anti-avoidance legislation

4 are still under enquiry, including one case referred to the Valuation Office.

Three of the cases still under enquiry involve possible income to gain conversion. The two cases under appeal also involve income to gain conversion and the additional tax involved is €1.1m. The Appeal Commissioners have requested a written submission from Revenue in one of these cases and in the second case consideration is being given to appointing counsel to represent Revenue at appeal.

Collector General’s Analysis of CGT Yield

In February 2006, Revenue's Management Advisory Committee considered a report prepared by the Collector General on a statistical analysis of the CGT elements of the Form 11 Income Tax Returns for 2004 filed through the Revenue On-Line Service (ROS), and of the largest CGT payments in 2005. The main conclusions and recommendations of the Collector General's analysis were

The yield from CGT appears to be driven by gains from land sales and, to a lesser extent, equities and property. Continuing strong yield is therefore dependent on the buoyant property market and business profitability.

CGT is now a significant tax and should therefore attract an equivalent level of compliance attention.

Although the yield is rising each year, there is no accurate analysis of the levels of non-compliance. Notwithstanding the timing differences between Stamp Duty and CGT, the relationship between the two needs to be exploited to help bridge the compliance gap.

CGT paid is generally paid on time and only 3% of the 2005 receipts were paid late.

Further examination of possible shifting of income to gains may be worthwhile.

Revenue may need to assess the risk to the tax base arising from the movement of significant capital abroad.

The Management Advisory Committee noted the contents of the Collector General's analysis and agreed that CGT needed to attract a significant level of compliance attention. The 2006 business plans would focus on compliance and the Revenue Risk Project Group would consider the risks, including further analysis of the risk of conversion of income to gains.

Audit Findings

Follow-up of Clearance Certificates

Clearance certificates are issued by districts from a database that records details of the certificates. In the Dublin district, details of clearance certificates issued are also recorded on a control spreadsheet to facilitate monitoring and subsequent follow-up. However, at the commencement of the audit, there was no indication on the control spreadsheet of assessment activity in relation to 617 of the 706 clearance certificates issued by the district in the period November 2003 to December 2004, and which had not been exempted as Principal Private Residences (PPRs). Since March 2006, the District has been working through the cases and comparing the details to the CGT returns, referring cases to other districts and noting further cases as PPRs mainly from information on the return. The updated spreadsheet shows 148 cases not marked as PPRs but where the liability has not been assessed. These 148 cases are being enquired into by the District mainly through the issue of letters requesting the return, or computation, as appropriate.

The district in the East/South East Region did not maintain a control spreadsheet of clearance certificates issued. A reduced level of check applied in that samples of certificates issued were subsequently selected from the database by the relevant compliance and audit districts for follow-up. In the unit of Large Cases Division, an officer is assigned to deal with all the tax affairs of each case and so has a detailed knowledge of all activities in a particular case. For this reason, a control spreadsheet was not required in that area. Instead each officer's case records will note the issue of a clearance certificate.

The Accounting Officer informed me that current standing instructions required a record to be maintained of clearance certificates issued, and for that record to be periodically reviewed with a view to having assessments raised if necessary. He also said that work has commenced on incorporating clearance certificate information into the data warehouse which would facilitate its integration with Revenue's main systems. In relation to the 148 cases on a district spreadsheet, the Accounting Officer has informed me that 53 have since been identified as PPRs, assessments have been raised in 15, assessments were not required (covered by losses, etc) in 29, and 51 are still under enquiry. CGT has been paid in all cases assessed and surcharges for late payment have been imposed in four cases. He pointed out that from November 2006, the computer system will automatically generate a surcharge for every late return. All cases would be pursued to finality. All outstanding cases had received reminder letters, and estimated assessments would be input in the near future as appropriate.

Examination of Sample of Clearance Certificates

A number of issues were noted from an examination of a sample of 37 clearance certificates issued by the three districts, and from a review of the taxpayers' records and any subsequent returns. These included instances where

there was no return or CGT payment for the period to which the clearance certificate related

the consideration per the clearance certificate issued did not appear to be consistent with that shown on the subsequent return

there was no note on Revenue's main computerised taxpayer record to indicate that a clearance certificate had been issued.

The Accounting Officer stated that review of the cases with no returns or payments is ongoing. He pointed out that there were many legitimate reasons why the amounts on a clearance certificate and a return might not agree arising from the wide range of reliefs, allowances and exemptions, such as Principal Private Residence and Retirement Reliefs. However, four of these cases have been noted for audit (the audit has commenced in one). He stated that as the issue of a clearance certificate was noted on taxpayer files for information purposes only, procedures in that regard may vary somewhat from Region to Region. However, there would be a general requirement that they be entered as promptly as possible. The manual entering of these notes would become redundant when clearance information was captured in the data warehouse.

Cross-check with Stamp Duty Data

During my audit, Stamp Duty payment details were examined relating to 12 property transactions in late 2003 and 2004 where the consideration was greater than €500,000. These involved the sale of property by 16 taxpayers, two of which were companies. A number of issues were identified including

five cases where there was no return or CGT payment for the period.

three cases where there were possible inconsistencies between the recorded Stamp Duty details and the subsequent return.

The Accounting Officer informed me that the eight cases identified on the Stamp Duty cross check were subject to ongoing examination.

Wider Audit Concerns

In addition to inviting the views of the Accounting Officer on matters arising from the cases examined during my audit, I also sought his observations on wider audit concerns arising both from those cases and from a review of the two Revenue reports. In particular, I inquired whether

Revenue had completed its appraisal of the extent of the shifting of income to gains

he was satisfied that Revenue was making full use of the valuable information available as a result of the clearance certificates and Stamp Duty payment details

a formal assessment had been carried out by Revenue of the level of CGT non-compliance

he was satisfied that current procedures were adequate to ensure that all CGT was promptly assessed and collected.

Accounting Officer’s Response

Income to Gains Substitution

The Accounting Officer stated that in light of the exceptional growth in CGT yield and because there is a divergence in tax rates between income and capital gains, Revenue's management advisory committee considered it prudent to consider whether there was any evidence that some individuals were shifting income to gains (the substitution effect). In keeping with sound risk management, Revenue would continue to keep such a situation under regular review. The review by Large Cases Division in 2004 did not find evidence to support a serious concern about the prevalence of the substitution effect. However, as a result of the review, Section 817 of the Taxes Consolidation Act, 1997 was amended in the Finance Acts 2004 and 2005 to close off possible loopholes. The Accounting Officer said that the Collector General's analysis quoted figures that broadly supported the earlier Large Cases Division review of the substitution effect. These figures showed that of the 237 taxpayers that paid over €1m in CGT in 2005

Only 24 individuals had regular CGT liabilities in each of the previous three tax years,

Only five of the 24 individuals had a CGT liability greater than an Income Tax (schedule D and E) net liability in each of the three years.

One of the Collector General's conclusions i.e. that it may be worthwhile to carry out further examination to confirm there was no substitution effect, reflected the general Revenue view that it was a matter that should be kept under regular review. In support of this, the Management Advisory Committee approved a number of measures. Responsibility for the establishment of a Risk Project Group, had been assigned to the Operations Policy and Evaluation Division and work would commence in the second half of 2006. Because of timing factors it had been necessary to deal with work in this area in the context of the 2007 Business Plans. Besides the Large Cases Division review and the Collector General's paper, he also pointed to a separate exercise carried out in a Dublin Tax District in Spring 2005 on 60 of its largest CGT payers. All cases were screened and audits were carried out on 10 of them. That exercise found only one possible substitution effect case. That case was currently under enquiry with the Anti-Avoidance Unit.

Cross-check with Stamp Duty Data

The Accounting Officer informed me that there was a strong correlation between the information from the Stamp Duty payment data and clearance certificates, but that there were exceptions where there would not be a complete match between the two declarations e.g. if the value of the transaction was less than €500,000, or for builders disposing of newly constructed houses. Stamp Duty details were returned in relation to property transactions but not all property transactions were subject to CGT, e.g. residential and non-residential (Section 643) development land, which may be chargeable to income tax. Despite these and other exceptions and the timing difference between Stamp Duty and CGT, he is generally satisfied that Revenue was making the best use possible of the information available to it to maximise CGT compliance. He emphasised that use of the information could only be maximised when it was fully captured in the data warehouse and available for risk profiling of individual taxpayers. The Risk Evaluation, Analysis and Profiling (REAP) system included rules on CGT/stamp duty transactions. This system was being implemented nationally and would be further developed over the coming years. Already the system included risk related rules which were used to highlight individual cases. The rules checked cases with regard to the following

a mismatch between an asset purchase (either from Stamp Duty or CGT data) and declared income

an asset sale (either from Stamp Duty or CGT data)

CGT liabilities outstanding or paid late

a mismatch between a CGT payment and the non-inclusion of CGT information on a return (or the absence of a return), or

the payment of a CGT liability against declared income.

CGT Compliance

In relation to the level of CGT compliance, he said that there was ongoing assessment at central, regional and district level of general risk, including specific taxhead risk. For example, the Collector General's analysis concluded that CGT payment compliance was very high with late payments responsible for only 3% of yield in 2005. In addition, a number of Districts had carried out CGT compliance campaigns and the issues or risks highlighted had been disseminated within Revenue via the Capital Taxes Network. One of those compliance initiatives was an ongoing project in relation to the CGT risk on the disposal of second non-principal private residences by Irish residents, and the disposal in the State of properties by foreign residents. 113 cases were currently under examination, 68 of which were resident and 45 non-resident. CGT risk issues would, of course, continue to be screened as part of the normal ongoing compliance/audit programmes.

Adequacy of Current Compliance Procedures

The Accounting Officer stated that CGT was a self assessed tax and that taxpayers were obliged to make returns without being requested to do so by Revenue. Furthermore, CGT was also an event driven tax and Revenue's compliance approach must take those factors on board. He was satisfied generally that current procedures were adequate and adequately employed to ensure compliance with the CGT legislation. Procedures, mainly due to developments in the IT area, were undergoing significant change. Those developments included, for example, the electronic capture of information (either from ROS or paper filed returns), the wide availability of that information for officials via the Integrated Business Intelligence application on the intranet, the use of that information by REAP, and the inclusion of CGT assessing in the mainstream Integrated Taxation Services system. Finally, he mentioned the Operations Policy and Evaluation Division's plans to conduct a risk examination of CGT later this year; some initial scoping work had already taken place.

2.10 The Management of Tax Appeals


A taxpayer who is dissatisfied with a decision or assessment made by the Revenue Commissioners has a right to submit an appeal in writing through Revenue to the Appeal Commissioners. This must be done within a limited period that varies from tax to tax (e.g. VAT: 14 days from date of estimate or 21 days from date of assessment, Income Tax: 30 days from Revenue assessment). The appeal is lodged with the officer of the Revenue Commissioners, formerly known as an Inspector of Taxes, who had been handling the case.

A taxpayer who remains dissatisfied following the decision of the Appeal Commissioners may appeal to the Circuit Court for a complete re-hearing. With the exception of Capital Acquisition Tax, there is no corresponding provision for appeal by Revenue. A point of law arising on a decision of the Appeal Commissioners may be referred to the High Court (or Supreme Court if necessary) by way of case stated at the request of either party to the appeal. An overview of the tax appeals process in diagrammatical format is shown in Figure 1. The role of the Appeal Commissioners is represented by the two shaded boxes.

Paragraph 20 of my 1999 Annual Report noted that, as part of the ongoing general review of the systems, procedures and practices applied to the assessment and collection of revenue, I had sought information regarding the annual throughput of appeals cases and the overall summary of outcomes e.g. decided in favour of the taxpayer or Revenue, appealed to the Courts, and of the extent of cases on hand. The response indicated that each case was dealt with on an individual basis from scheduling to hearing. While details of issues of principle were published, the Appeal Commissioners were not a tribunal of record and were not required to, and did not, retain a written record of determinations, proceedings or documents submitted. The Appeal Commissioners or Revenue did not retain statistical or summary records. Revenue estimated that between 500 and 600 cases had been lodged with the Appeal Commissioners in 1999, and that approximately 250 cases were heard and decided annually. The remaining appeals were either withdrawn or settled prior to a hearing.

Tax Appeal Procedure

Lodgment of the Appeal with Revenue

Each appeal application is reviewed by Revenue to establish that the statutory conditions have been met. An appeal is not allowed in cases where the appeal is outsideof the relevant time limit, or where all tax due – other than the amount in dispute – has not been paid. Where it is decided that an appeal is not allowable, a notice of refusal is issued by Revenue to the taxpayer. The taxpayer may then appeal against this decision directly to the Appeal Commissioners within 15 days of the notice of refusal. A taxpayer can also appeal directly to the Appeal Commissioners at any stage if he feels that there is undue delay within Revenue.

When it is decided that an appeal is in order, a Revenue form (AH1) outlining the case from both sides is sent to the taxpayer. A taxpayer who is not satisfied with the Revenue outline may complete and return an independent statement on a second form. Revenue forwards the form(s) AH1 to the Appeal Commissioners, together with an estimate of the likely length of time required for the hearing, and a request for a hearing date. The case is listed by the Appeal Commissioners who notify Revenue of the date, venue and time. Revenue then notifies the taxpayer of the hearing details.

The Hearing of the Appeal by the Appeal Commissioners

The Appeal Commissioners, through Revenue, may request further submissions prior to the hearing, in order to speed up the process and to allow for a review of the case before the hearing begins. Where further information is supplied by the taxpayer prior to the hearing of a case, Revenue may review the case and come to a settlement with the taxpayer. The appeal is then withdrawn. The taxpayer may also withdraw the appeal at any time, for any reason.

Appeals are heard by an Appeal Commissioner at the Dublin headquarters of the Office, or in Circuit Court offices at various locations outside Dublin. Cases are heard in camera but taxpayers and Revenue may be professionally represented at the hearings. The decision on an appeal is normally announced on the day of the hearing, with both parties present. The finding is subsequently notified in writing to Revenue (on form AS1).

Office of the Appeal Commissioners

The Appeal Commissioners are appointed by the Minister for Finance under Section 850 of the Taxes Consolidation Act, 1997 to hear appeals by taxpayers against assessments or decisions of the Revenue Commissioners concerning taxes or duties. Decisions of the Appeal Commissioners are based on findings of fact determined from the evidence presented at the hearing, and by interpretation of tax law. Prior to 1978, appeals were heard by one or other of two Commissioners. Following an increase in workload, a third Commissioner was appointed in that year, but the number reverted to two in 1993 in the aftermath of the introduction of self-assessment. method of tax returns.

A separate vote for the funding of the Office of the Appeal Commissioners was established in 2003, with one Commissioner serving as Accounting Officer. Previously, the salaries and expenses of the Appeal Commissioners were paid through the Revenue Vote. The Commissioners are assisted by two support staff, who act as clerks to the Commissioners. The recruitment of a further staff member has been sanctioned by the Department of Finance, but an appointment has not been made. Total expenditure amounted to €344,000 (Est. €561,000) in 2003, €357,000 (Est. €571,000) in 2004, and €399,000 (Est. €607,000) in 2005.

However, outside of the listing and hearing of cases, the Office of the Appeal Commissioners relies on Revenue for the processing of financial transactions and other services such as personnel, training and information technology. The Accounting Officer receives a monthly report on expenditure from Revenue. The arrangements are formalised in a Service Level Agreement between both Offices signed in February 2005.

The Appeal Commissioners' web site is hosted and maintained by the Irish Taxation Institute. There are at present 31 determinations listed on it, 25 relating to 2000, 5 relating to 2003 and 1 case relating to 2005. It also contains a calendar of hearing dates and venues for the current term and a Freedom of Information Guide relating to the Appeal Commissioners. The Commissioners do not issue an Annual Report covering developments or activities, and have not prepared a statement of strategy or a business plan. Statistical or summary records of cases, throughput, outcomes and decisions are not maintained.

External Reviews of the Operation of the Appeal Commissioners

Arising from the Committee of Public Accounts Parliamentary Inquiry into DIRT, various parties prepared proposals in relation to the role and operation of the Appeal Commissioners, and the issue was also considered in the final report of the Committee of Public Accounts in April 2001. During the period 2000 to 2003, reports and submissions prepared by the following bodies and groups included proposals and recommendations for improving, reforming or extending the tax appeals process as operated by the Appeal Commissioners

D/Finance Steering Group on the Review of Revenue – August 2000

Submission of the Institute of Taxation to the PAC Inquiry – February 2001

Submission by Revenue to the PAC Inquiry – February 2001

Submission by the Appeal Commissioners to the PAC Inquiry – March 2001

PAC DIRT Inquiry Final Report – April 2001

Law Reform Commission Report on a Fiscal Prosecutor and a Revenue Court – July 2003.

Recommendations Made

Many of the proposals covered the broader aspects of the status and functions of the Appeal Commissioners ranging from appointment of commissioners, jurisdiction, statutory basis, legislative changes, to the extension of the Commissioners' role. However, other recommendations, which are listed in Figure 2, are of more direct interest to this review as they might be seen as indicators of perceived weaknesses in the current operations of the Office of the Appeal Commissioners, and as providing opportunities for improved performance in the area of tax appeals.

Figure 2 Recommendations relating to Current Operations and Performance of the Appeal Commissioners


D/Fin Revenue Review Group

Institute of Taxation

Revenue Commissioners

Appeal Commissioners

PAC DIRT Sub Committee

Law Reform Commission

Publication of Annual Report

Comment on areas of Tax Legislation through report

Provide Separate Vote and Accounting Officer

AO to conduct a review of adequacy of resources

Name of the Office does not indicate independence

Formal rules required due to delays in listing cases


Formal rules req’d due to delays issuing decisions


Publication of determinations in detail

Appointment of a third Appeal Commissioner


Review of IT requirements incl. Website

General review of administration systems

Review of staffing requirements

Establish a case management system in the Office

Objectively establish a realistic budget for the Office

Ending of Revenue responsibility for listing appeals

Issue concise written determination within 3 months

Denotes support for the recommendation by the body or group.

oRecommendation considered not to be necessary by the body or group

Objectives and Scope of the Audit

The statutory appeals process is an important safeguard for the taxpayer in his/her relationship with the tax system. It also provides a reasonableness check on the tax assessment process. My audit sought

to establish whether there had been any development of the systems, procedures and practices for the management of tax appeals in Revenue and in the Office of the Appeal Commissioners since my 1999 Report

to consider the extent to which the annual throughput of appeals cases and of case time elapsed in both Offices was indicative of the efficient resolution of appeal cases

to ascertain whether the outcomes of appeals were analysed and summarised to provide management information within Revenue, or published by the Appeal Commissioners for the benefit of taxpayers in general.

As can be seen from Figure 1, responsibility for the management of tax appeals is in effect shared by two independent Offices who each perform the distinct roles assigned by the Taxes Acts. Notwithstanding the distinct statutory roles, the audit addressed the appeals process as a continuous one that commences with the lodgment of the appeal and concludes with a determination by the Appeal Commissioner i.e. from the taxpayer viewpoint.

The audit findings are based on the review of procedures and documentation, the analysis of data from Revenue systems, the extraction from Revenue records of the time elapsed at each stage of the appeals process in respect of a sample of cases, on informal discussions with officials in Revenue and in the Office of the Appeal Commissioners, and on formal correspondence with the Accounting Officers of Revenue and the Office of the Appeal Commissioners.

The performance of a case-tracking exercise following a sample of appeal cases through Revenue and the Appeal Commissioners was an important part of the original plan for the examination. However, this could not be completed as the Accounting Officer of the Office of the Appeal Commissioners had a serious doubt as to whether it was within his jurisdiction to supply my Office with the information and documentation requested in relation to taxpayers. He has sought the opinion of the Attorney General in the matter, and that is still awaited. As a consequence, all data analysis and selection and sampling of cases were, of necessity, performed only on Revenue records and case files.

Tax Appeals Process within Revenue

Standard Practice

In general, normal and routine appeals are handled on an individual case basis by the officer with previous responsibility for the case. Revenue practice is that tax cases that have been appealed are sent on to an appeal hearing only after every reasonable effort has been made to settle the case by negotiation without conceding any important point of principle. Assistance in relation to presentation and argument of cases is available from the Revenue Legislation Services (RLS) Divisions to individual officers handling appeals. In order to comply with time limits, a case stated to a higher court is demanded by Revenue in all cases where the case officer is dissatisfied with the determination of the Appeal Commissioners or the Circuit Court on a point of law, and the issue is considered sufficiently important to warrant consideration of appealing the matter to the High Court. The demand may be withdrawn subsequently following consideration.

Referrals to Revenue Central Appeals Committee

Officers are required to refer particular appeal cases to an Appeals Committee within Revenue before the form AH1 is sent to the Appeal Commissioners. The Appeals Committee was formed to identify significant issues that might give rise to concern for the quality and standard of Revenue's approach to "argument appeals", as well as to oversee and co-ordinate such appeals. Specific responsibilities include

Implementing a consistent and effective approach to the selection and presentation of appeals for the higher courts

Deciding on whether engagement of counsel should be approved in particular cases

Ensuring a free flow of information throughout Revenue regarding cases taken to appeal to the higher courts

Ensuring appropriate technical input is received from the RLS divisions

Monitoring the timely passage of appeals through the appeal process.

Cases that are required to be sent to the Appeals Committee are

All cases in which an appeal to the higher courts is likely

Where an officer considers that counsel should be retained

Where the point at issue is seen as having wide precedent significance

Cases involving a significant amount of tax or duty

Cases involving avoidance and avoidance schemes

Where a case stated has been demanded and the Committee has not already considered the case.

Information on Progress of Appeals

The Appeals Committee circulates decisions taken e.g. how a case is to be handled, and whether counsel is to be retained, to the individual officers, to regional liaison officers, and to all Assistant Secretaries. In cases where the retention of counsel has been approved, details of the issues are placed on the Revenue intranet for general information of staff. Where the question at issue is already awaiting hearing by the higher courts, or has previously been dealt with in some other way, further similar cases will be returned to the region or division to await the outcome of the previous case or to be dealt with in accordance with the previous decision. The case officer provides the Committee with brief reports at each appeal stage of cases where counsel has been authorised. The Committee makes a six-monthly report to the Revenue Board on the progress of cases under appeal to the higher courts.

Role of District Manager

In addition to the specific roles of the case officer and the Appeals Committee, the manager of each tax district is expected to be closely involved in

The selection of cases for consideration by the Appeals Committee

Ensuring a consistently high standard in the preparation and presentation of the Revenue case at appeals

Monitoring progress at each subsequent stage in the appeal process.

Records of Appeal Cases

Revenue does not maintain a central or regional record of tax appeals giving basic control information e.g. a listing of all appeals received, the details and issues involved, current position, date sent to the Appeals Commissioners, and the outcome. As stated above, the Appeals Committee maintains a detailed record of current cases that are under the guidance of the Committee; other cases are a matter for the individual case officer. However, when an appeal is received, it is necessary to suspend all enforcement action for the amount in dispute. This is achieved by the input of a ‘Stop' instruction to the taxpayer's computer record – a ‘Stop16' for tax cases under appeal.

Selection and Analysis of Audit Sample

As a statistical or summary record of appeals cases, throughput, outcomes and decisions is not maintained by Revenue, it was necessary for the audit to use the movement in Stop 16s as an activity indicator in these areas. The quality of this information is likely to be good following Revenue action taken in response to unfavourable Revenue Internal Audit comments in 2003 on ‘uncleared' stops. During the course of audit, a database was obtained of cases where the "under appeal stop" was put on the case in each of the years 2000 to 2005. The database showed the dates on which the stop was inserted and later removed. There were 3,104 cases in total on the database. Table 19 shows the number of cases categorised by the year the stop was inserted and the period of time the stop was in place as at May 2006.

Table 19 Database of Cases with Appeal Stops

Period Stop in Place

Stop put on in year








0-6 mths








6-12 mths








1-2 yrs








2-3 yrs








3-5 yrs








Still in Place








Total Cases








While the Stop 16 data does not indicate the ongoing status of each case, an analysis of a random sample of 43 Stop 16 cases up to end 2005 gave the following results

six had been entered in error (one remained uncorrected from November 2005)

of the 37 valid appeal cases, only 11 cases had been sent to the Appeal Commissioners by Revenue

with the exception of one case of 79 months, the time elapsed between the date of receipt of those appeals in Revenue and the cases being sent to the Appeal Commissioners ranged from less than 1 to 27 months; the appeal in the case of 79 months was held up pending the outcome of other cases

Hearings had been listed in 8 of the cases; the time elapsed between the date of submission to the Appeal Commissioners and the hearing date ranged from 1 to 8 months.

Of the 8 cases, 3 were settled prior to hearing, 5 were heard, and determinations have been made in 3 of those. The time between hearing and determination in the three cases ranged from 3 to 15 months.

Cases not forwarded to the Appeal Commissioners had been held in Revenue for periods of 8 to 17 months.

Only three cases from the sample of 37 passed through the full appeals process. The overall elapsed time in those cases three cases was 83 months, 30 months and 18 months.

Audit Issues

The results of the audit sample suggest that the system for handling appeals is not as efficient as it could be, and I sought the views of the Accounting Officers of Revenue and of the Appeal Commissioners.

In particular, I also sought observations from Revenue on the lack of records, the management of appeals and control of Stop 16s. As regards the Appeal Commissioners, I asked for information on the throughput of cases, the administration of the Office and the level of implementation of the various recommendations set out in Figure 2.

Responses of the Accounting Officers

Length of Time Required in Appeals Cases

The Accounting Officer for the Office of the Revenue Commissioners indicated that the duration of any case within the Appeal Commissioners was not a matter for his Office. He noted that the findings in respect of elapsed time in Revenue did show a large variation between individual cases which tended to reinforce his view that it was the nature of the case that determined the length of time to have it submitted to the Appeal Commissioners, rather than any general delay in the procedures for dealing with it in Revenue. It had to be borne in mind that finalising a case for submission to the Appeal Commissioners was not just a matter for Revenue, the taxpayer was also centrally involved both in providing information and in agreeing the AH1. Taxpayers could at any stage appeal directly to the Appeal Commissioners if they felt that there were undue delays within Revenue. However, complaints in relation to delays were very rare.

Since the introduction of self-assessment, all appeals against assessments were effectively ‘argument' appeals. The points at issue could range from a disagreement between Revenue and the taxpayer as to the levels of income disclosed in a return to a difference on the interpretation of a statute. In many cases, estimated assessments were raised while an audit was ongoing, usually in the absence of progress on the audit or where a fundamental difference appears that is unlikely to be resolved by agreement. The raising of an assessment may prompt further negotiations or submission of outstanding material. By their nature, such cases were difficult and took time to bring to a stage where they were ready for submission to the Appeal Commissioners. He also indicated that the change in pattern for 2005 cases whereby the 896 cases received was twice the previous annual average and the proportion of cases resolved within 6 months had fallen from 45% to 26% appeared to be related to two large groups of cases (260 and 290 cases) that had appealed on the same grounds.

The Appeal Commissioners indicated that they were unable to comment on specific cases pending the receipt of specific advices in that regard from the Office of the Attorney General.

Elapsed Case Time within Revenue

Revenue did not see its role in the appeals process as a controlling one but rather, from the Revenue perspective, as a facilitatory role. That view was supported by the fact that taxpayers could appeal directly to the Appeal Commissioners at any stage if they felt that there were undue delays in Revenue. The role was also a pragmatic one in that many appeal cases were settled between Revenue and the taxpayer without recourse to the Appeal Commissioners.

The cases were dealt with by Revenue in accordance with the relevant legislation. Revenue has studied the recommendations of the Law Reform Commission Report on a Fiscal Prosecutor and a Revenue Court with a view to furnishing its observations to the Department of Finance. In the context of the overall implementation of the package of recommendations, Revenue would have no great difficulty with them insofar as they relate to Revenue. Specifically, it would have no difficulty with the recommendation regarding ending Revenue responsibility in the listing of appeals. However, the Accounting Officer pointed out that this was not primarily a matter for Revenue.

The Appeal Commissioners stated that informal discussions had been held with the Institute of Taxation and with Revenue concerning the suggestion that appeals should be addressed directly to the Appeal Commissioners rather than through Revenue. Those discussions would continue but had not yet reached a stage where a recommendation on the suggestion could be made.

Other Observations from Revenue

The Accounting Officer pointed out that all important cases were sent to the central Appeals Committee, which maintained detailed records and made six-monthly reports to the Revenue Board. Different levels of records were maintained at various local levels. Information on appeals was presently being analysed by the Strategic Planning Division with a view to providing central and local management with appropriate performance reports.

He stated that while the situation in relation to Stops on the central computer system had improved generally since an Internal Audit report in 2003, some instances of delay in removing them still occurred. A listing of Stops older than three months had issued to all District managers in June, and that would be repeated before year end. A computer query facility to enable regions and district to control and monitor Stops more effectively was being explored at present.

Other Observations from the Appeal Commissioners

The Accounting Officer stated that the timely passage of appeals through the Office was not hindered by a lack of records. While statistics were not available for earlier years, he provided a summary of cases processed for the years 2002 to 2005 as shown in Table 20.

Table 20




Taken Off

















He reported that determinations had been handed down, or had been listed for announcement before the end of the current term on 31 July, in respect of all cases fully heard to 30 June 2006, where the Office had received all information requested. Between 10 to 15 appeals were received annually directly from taxpayers in cases where Revenue had considered the appeals to be statutorily invalid. As the Appeal Commissioners were not informed by either party or the Court, he had no information on Circuit Court hearings. He also supplied case stated statistics i.e. cases referred to the High Court on a point of law as shown in Table 21.

Table 21





















With regard to the administration of the Office, a full review of resources, administration systems and staffing requirements had been completed. He was satisfied that a realistic budget had been established for the Office. The underspend arose because of the failure to recruit a suitable candidate for an additional position sanctioned. The website and general IT facilities satisfied current requirements; however, the publication of further selected cases had been delayed by the absence of the additional staff.

He stated that a number of the recommendations in Figure 2 had been implemented. In addition, the Commissioners had long accepted that an Annual Report should be published but that it awaited the filling of the sanctioned staff position. Other recommendations were premature and needed more detailed examination and wider consultation.

Mr. J. Purcell

I will proceed to the chapters because the Votes are self-explanatory. Revenue has a wide range of activities with an international dimension and my examination focused on four of these areas — double taxation agreements, exchange of information with other countries in relation to direct taxes, recovery of outstanding taxes where it involves other countries and fighting so-called carousel fraud.

As chapter 2.7 notes, the number of double taxation agreements has increased over the years in line with Government policy to continue to expand our network of agreements. Revenue also reviews existing agreements and renegotiates them if appropriate. A relatively recent development is the effort being made to negotiate information exchange agreements with countries that have tax haven characteristics. However, there has been criticism in some circles about the need for Revenue to devote more resources to increasing the number of agreements to underpin the growth of international financial services in this country. While recognising that the position has improved over the past ten years or so, it is fair to say this is an area that could benefit from more attention in the short term. The extent of the exchange of information on direct taxes in specific cases in recent years can be seen from table 11. Information is also transferred spontaneously and automatically, as shown in table 12. There is also some sharing of information between EU member states in cases with outstanding taxes, as shown in table 13.

Revenue has in recent years sought to increase the awareness, and use, of international information exchange throughout the organisation. EU directives also provide for the recovery by one country of tax owed to another. In the three years to 2005, Revenue received requests to recover tax owed in other countries to a value of €43 million. Just over €2.6 million of that amount was collected. In that same period, Revenue asked other countries to collect just under €18 million and almost €1.5 million of that was recovered. A recent EU report noted that there had been an increase in the use of these arrangements but that there was still a substantial gap between the amounts requested and what was recovered. That was obvious from the figures I just quoted. However, I should say that Revenue's performance in this area compares favourably with the EU average.

The final aspect examined was the arrangements in place to counteract what has become known as carousel fraud. Revenue polices this area through a specialised team which carries out research, visits traders and exchanges information with other countries. The risk from this type of fraud can be gauged from the case in 2004 which is mentioned in the chapter where €5.8 million in outstanding tax was written off where the liability arose due to carousel fraud. VAT fraud, including carousel fraud, is seen as a major issue at EU level and notwithstanding the difficulty in estimating its impact, as outlined by the Accounting Officer in the chapter, I understand that the Commission intends to launch an in-depth study on the amount of VAT fraud and different methods to assess it and to gather comparable figures for all member states.

Chapter 2.8 also has an international dimension in that it deals with Revenue's response to taxation issues arising from the growth in the use of the Internet to buy and sell goods and services, often across EU and international borders. We examined, in particular, the extent of e-commerce in Ireland and its impact, if any, on the tax base, the arrangements put in place by Revenue to address emerging risks and the effect of EU initiatives in this area. To take each of those in turn, there are no firm figures about the volume of e-commerce trade on which to gauge its impact on the VAT tax base but using estimates prepared by IBEC, it is likely that it is negligible in macro terms. At final consumer level, it is reckoned that it would be significantly below €80 million in 2006. For this reason, Revenue tends to rely on its regular counter measures to combat evasion in this area, such as identifying businesses not fully registered and intelligence gathering from a range of activities. The tailored application of these counter measures to the e-commerce sector should address the main risk to the VAT yield from this source. That lies with businesses trading solely on the Internet and e-marketplace traders rather than businesses which have introduced on-line operations alongside their existing business.

Arrangements at EU level have also served to protect the VAT tax base, especially the change introduced in 2003 which made the place where the consumer resides the point of liability for VAT on e-services supplied to EU customers from outside the EU. Hitherto no VAT was payable on such transactions. Given the global nature of the Internet and the inevitable exponential increase in the level of business conducted on it, much of the work to be done in managing the risks to VAT in future will more than likely take place in the context of developments at EU and OECD levels. Revenue is actively involved in these arenas.

Chapter 2.9 records the results from an examination we carried out on the assessment and collection of capital gains tax. The expected yield from this quarter for 2006 is now over €3 billion so in a relatively short period of time, it has become like stamp duty — an important contributor to overall tax revenue. Being a self-assessed tax and one which by its nature tends to arise from once-off transactions, one would expect that there would be a high risk of failure to declare the capital gain. One interpretation of the current uplift in this area would suggest that risk has not materialised but, of course, other factors could be coming into play, in particular the surge in property dealings in recent times.

Compliance in this area is undoubtedly helped by the interaction between stamp duty and capital gains tax in terms of the cross checking and by the follow up of clearance certificates issued. We examined both of these controls and found them to be generally satisfactory. Nevertheless, our testing showed that more could be done in this line. The other main risk is that taxpayers would seek to reduce their tax liabilities by incorrectly recording income as gains to avail of the 20% capital gains rate as opposed to paying at the higher income tax rate of 41%. Revenue's examinations have found no evidence that such a practice was widespread but this area needs to be kept under constant review. From a compliance viewpoint, IT developments are improving Revenue's ability to police this tax as it becomes integrated into its mainstream taxation services. I also welcome the impending risk examination of capital gains tax in light of its growing importance to the public finances.

Chapter 2.10 covers the examination of the management of tax appeals by the Office of the Revenue Commissioners and the Office of the Appeal Commissioners, each of which has distinct roles assigned to them by the taxes Acts. The examination followed the tax appeal process across office boundaries from the time an appeal is lodged with a tax inspector on to the determination of the outcome by an appeal commissioner. In my 1999 report, I noted the absence of any meaningful management information on the throughput and performance of the tax appeal process. A number of later reports, including one by the Law Reform Commission in 2003, made recommendations to address perceived weaknesses in the process.

Our examination effectively sought to establish what progress had been made in the interim. The audit work was not helped by the continued absence of an overall record of tax appeals in Revenue, although again I should say there was a record of significant cases which are overseen by a central appeals committee in Revenue. Nevertheless, it was possible to plot progress on a sample of appeal cases selected by analysing data relating to stops entered on the Revenue computer system. Tracking the movement of those cases all the way through the appeals system was not possible because my staff were unable to gain access to the relevant records in the Office of the Appeal Commissioners. The Attorney General's opinion has been sought in this matter.

My overall conclusion from the audit work completed was that the system for handling appeals was not as good as it could be, particularly with regard to the recording of appeals, the control of the associated collection stops in Revenue and the level of information publicly available on the outcome of noteworthy appeals. I am glad to report that moves are afoot to improve the situation. In the past few weeks Revenue has issued new operating instructions that provide for all requests for appeals to be centrally recorded. Revenue is also examining how best to provide central and local management with appropriate performance reports and a computer facility to control and monitor collection stops.

As regards the Appeal Commissioners, they intend to publish more selected cases and produce an annual report once additional approved staff are appointed. It may also be opportune for them to consult with stakeholders about developing their website, which is maintained by the Irish Taxation Institute as a public service.

Thank you, Mr. Purcell. Mr. Daly, please make your opening statement.

Mr. Daly

As there is quite an amount of ground covered by the four paragraphs under consideration by the committee today, I will just touch on some of the main areas included in each of the paragraphs.

Paragraph 2.7, which is the first of them, deals mainly with the non-customs aspects of Revenue's international business. This international business is largely conducted in the context of our double taxation agreement network, EU membership and affiliation to international bodies such as the OECD.

From a tax administration perspective, double taxation agreements serve the dual purpose of eliminating double taxation and reducing tax evasion. Revenue attaches great importance to the role of double taxation agreements in facilitating investment and international trade, especially in an economy as open as ours. I am also conscious that, at present, despite the almost doubling of double taxation agreement numbers in the last decade or so, we are still on the low side — with 44 agreements in place — by comparison to some of our EU/OECD partners. It is our intention, in line with Government policy, to increase this number and negotiations are currently ongoing with ten new countries. Of course, it is not all about numbers of treaties. The important matter is that our treaty effort is focused on areas and countries which are significant for Ireland's existing business and for emerging opportunities. The committee can be assured that we are actively examining ways and means of accelerating future growth in the double taxation agreement network.

Chapter 2.8, which deals with the impact of e-commerce on VAT administration, is an area which also has a strong international dimension. As can be seen from this paragraph, Revenue has been vigilant since the 1990s in regard to any potential tax risk that could arise in this area given the borderless world of the Internet and the bordered world within which taxation systems operate. We are reasonably confident from our own risk analysis and from the buoyant VAT receipts of recent years that e-commerce has not impacted negatively to any significant extent on VAT collection. Indeed, to the extent that it has generated additional taxable commerce that otherwise might not have taken place, it has added to those receipts.

Taking on board the EU nature of our VAT rules and regulations together with the internationalism of the Internet, it seems clear to me that the best way Revenue can play its part in safeguarding the national Exchequer is through active participation with our EU and OECD partners in this area. Chapter 2.8 makes reference to the fact that Revenue had just been accepted for membership of an EU project group to investigate tools and techniques to aid in the detection of Internet traders. I am pleased to say that Revenue has now been jointly appointed to lead the steering group for this project with our UK and Polish colleagues and, therefore, we are well placed in regard to the developing taxation challenges posed by electronic commerce.

Chapter 2.9 deals with the assessment and collection of capital gains tax. The yield from this tax has grown very significantly in recent years, from €876 million in 2001 to an estimated €3.1 billion for 2006. This paragraph includes an analysis by the Comptroller and Auditor General of studies undertaken in Revenue to investigate whether there was any evidence to support "the substitution effect" whereby high marginal rate income tax payers could attempt to shift income to gains to avail of the lower capital gains rate of tax. The conclusions based on the position at July of this year are laid out in the paragraph. Broadly, these conclusions were that there was no evidence to indicate that the re-categorisation by taxpayers of income as gains was widespread and that capital gains tax is a significant tax which should attract an equivalent level of compliance attention.

Since July we have not found any further indications or evidence of a substitution effect. Nonetheless, in keeping with sound risk management, Revenue is continuing to keep the situation under review. I should say that although capital gains tax is a self-assessment tax, Revenue has in the past and will again in the future take the initiative where we can in advising specific taxpayers, or groups of taxpayers, as to their obligations regarding payment of this tax. For example, Revenue undertook an extensive campaign in September 2004 which highlighted the CGT compliance requirements for taxpayers who sold First Active shares to the Royal Bank of Scotland. That campaign yielded some €36 million.

Chpater 2.10 deals with the management of tax appeals. It traces the management of tax appeals through the two separate Offices of the Revenue Commissioners and the Appeals Commissioners. As regards the length of time it can take to process some cases in Revenue, I do not think I can improve on the explanations in the paragraph. Basically, any generalisations in this area need to carry a "health warning" and it is only through an examination of the complexity of individual cases that one can come to reasonably safe conclusions.

Thank you, Mr. Daly. May we publish your statement?

Mr. Daly


Mr. O'Callaghan, I understand your intention is not to make a formal preliminary statement but, for the benefit of the committee, would you make some preliminary remarks to illustrate your role?

Mr. John O’Callaghan

Our function is essentially to hear 99% of matters of dispute between the Revenue and the taxpayer, that is, ones that the Revenue and often agents for the taxpayer cannot resolve between themselves. There are two of us. We have a small function. Our cost per year is less than €1 million. We hear a considerable range of issues, from the very small to the very large, relating to every tax. The Revenue appear as one party to every appeal that we hear and, as I stated, on the other side there could be many types of people, from major corporations to somebody with a chainsaw looking for a sub-contractor's certificate to chop down a few trees.

We are an extremely small organisation. On the Comptroller and Auditor General's review of our function, there has been something of a hiatus, to which he referred, because I took the view, having taken an oath of confidentiality when I was appointed, as my colleague did, that I could not simply give full access to the files without clearance on this particular point. Mr. Purcell has already referred to the fact that advice has been sought from the Attorney General on this matter.

Regarding the processing of appeals, as far as we are concerned there is not a particular problem of delay. Somebody who wants an appeal will get it heard within two or three months — that would be typically the maximum time — but, as the Chairman of the Revenue Commissioners quite properly stated, one must look at the individual cases. Some cases can take a year or more, with four or five days of full hearings involving legal representation on both sides. They can be very complicated, particularly these days regarding VAT issues where matters of European law are involved and where we have an obligation to refer to the European court under Article 234 of the European treaty where there are matters of European law about which we cannot safely reach a conclusion.

There is a wide range of issues with which we deal but we keep a low profile. There are four of us in total in the entire organisation: myself, my fellow commissioner, one administrator and one assistant administrator. As Mr. Purcell stated, we are seeking extra staff to enable us to increase our resources. In my opinion, we deserve some credit for carrying out, with such sparse resources, a function in connection with every tax appeal. Occasionally we would like a nod of approval on that front, even from the Committee of Public Accounts. There may be specific questions to be addressed——

Politicians would also like such approval.

Mr. O’Callaghan

They can have it from me. Specific questions may arise but I have answered the queries posed in order to give an indication of what we do. I accept that we could perhaps have a higher profile.

Are the commissioners in a position to make decisions on the basis of written submissions or must appellants appear before them?

Mr. O’Callaghan

We regularly seek written submissions to enable us to become familiar with the issues involved. Such issues are often very legal or technical in nature and one would be obliged to reread the information provided on a number of occasions. We seek submissions in order to make ourselves familiar with matters. I do not believe, however, that we ever make decisions purely on the basis of written submissions. We always invite people to come before us in order to discuss matters.

With how many cases have the commissioners dealt in the past 12 months?

Mr. O’Callaghan

I would guess 200 or 300. We have a record of the number of cases with which we have dealt. The figures are misleading because it might only take ten minutes to deal with one case, while it might take two weeks to deal with another. The main question that arises relates to the number of cases on the waiting list to be heard. I am not aware that there is a large waiting list and I am of the opinion that we are able to handle the volume of work that comes through.

Is it possible for people to appeal the commissioners' decisions to the courts?

Mr. O’Callaghan

Yes. In straightforward terms, both parties can appeal to the High Court on a point of law. The taxpayer has an additional option in that he or she can go to the Circuit Court for a full rehearing. The Revenue can only do so in one instance, namely, in respect of cases involving capital acquisitions tax. It has a right to challenge our findings in such cases in the Circuit Court. If the Revenue audits a business and determines that its records are not correct and we accept that the records are adequate and that the returns are correct, this is a pure finding of fact on our part and the Revenue can do nothing about it with the exception of arguing in the High Court that no reasonable commissioner could have found as he or she did as a matter of law. Matters of fact are generally binding on the Revenue. However, it goes to the High Court quite regularly in respect of points of law, of which there is no shortage.

It is common practice that public bodies appeal matters on points of law. In respect of planning permissions, the appeal to the courts cannot be on the substantive issue but it may relate to a point of law such as, for example, that incorrect procedures were followed. I would have thought that everything to do with the work of the appeal commissioners would involve points of law, namely, in respect of the interpretation of the Tax Acts.

Mr. O’Callaghan

That is what it mostly involves.

In effect, therefore, every matter could be referred to the High Court.

Mr. O’Callaghan

Usually, but sometimes there would be matters of fact involved. For example, a case might hinge on whether we accepted somebody's evidence on whether they took a particular course of action. In general, it would be difficult to get the High Court to overturn a simple finding of fact.

When does Mr. O'Callaghan expect to receive the Attorney General's legal advice on the issue of the Comptroller and Auditor General obtaining access to the files of the appeal commissioners?

Mr. O’Callaghan

I hope that it will be forthcoming by the end of January. I have not received a specific commitment from the Attorney General. However, we have met and he has been in contact with officials of the Department of Finance and the Office of the Comptroller and Auditor General. I hope to receive the advice shortly.

I thank Mr. O'Callaghan.

I wish to begin with chapter 2.10. In 2005, the Office of the Appeal Commissioners received €607,000 and it spent €399,000. It, therefore, returned to the Exchequer €208,000 or just over one third of its budget. This was the third year in a row that the commissioners had done so. In 2004, it returned 37% of its budget and in 2003 it returned 39%. It appears that in each of these years the office made attempts to increase its number of staff. Mr. O'Callaghan indicated that this is still the intention. What factors are preventing people from being employed?

Mr. O’Callaghan

We encountered a degree of difficulty in that the kind of people we need must have excellent reporting skills. We want people who will be able to assist us in reporting on the cases on which we are working and perhaps to maintain files, etc. They need good legal qualifications and reporting skills. The difficulty was that we were informed that we were obliged to recruit within the Civil Service. To be blunt, we have encountered a number of problems in terms of dealing with red tape. That is why, as the Deputy correctly pointed out, each year we have returned to the Exchequer a financial provision in respect of employing staff to fill gaps relating to the reporting of cases and the preparation of an annual report. The actual functioning of the office on a day-to-day basis is not compromised but there are difficulties in respect of the additional matters to which I refer.

Mr. O'Callaghan used the term "red tape". Is he referring to the Public Appointments Commission in that regard?

Mr. O’Callaghan

Yes, that kind of thing.

Have jobs been advertised?

Mr. O’Callaghan

This is another problem. Until we have somebody in the office, we do not know exactly the level of input we need. We do not want to employ somebody on a full-time basis and discover that their services are not necessary. At present, the two us do everything. For example, we type our own letters, etc. We have one very able administrator who deals with the Revenue, our post and so on. We do not know until we have somebody in the office the level of input that will be required. We do not want to employ someone and discover that, four days a week, they are sitting around doing nothing.

May I suggest that Mr.O'Callaghan is overworked?

Mr. O’Callaghan

We are not claiming that we are overworked.

The appeal commissioners have not produced an annual report, they do not have a statement of strategy and the website, which is maintained on a voluntary basis by the Institute of Taxation, does not contain information on many cases that might be referred to by way of precedent in order to aid the process of further appeals. Three to four years seems an awfully long period to have been tied up in red tape in respect of appointing staff that are obviously needed.

Mr. O’Callaghan

It does. It is extremely difficult to appoint people. The processes involved are not easy to deal with. We have had various meetings with officials and we have not been able to make headway.

When members discover where they stand next May or June, they might be able to offer some assistance.

It can take quite a long time for the appeal commissioners and, initially, the Revenue Commissioners — both Mr. O'Callaghan and Mr. Daly insisted that there are no delays in this regard — to process cases. If a person was so minded, he or she could argue that the question of tax avoidance is as much a matter of time and avoiding final payment as it is a question of the sums involved. Some people's involvement with this process might last up to four years. There are instances where the appeal commissioners have heard cases and have not issued decisions for 12 months or more.

Mr. O’Callaghan

That is very unlikely. On what basis is the Deputy making such claims?

On the basis of some of the information I have been given in respect of the audit results, etc. For example, the time duration between the hearing of an appeal case and the making of a determination ranges between three and 15 months.

Mr. O’Callaghan

A period of 15 months would be extraordinarily unusual. From where did the Deputy obtain that information?

I see that the information to which I refer probably relates to the initial process involving the Revenue Commissioners.

Mr. O’Callaghan

There are problems in reporting these matters. In many cases, people lodge appeals to keep the process going. If one does not appeal an assessment, the tax becomes final and payable. A person might be in correspondence with the Revenue in respect of a matter and an assessment will issue and an appeal will be lodged in respect of it. Further correspondence with the Revenue will then ensue. We do not receive any notice in this regard. There is no reason we should have. The Revenue is looking for information and the taxpayer is making arguments. In 99.9% of such cases agreement is reach and the 0.1% that come to us might well be listed several years after the initial correspondence. It is difficult to say what the timescale for individual appeals is. In so far as somebody defers payment, he or she is hit with hefty interest and late payment penalties if he or she has not paid the tax and has tried to use the appeals system to defer it.

The process is lengthy.

Mr. O’Callaghan

It can be but, equally, if we receive a referral today from an inspector of taxes saying he wants to list a case in Galway at the end of January, we will put it down for hearing. There is not a lengthy time lag between us receiving a request and listing it. We seek submissions and we list it once we have received them. Typically we list it within a month or six weeks of receipt of the submissions.

Perhaps it is best to begin with Mr. Daly and discuss the process used by Revenue and how the case ends up in the office of the appeal commissioners. A case goes from a case officer to the district manager to an appeals committee within the Revenue, which can take up to 27 months. Is that correct?

Mr. Daly

I echo the point made by Commissioner O'Callaghan in that many people lodge appeals as part of the process. When one of our inspectors or a taxpayer decides to appeal, both parties must first engage because an AH1 form must be forwarded to the appeal commissioners before it can be listed for a hearing. Usually, an attempt is made to agree the content of that form, which is not difficult. However, there is often a significant time lag before we go to the appeal commissioners for a listing because of the engagement between the taxpayer or the agent and Revenue. Most cases are settled.

With respect to those that are not, when the request is made to the commissioners for listing, they seek a written submission from the taxpayer, a reply from Revenue and eventually those submissions will be exchanged, though not always. The report contains many figures relating to elapsed time but if the median is taken, approximately 50% of cases are processed within seven months while the remainder take longer. Then there is a number of extraordinary outlier cases. One case mentioned in the report took 79 months but it was a complex capital allowance case. A similar issue was decided in another case, which is being appealed, and that is the reason those cases do not go forward. This is a judicial process and, in the normal way, these cases take time. I am not satisfied this is ideal and I would like the process to be speeded up but, as a process that involves settlement discussions between taxpayers and Revenue, which can ultimately be resolved through a judicial framework, it is not extraordinarily bad.

Issues arise relating to the statistics and the monitoring of appeals. We have moved extensively to improve that in recent times. The Deputy mentioned that all appeals are forwarded to the Revenue appeals committee. However, they do not formally go to the committee. The committee is kept for serious cases involving precedent and in which major issues are at stake. Other than that, appeals come straight from the Revenue district. However, we have put a new system in place, as the Comptroller and Auditor General mentioned in his opening remarks, whereby AH1 forms will be forwarded to the appeals committee in Revenue so that we will have a record in the future of the process of the appeals. We have also provided the opportunity for local managers in districts to obtain information from time to time from our systems about the progress of appeals.

The Comptroller and Auditor General had to use our Stop 16 as the formula for extracting this information. While it is pretty reliable, Stop 16 might have been used occasionally for items in the past other than appeals and, therefore, it might not tell the full story.

Does Mr. O'Callaghan have updated statistics on how many appeals are referred to the Circuit, High and Supreme Courts on a point of law?

Mr. O’Callaghan

We do not because once we sign off on a case and give our decision, it is up to the taxpayer to take the case to the Circuit Court. We do not ever receive a report back from the Circuit or High Courts, which is a little unusual because the format of an appeal to the High Court is by way of a case stated. We sign off a case stated and forward it to the High Court. Typically the question at the end of the process is whether we were correct in law in finding as we did. The High Court gives a decision but it never writes back to us to tell us what has been decided. It is recorded at that point. We do not have statistics for that, as they are not part of the process.

Therefore, the Revenue does not track them.

Mr. Daly

We have assembled information on that as part of the process of trying to get a greater handle on all of this. Between 2000 and 2004, 20 cases were heard in the Circuit Court, 24 cases in the High Court and four in the Supreme Court. As Commissioner O'Callaghan has mentioned, we have only the right of re-hearing in the Circuit Court in respect of capital acquisition tax cases but the Law Reform Commission has recommended that Revenue should have a right of re-hearing in all cases to put us on a level playing field with the taxpayer but that has not been implemented.

I refer to chapter 2.9, which deals with capital gains tax. Mr. Daly stated the receipts for CGT have increased significantly since 2001 by almost €2.5 billion. Usually for a self-assessment tax, it is higher than the amount raised from income tax and non-PAYE sources. The Comptroller and Auditor General in examining this asked a series of questions about available information and the controls exercised by Revenue. The officials responded to many of those. Can Mr. Daly quantify the degree to which he believes income might be declared as capital gains in the system? A number of cases have been identified by the larger cases unit within Revenue, particularly following a recent investigation. Is there a greater incidence of that occurring in cases where the yield is between €250,000 and €500,000?

Mr. Daly

I cannot quantify a figure for the tax at risk. We have had a number of projects focusing on this over several years because it is the big risk we see where a personal tax rate is 42% and CGT is half that. We are all the time worried about conversion of income to a gain or a gift because the same considerations apply, as gift tax is half the income tax rate.

Our large cases division did an exercise and Dublin and some of the other regions have done other exercises in more recent times. The Collector-General's office also did an analytical study. I do not think as a result of these exercises we have come to the conclusion that there is any serious issue here. We are getting small numbers of cases where we suspect that there may be conversion. For example, the large cases division is taking four cases to appeal on the basis of suspicion that there may be conversion from income to gain. We have examined a lot of cases during the period of July 2005 to November 2006 in some of the other regions and there is nothing significant emerging. The real areas where we might have a worry would be if there was a property developer who was trying to characterise the sale of a property as a one-off transaction rather than a business or a trading and cash-rich companies trying to extract cash from the company by possibly a sale to relatives or connected persons or such like. In that particular case which is referred to in the Comptroller and Auditor General's report, we changed the law over the past two years to close down the possibility of this. We do not have any great evidence of this practice but we are very conscious of the temptation of the ongoing 20%.

Will Mr. Daly refer to the other recommendations made by the Comptroller and Auditor General in his report about cross-checking for information and the differing standards that seem to apply in respect of clearance certificates and the lack of sufficient cross-checking with stamp duty returns? I refer to property transactions and whether the tax paid by the buyer tallies with the tax paid by the vendor.

Mr. Daly

Three areas are involved. An ST21 declaration is the declaration of stamp duty; a CGT50 is the clearance on capital gains; and there is the ordinary CGT return which is eventually made. It is obvious we should be matching all of these. There are timing differences involved. The CGT50 is not required in all cases and is not required in cases under the value of €500,000. The key to all this is our new risk analysis system and database where all this information is now being fed in and matched. This gives us a much better handle than we had in the past. There will be systematic matching of this information and it has already started.

Is that the data warehouse? Where does that stand now? I believe it is still evolving.

Mr. Daly

It was a pilot for early this year and some of last year and it has now been rolled out countrywide so it is in operation and will be used to identify cases and risk for 2007. It will be a significant factor in driving our audit selection for the coming year of 2007. It is populated with a lot of data and will continue to be populated with more, including the stamp duty data, the CG50 data and other information relating to assets and the sale and disposal of assets.

Is there a correlation between the growth in capital gains tax and the growth in stamp duty returns?

Mr. Daly

I am not sure what the factor is but they are the two areas that have grown significantly in the past couple of years in terms of revenue yield. The surplus or outturn for this yearshows that capital gains tax, stamp duty and, to a lesser extent, some other taxes, account for a significant part of that surplus. There is a correlation.

When it comes to forecasting next year's anticipated receipts, do the Revenue Commissioners undertake an examination of likely trends in the property market and whether yields would be affected in the coming years?

Mr. Daly

We do, as we did last year around this time. We take account, in conjunction with our colleagues in the Department of Finance, of all the data that is in the market, such as microdata-specific commentsthat might be coming from experts, economists and people in the property market. As we said at the last meeting, forecasting is not an exact science and tax estimates are a factor of both the level and mix of economic activity. In good faith we take every piece of data available at the point in time when the forecast is being done. We have already done much of this in terms of 2007. In so far as the forecast may be out of kilter with the outturn, that is a result of the extraordinary developments in the economy during the year. I think I said last week everybody this time last year was expecting the property and construction area to, if not quite collapse, certainly to slow down. This did not happen.

From the point of view of the Revenue — it is also what I hear from the professional sector — in all of the tax growth last year there is probably a compliance effect because the Revenue's profile of tax compliance, investigations and effectiveness has improved in recent years, although this is difficult to quantify.

I welcome all the members of the delegation to the meeting. With the economy growing as fast as it is and the numbers of people employed in the country, it is difficult on the day following the budget when the money raised by the Revenue Commissioners was distributed, to find fault with a much improved situation for the collection of revenue.

What is the percentage rate of compliance? Politicians have seen the change in attitude to compliance, which is significant. How can the rate be improved in the future? There is pressure for funding of different societal needs such as health, education or special needs and these can only be resourced by having a fair and compliant tax society. Where does our compliance stand by comparison with international standards?

Mr. Daly

I will answer the Deputy's question in two ways. The vital statistics which Revenue can provide in terms of the numbers paying on time and compliance with respect to personal tax returns and company tax returns show the situation as being very good and as having improved significantly over the years. The rate of returns and payments on time and up to date is now well into the 90s in terms of percentage. The more difficult question to answer is the percentage of all those returns which are accurate in that they reflect exactly what people should be paying to the Revenue. It is very difficult to put a percentage on this.

This is now a much more compliant country than five years ago and certainly more than ten years ago. This is a result of a combination of activity by Revenue and the additional powers we have been given which have resulted in making people realise that we will eventually catch up with them. It is a factor of the high profile investigations. Last Saturday's edition of the Financial Times carried a story about the UK revenue authorities beginning an investigation into offshore accounts which, to my mind, seems to be a mirror image of the model we used a few years ago and which we should have patented. The Australians are also doing exactly the same. All that activity has improved the attitude to compliance. People generally are becoming more aware of the civic responsibilities attached to paying their taxes and paying them on time. Ireland is a much more compliant country than it was. It would be naive to say we were fully compliant — I do not think members would expect me to say that — but we are well on the way.

The Deputy mentioned the international dimension. I spend much of my time talking to colleagues in other countries and take the view that we are well up the international ranks. There are some countries which, for historical or demographic reasons, would be the leading lights in this regard but we are very high up the ranking.

In terms of countries which have tax haven characteristics, Mr. Daly's earlier report mentioned that we have 44 agreements with various countries. Thanks to many people, Ireland does business with well in excess of 100 countries. With what type of agreements is Revenue encountering problems?

Mr. Daly

As a general comment, it is more difficult for Ireland to negotiate double tax treaties with other countries because of our success. Other countries now regard Ireland as a competitor country, whereas ten years ago this was not of major concern to them and if Ireland asked for a treaty, they were willing to sign one. Negotiations have become more difficult. I keep reminding people that double tax treaties are, by definition, between two parties. Ireland cannot draw up a treaty and hand it over to another country and ask it to sign it. The process is long and sometimes difficult. Part of the difficulty is that the model tax agreement that we and most countries use — it is an OECD model — contains a clause about exchange of information. Some of the other countries with which we want to have treaties have difficulties with this clause due to secrecy laws and this causes a difficulty.

We have an active programme. We have ten new treaties, negotiations are in progress with ten countries and new treaty negotiations will start with a further eight countries in the next few months. We are also renegotiating treaties with five countries. This is a heavy agenda in terms of treaties but Revenue will pursue it. As I indicated, it is not so much the numbers but identifying where we are doing business.

Side by side with the treaties we are negotiating tax information exchange agreements with what would have traditionally been regarded as tax havens, for example, Jersey, Guernsey and the Isle of Man. That is a separate programme.

There has been some comment recently about Revenue's commitment to the issue of treaties. I find these comments extraordinary because treaties are one of the top priorities in Revenue. I had a very successful and useful meeting only last week with representatives of the financial services industry and a few days prior to that I met representatives of the big four accountancy bodies. Treaties were on the agenda of both meetings and I think they fully understand our position and support us in this work. It is not a matter of resources or commitment but one of the practicalities of developing treaties. There are, however, countries with which we will probably not be able to do business.

What are the dangers as regards carousel fraud, VAT fraud and the globalised activities taking place on the Internet? Occasionally we hear big news stories about how it is possible to hide what is taking place. The percentages involved may be small but the players are big. How is this developing?

Mr. Daly

Revenue has an active carousel fraud unit which is working to police and head off carousel fraud. Ireland is fortunate in not having suffered a great deal from this problem, although in one or two cases, businesses here have been conduit traders and have facilitated fraud, particularly in the United Kingdom. We continue to work extensively with the UK and other countries which are losing billions to this carousel fraud. While Ireland has not lost billions, Revenue is conscious of our vulnerability and, as I indicated, we have a unit that focuses solely on this problem.

On the general question of e-commerce, there has been significant growth in electronic commerce and VAT. I do not see any loss or leakage in these areas that bothers me. Doing business over the Internet will be the reality in the future. There are arrangements in place at European Union level to police and service this area. As I indicated, the Revenue Commissioners are represented on the steering group of a body at EU level which will work on this issue in future.

From a policing point of view, the challenge is to ensure that companies doing business over the Internet and sending goods to Ireland are registered and declare their business. The most effective tool in policing this area will be the type of issue the EU level committee will examine. I am not an expert but I understand technology is available to surf the Internet to identify patterns of trade and commerce which would enable us to identify people who are not registered with us. In summary, while this is not a serious problem, it is one we need to watch.

I have a general question for Commissioner O'Callaghan. The types of appeal vary from minor matters to complex, time-consuming issues which may have a legal dimension. Surely appeals have common characteristics. A significant percentage of appeals must relate to a broadly similar area. What is this area? Rather than thousands of different types of appeal, there are probably a small number of general appeal types. If communications with the public improved, we could avoid duplication, where possible.

Mr. O’Callaghan

The Deputy has touched on a few interesting issues. The range of appeals is amazing. For example, I was in Kilkenny yesterday and we spent three and a half hours on one issue. The case in question was not even a formal appeal but involved an individual whose tax agent was convinced that he had a right to appeal Revenue's decision to publish his name. Section 1086 of the Taxes Consolidation Act states the Revenue Commissioners shall publish a list of defaulters every three months. Subsection 1086(4) states the Revenue Commissioners will not publish the name if, prior to the Revenue commencing its investigations into the matter giving rise the personal liability, the individual concerned had made a full and complete disclosure to the Revenue Commissioners.

The first issue to address was whether the person had a right to appeal the decision. The Revenue Commissioners were about to publish this individual's name but his agent indicated he did not agree with the decision. The barrister for Revenue properly stated that this was not one of the matters against which an appeal can be made. We normally hear appeals against assessments, which is a matter governed by section 933 of the Taxes Consolidation Act. A separate section — section 949 — states that we can hear appeals against claims to relief, etc., where the relief is measured in the section, but it does not specifically refer to the claim in question, that he had come to the Revenue before they got to him. In the end, I looked at the underlying issue and said to the agent that even if I were to find that he had a right of appeal, with which the Revenue disagreed, I did not think he would win on the underlying issue because his client had ignored all the notices in the newspaper. That is not the main issue by the way, as the Revenue had approached the banks but they had not reached the client's accounts. At that stage the client was well aware of what was happening. I did not see how he could win. It ended up as an informal process because Revenue is going to publish the details on 12 December. That is one instance.

That one should appear on the screen because as far as I can see it will be unlikely that anyone will apply for the job.

Mr. O’Callaghan

That touches on the issue of what matters can be appealed to us. I stated at the outset that 99% of disputes between the Revenue and taxpayers can be appealed to us. The Revenue has to be satisfied and make a decision. An appeal may be made to us. The question is whether the Revenue decision not to publish is a relief because the other section that allows an appeal requires that it would be a relief. The taxpayer in that case said it was, but the barrister on behalf of the Revenue said it was not. I did not have to decide on it in the end. That is one example of an issue where we may not have an ability to hear a case.

Other issues arise in connection with subcontractor certificates. If somebody requires a certificate, it is necessary for his or her tax affairs to be kept up to date for the previous three years. This is referred to as the relevant period. That is strictly governed by legislation. Strictly speaking, if one was a few weeks late in making a VAT return, one would be viewed as non-compliant. The Revenue has discretion to overlook such non-compliance but there is an argument that we do not have the right to review that discretion.

There are many small areas where it might be more efficient if we had discretion. I hope I am not straying into policy areas. Policy is not a matter for us. I have been in this job for 12 or 13 years and we have never suggested any policy changes but issues do exist. Another matter that might be of some assistance, particularly regarding profile, which is the issue in question, is the way the appeal system works. Currently, if one is appealing an assessment, one writes to the inspector of taxes. The consequence of that is that we are not particularly well known. Many people are aware of the Ombudsman's office but I am continually surprised at how few people understand they have a right to challenge the decisions of tax officials. People can do this themselves; they do not need to be legally represented.

We have discussions with the Institute of Taxation as to whether a process whereby the appeals came to us first would be preferable. It would give a better profile, to use that word again. The difficulty is that, to get an appeal heard, one has to comply with the various matters that arose under self-assessment when that was introduced. One must have made one's tax return and paid whatever tax is disclosed on one's return, etc. The Revenue has to check these matters. It appears to us that if we were to handle all appeals, the function would probably best be addressed by somebody who wants to appeal writing to the Revenue asking for a certificate of compliance with section 957 of the Tax Consolidation Act and when they come to us we would then be seized of the appeal from the beginning. That would deal with some of the issues that have been raised here.

The Revenue has not had a chance to consider this at any level. I mentioned it briefly recently to the chairman, Mr. Daly, but it has not been put to the Revenue, as such. It is an issue in which we are interested. I do not know whether it is a matter of policy or whether it is outside my scope to even refer to it.

Mr. Daly

I find it difficult to accept that people do not know of their right of appeal to the appeals commissioners. This is something in which Revenue puts a great deal of effort, in terms of our customer charter, our charter of rights and making available to people information about their right to review and appeal. I need to say this.

In response to the recommendation of the Law Reform Commission, we should remember that the whole thrust of that report was that the appeals commissioners and Revenue should be visibly separate from one another. We have had the divorce but perhaps we have not had the decree absolute yet or whatever it is. This is very important to us. In terms of perception for taxpayers, it is important that we would be seen as two totally different offices.

Specifically, the one thing we have said already that Revenue does not need to consider further, is that we would be quite happy to lose the responsibility for the listing of appeals with the appeals commissioners. We consider it would be better with the appeals commissioners. As the commissioner, Mr. O'Callaghan, stated, there are some loose ends to tidy up, in the sense of what the taxpayer has to do before he or she can appeal. The process of listing appeals should not rest with the Revenue. It creates the wrong perception. I do not believe it disadvantages anybody but it creates the wrong impression.

I will start with Mr. O'Callaghan. I was most interested in the whole area of appeals. He indicated that his office deals with 200 to 300 appeals per annum. Is the profile of appeals made up mainly of individuals or companies?

Mr. O’Callaghan

I do not have the breakdown with me but off the top of my head I would say there are more individuals. For instance, I was in Kilkenny yesterday and Galway on Tuesday. In Galway there were three cases and there was one case in Kilkenny which I thought would take a quarter of an hour but it took three and a half hours. These cases involved individuals. Much of the time the cases relate to small operations such as small shops or pubs. Being small, they may not have systems in place and their affairs can be out of date. They do not deal properly with the Revenue so the case ends up with us, as the final resort for the Revenue. They use us as a way of trying to get the information from people.

Is the profile small cases rather than large corporations?

Mr. O’Callaghan

It can be, but then we have many large cases also. We have a tax avoidance case currently involving hundreds of millions of euro. One of our cases went to the Supreme Court. Once a case goes to the Supreme Court, it is in the public arena. It related to Tara Mines, which claimed it was not involved in manufacturing. The issue was whether the company was precluded from claiming the lower rate of tax and whether its income was derived from the produce of a mine. I will not go into the details of the case but the point is that the Supreme Court disagreed with us. The amount involved in that case between tax and interest was more than €100 million.

There are many large cases and some very small ones. These days VAT can be an incredibly complicated matter. It is harmonised at a European level and as a consequence we may have to examine 20 or 30 European cases, as quoted to us by both sides to determine the correct issue. Sometimes we have to refer to the European Court for an opinion.

In response to Deputy Boyle, Mr. O'Callaghan indicated that when appeals reached him they may have been elsewhere previously, and they do not take that long. Is that correct?

Mr. O’Callaghan

They might take a year. I have had cases that involved four or five hearings on different dates and where there was a need for further submissions following the hearings. I gave a decision on Monday where I had to look at five different transcripts relating to five different days. That was a case where a company had acquired certain premises to protect its business. It was a wholesaler and some retail premises belonging to a customer it supplied came up for sale. It was concerned that it might be bought by an operator that would not take its supplies and it therefore bought the premises and sold them a couple of years later, but at a loss of a couple of million euro. It spent several million buying back the shares of a couple of the directors.

The argument was that the loss on the sale of the shops constituted a loss in respect of a trading item because it had been incurred to protect the business. It was further argued that the cost of the shares, €4 million, similarly represented a deduction. We had three or four days of hearings on this and maybe 40 cases were referred to in determining the issues. It varies widely.

Deputy Michael Smith asked whether there are standards. There tend not to be. Some issues arise time and again, such as the single parent family allowance. Where somebody has a child and lives with another person, the legislation states the couple does not get the extra tax allowance if not living as man and wife. The couple might appeal the Revenue Commissioners' determination that they are not entitled to the allowance or might say they are financially independent and not married and that it is up to them to determine whether they live as man and wife. That is another issue. Surprisingly, there are not many standard issues.

Having listened to Mr.O'Callaghan, I appreciate the work he does. His office is small. He hit the nail on the head when he said he felt it was not well known. Perhaps he needs to examine this issue in light of Deputy Boyle's remarks, with which I agree. The office has had a surplus over recent years because it has failed to recruit. While the office is addressing the appeals, other information, including the profiling and statistical information on the divide and scale of cases, is not easily available. It might be useful to have it. The additional staff should be recruited fairly urgently.

Is the Office of the Appeal Commissioners regarded as sufficiently independent from the Office of the Revenue Commissioners?

Mr. O’Callaghan

There is a perception problem. The accountancy profession in general is pretty well aware of our office, as are most lawyers, but not all. This is indicated in the Law Reform Commission's report. When we got a draft of the report, we wrote a 13-page letter pointing out a series of issues with which we disagreed. It was pointed out that the gap between the offices needs to be perceived to be greater. It was suggested that confusion even arose over their names — the Office of the Revenue Commissioners and the Office of the Appeal Commissioners.

The name of the office dates back a long time. Income taxes were first introduced in Napoleonic times in 1799. They were supposed to be abolished when the war with Napoleon was ended but this did not happen. There were commissioners in this era and there are UK special commissioners. There is an historical aspect but the name in itself can cause confusion. Other matters also arise and there could be a clearer divorce, as Mr. Daly stated.

Mr. Daly

There should be an absolute divorce. The Office of the Revenue Commissioners has maintained this position for quite some years. Much separation has occurred. I was the Accounting Officer for the Office of the Appeal Commissioners until two or three years ago – at least that has disappeared. On the basis of a service level agreement between the two offices, we provide certain services, which probably makes sense in terms of IT support and support regarding the payment of staff. We have no responsibility for the recruitment of staff for the Office of the Appeal Commissioners.

The next step should be to address the question of the listing of appeals and to remove responsibility from the Revenue Commissioners. There are many other recommendations in the Law Reform Commission's report but that is one with which we certainly have no difficulty. We have no difficulty with distancing ourselves even more. There is nothing personal about this I hasten to add.

The emerging area of VAT on e-commerce was referred to several times. Mr. Daly said in his opening statement that e-commerce has generated additional tax. Has he quantified the tax yield for activity of this type?

Mr. Daly

We have not really done so because there is no requirement on people making their VAT returns to make separate returns indicating how much derived from e-commerce.

I suppose it is like everything else in that we know it is growing, but if we do not know the scale we do not know what resources are required. It is a vulnerable area.

Mr. Daly

In so far as we have been able to make a stab at it at all, as mentioned in the report of the Comptroller and Auditor General, it was estimated that the worth of business-to-consumer electronic transactions would grow to some €400 million in 2006. On the basis of that estimate, and applying the standard rate of VAT, we believed there was a maximum exposure, bearing in mind the result if we did not get the VAT in question, amounting to approximately €80 million, which is not significant in terms of the total VAT take. The estimate of €80 million assumes that all the transactions in question are subject to VAT and derive from outside Ireland. We are satisfied that our normal audit programme picks up all transactions concerning Irish businesses engaging in e-commerce with Irish consumers.

It is a question of transactions abroad.

Mr. Daly

That regime has tightened up considerably in recent years at EU level. There is obviously a political debate at this level on the VAT regime and whether it should be changed to have regard to carousel fraud and other exposures, or whether a reverse-charge mechanism should be employed. This is very much an issue at political level and there are differing views among countries on whether the closure of loopholes through changing the whole system would open up many others we have not thought about.

If somebody uses the Internet to buy an item in a store in the United Kingdom for €50 or €100, what physical mechanism is there to track this and recoup any taxes or duties that might be due?

Mr. Daly

If the individual purchases goods from a UK supplier on the Internet and receives them by way of parcel post, we do not have any means of interrogating the commercial transaction. Obviously the business will be audited by the United Kingdom and there are many mutual assistance arrangements in place. We have staff in place at postal depots working of a full-time basis to examine post entering the country. They would focus more on non-EU post and there is a considerable focus on drugs in particular.

I apologise to the Chairman and witnesses for my coming in and out. It is because of budgetary debate arrangements.

I have some queries for Mr. Daly on an international aspect of our taxation system. We have had an arrangement for a very long time whereby the wages of workers brought into this State by major companies such as construction companies, who worked here but were regarded as being domiciled abroad, were paid into banks outside this country on a completely PAYE-free basis. This led to an immediate abuse in that their employers could pay them less than the trade union rate, thereby undercutting employers paying the full rate that takes PAYE tax into account. Is the remittance basis of taxation still in place?

Mr. Daly

No, it has not been in place since the budget last year. The remittance basis of taxation arrangement applied to individuals who were not ordinarily resident here, although they might have been working here. It provided that such individuals were liable to Irish income tax only on the portion of their income from outside the State that was remitted here. In 2005 we became aware of abuses and while I cannot talk about particular cases, following a recommendation from Revenue, the Minister abolished the arrangement in last year's budget. Extrapolating from this what companies pay their workers is not my area. Having identified an abuse, we moved quickly to close the loophole.

Except, according to a reply to a parliamentary question, it had continued since the 1920s.

Mr. Daly

The remittance basis had been in place since the foundation of the State for a good reason: to encourage people with a particular expertise to come to Ireland on short-term contracts to develop industry. Like many other things in the system, it had straightforward origins and the best of intentions but was then abused. When we found out about the abuse, the loophole was closed.

The abuse became industrial in scale. Gama Construction brought the issue to a head. It imported thousands of workers between 2002 and 2005 and massively abused the scheme. Did the Revenue Commissioners try to calculate how much tax had been forgone in a ten year period since large-scale abuse started to appear?

Mr. Daly

My recollection, going back to the budget discussion last year, is that no estimate was made of how much might be forgone but by closing the remittance space entirely this year — this does not necessarily relate to any one company — we yielded a sum of €50 million. Again, I hasten to add that was the anticipated yield; it does not mean there was abuse or losses to that extent. Not all of the yield is attributable to closing the loophole in respect of one company or sector.

Let me pursue an even more sinister abuse about which I have made formal complaints to Revenue. The Turkish construction company mentioned had thousands of workers here between 2000 and 2005, some of whom were employed on major public infrastructural, local authority, ESB power station and major bypass projects. We exposed the company last year as paying a slave labour rate of pay of €2.20 per hour to construction workers, very little of which was paid here and there was no tax liability. The rest was paid into their home accounts in Turkey. As far as the workers knew, that was the extent of their wages but then we uncovered how the company had paid further moneys into bank accounts in Amsterdam in each worker's name for a three year period, about which the workers did not know. The intriguing situation arose where on 2 February 2004 a worker realised from documents that a sum of €3,400 had been paid in his name by Gama but on 3 February the money was transferred from the account to an entity called Ryder Investments which is a black hole because no one will tell us who or what it is and who its beneficiaries are.

I complained about this matter to Revenue because, even if one accepts the remittance basis, it is supposed to be for the benefit of workers. However, this was a company involved in large-scale fraud and a double abuse of the taxation system that continued until the budget. We found that up to €40,000 had been paid on behalf of individual workers, which sum was obviously going back into the company by a circuitous route for its benefit and, therefore, should have been subject to other taxes the company would have been due to pay. Has the investigation into this advanced?

In Mr. Daly's statement there was a reference to the level of co-operation the Irish tax authorities could expect from governments. Has the Dutch Government and banking system co-operated by giving Revenue all the information it needs to expose this scam and see what should be done?

Mr. Daly

I cannot talk about a particular case, as Revenue respects the fact that there is confidentiality. The Deputy built a scenario about workers' rights, payments and bank accounts, much of which is on record. The Department of Enterprise, Trade and Employment produced a report on the case and the High Court ordered that it be given to Revenue. Any information that comes to us that indicates there might be tax issues which are our responsibility is assiduously followed up.

These matters are on the public record but surely at some stage when the investigation is concluded, the public and public representatives will have a right to know what was discovered and the wrongdoing that was taking place. Can we look forward to publication of the findings of such an investigation?

Mr. Daly

Where there are tax issues and a Revenue investigation, the results are not published. It is standard procedure for us to preserve confidentiality. There might be cases on which we might want to go public but I cannot be the judge of when we should go public and when we should not. It is a long-standing tradition that Revenue does not breach confidence.

A list of defaulters is published.

Mr. Daly

If there is a case which at the end of an audit meets the conditions for publication, the information will be published. That is a general statement.

Does that mean Mr. Daly cannot tell me when the investigation into Gama might end and he will reach definitive conclusions?

Mr. Daly

All I can say is that if we receive information on any company, business or individual, we pursue it as assiduously and energetically as we can. We use all the methods and assistance, including international assistance, available to us in that pursuit.

Between April and November the Revenue Commissioners clawed back the first-time buyer's stamp duty concession from some 400 people because they were in breach of the conditions for the exemption. What is the average value of the clawback? I understand it was at least €10,000 per buyer. The reason may have been largely that first-time buyers were letting all or part of their new homes and exceeding the limit of the rent-a-room scheme which exempts between €6,000 and €7,000 per annum. I dealt, too, with a couple of cases in which people, perhaps under the decentralisation programme, had moved to another location and let their houses without knowing that they had to live in the house as their principal private residence for the first five years of ownership. The Revenue Commissioners are not at fault in this but will they inform banks and solicitors that when people avail of this exemption, they must conform to the rules under which it is granted? They clawed back €3 million from approximately 400 first-time buyers in the space of eight months. Are they engaged in a blitz? How many more have they picked up in the past month? How many do they reckon are in default?

According to the Budget Statement, the Revenue Commissioners will give people more information on their entitlements. I congratulate them on this. We have discussed the matter before both here and at the Joint Committee on Finance and the Public Service. Somebody letting a room for €7,000 a year loses the whole benefit if he or she goes one euro over the limit. Does Mr. Daly agree that people are not aware of this and that in a way banks encourage people to borrow up to their limit and include in their income assessment possible income from renting to reach the mortgage level? A serious job of informing first-time buyers is necessary in this respect.

Mr. Daly

I am glad the Deputy does not blame us because this is part of our normal compliance regime. If we did not do it, somebody would ask me in a few years' time why. We have a normal compliance regime for those who receive this type of allowance under the stamp duty regime. It does not apply to first-time buyers only; there are other categories too. In the period the Deputy mentioned there were approximately 392 cases in which various stamp duty reliefs which had been granted were clawed back. The total amount involved was €3.2 million. Within this figure there were 72 cases of first-time buyer's relief, in which the amount clawed back was €455,000. This gives an average figure of approximately €6,000 per case.

I would be concerned if people did not know about this issue but I find it difficult to understand they are not so aware. When one buys an apartment or house in those circumstances, one must certify in the deeds that one will occupy it as one's principal place of residence and that no rent will be obtained for five years from the date of conveyance. If that is included in the deeds, I presume the solicitor or bank, if one is taking out a mortgage, or the ordinary careful individual will understand this.

Would it come as a surprise to Mr. Daly that many do not understand it because they are at the pin of their collar to put the mortgage package together and many financial institutions allow and even encourage people to include potential rental income which is perfectly legitimate under the rent-a-room scheme? However, people do not understand that if they exceed the limit by one euro, they are off the pitch and the Revenue Commissioners can claw back the money.

Mr. Daly

I find it difficult to accept that they do not understand this but if there is anything we can do to ensure they are more aware of it, we will do so. We are not trying to catch people. We would much prefer them to be compliant.

I accept that.

Mr. Daly

The 72 cases should be taken in the context of 2,830 cases in 2005 who availed of the exemption. It is a very small percentage; clearly, most people understand their responsibilities.

The hundreds of others whose exemption was clawed back were second-time purchasers buying new houses under a certain size.

Mr. Daly

That is right.

Several hundred failed to meet the criteria on renting above the rent-a-room scheme limit and the condition that to avail of the stamp duty exemption one must live in the property for five years.

Mr. Daly

There is another category of young trained farmers, of which there are only a few. I find it difficult to accept that people do not know the conditions under which they receive a fairly generous tax relief. The Deputy mentioned the initiatives the Revenue Commissioners were taking, as announced in the Budget Statement yesterday. These are not only to provide information but the real goal is to automate reliefs to ensure people will not have to claim. I will consider if there is more we can do to ensure they are fully aware of what this involves.

Perhaps the Revenue Commissioners should send a letter to the banks and other mortgage providers to state this condition is strictly enforced.

Mr. Daly

If I were employing a solicitor and that was part of the deal, I would be quite annoyed if he or she did not draw my attention to this during the process.

Some of the people concerned may have recourse because perhaps the terms of the rent-a-room scheme have confused them.

The last time we met Mr. Daly said there was a review of customs activities at private airports which would be complete by the end of November. I represent a constituency in which the level of drug abuse has reached an unbelievable plateau the likes of which have not been seen for 20 years. There is a strong belief that at private airports, perhaps even at airports such as Shannon, which do not enjoy the same level of customs supervision as Dublin Airport, the door is wide open for those who wish to avail of the lack of drug detection systems. There is a strongly held view that the potential exists for a wide open door to those who wish to avail of the lack of customs and excise and drug detection systems at private airports, and even perhaps at Shannon Airport. This may be one reason why the State is awash with drugs. Has the review been completed and, if so, what was its outcome?

Mr. Daly

The review is largely completed and I expect to have it in the next week. I do not know what is in it. However, I assure the committee that this is an area that the Revenue takes very seriously. I do not have any evidence to the effect that small airports are the source of large-scale drug smuggling. We keep in close touch with other agencies and administrations, both at home and abroad. Our approach, whether it is Dublin, Shannon or Weston, is based on intelligence-gathering, liaison with our colleagues in other agencies, both at home and abroad, and risk profiling. Any international body dealing with drug interdiction will claim this is the most effective way to get results. We get good results at Dublin Airport and it is based on profiling.

At Dublin Airport?

Dublin Airport is a perfect airport.

Does Mr. Daly consider that six unannounced visits and 12 announced visits by customs officials a year to Weston Airport is sufficient? Changes have occurred in the attraction of being a customs officer. In the past it was seen as a career and highly regarded employment. Are there difficulties in recruiting customs officials?

Ireland, outside of the US, has the highest order list for private aircraft and helicopters with private airports mushrooming. US law enforcement agencies claim that 15 years ago a significant point of entry for drugs from Central and South America was private airports. What is plan B, given that we have this huge onslaught of drugs? What is being done to ensure private airports are not being used for drug smuggling?

Mr. Daly

I started off as a customs officer. It is a great career.

It is a great career.

Mr. Daly

There are no difficulties recruiting people for the customs service. People are recruited into the Revenue and then assigned to customs. Many personnel enjoy customs work because it tends to be different from tax work.

There are hundreds of thousands of airports in the Americas, many of which are remote. Making comparisons between the 27 private airports in Ireland, where very little happens without somebody being aware of it, is not valid.

Many drugs have been brought into the country.

Mr. Daly

It is not a question of doing so many number of visits to Weston Airport. The visits are based on intelligence gathering and profiling. I agree unannounced visits are more valuable.

There are only six per year.

Mr. Daly

I would not be surprised to see the number of those increased. The solution is to get the intelligence, target, risk profile and then intervene.

Would Mr. Daly have the figures for Customs and Excise presence at Shannon Airport?

Mr. Daly

I do not have the figures. Shannon is an international airport. As far as I am aware we have a customs' presence there when aircraft arrive or depart. If in limited circumstances there might be valley periods, customs will be there. There are other controls at Shannon. The idea of an aircraft coming in and out of Shannon without customs knowing about it cannot happen.

Weston and other private airports are much higher risk profiles than Shannon or Dublin airports.

Mr. Daly

We must see what emerges from the review. If there is a risk, the Revenue will cover it.

Can the committee have a copy of the report?

Mr. Daly

I would like to read it before because it might indicate some of the actions we may take. I do not want those to be made public.

Mr. Daly might send on as much information as he can to the committee.

Mr. Daly

I think the report is due to the Minister.

On the increase on tax relief on mortgage interest announced yesterday, has the Revenue done any projections on how increasing interest rates imposed by the ECB will affect it? Have projections been made as to what interest rate point would wipe out the benefit of the measure?

Mr. Daly

We have not done any such projections as I do not believe it is in our remit. We apply the tax rates that are enacted by the Oireachtas.

Would the Department of Finance have done such an exercise?

Mr. Barry

I cannot answer that specific question. I can find out for the Deputy whether such information is available.

Will Mr. Barry forward the information to Deputy Joe Higgins?

Mr. Barry


Obviously the measure will be some relief to hard-pressed first-time buyers. If it will be wiped out by increases in interest rates, it is a different story.

I note that in the budget, VAT reductions were announced for children's car seats and a new VAT refund for conferences in hotels. I, and other Deputies, have raised the issue of VAT at 21% on home care packages. This is onerous because families are paying for it and as they are not businesses they are not entitled to a refund. Was that issue addressed by the Minister yesterday? He has claimed it is being reviewed. Has the Revenue reached any conclusion on this?

Mr. Daly

It is a policy issue. The Minister, in a reply to a parliamentary question, indicated that it was being considered. The difficulty is that VAT is not a tax over which we have total discretion any more, because of the EU. Beyond that, it is a policy matter, and I cannot comment.

I understand that if the caring is provided by the public sector, the HSE for example through a home help, that is VAT-free. It only applies to care delivered by private sector companies.

Perhaps Mr. Daly can tell the committee how it was possible to drop the VAT on child car seats.

That is a policy issue, again. However, I suggest that what the Deputy is proposing is a suitable amendment to the Finance Bill.

Has Mr. Daly invoked double taxation agreements to assist the Revenue at any stage, as regards inquiries into tax evasion, bogus non-resident accounts, insurance policy mechanisms, Ansbacher and so forth?

Mr. Daly

Not specifically, although we may have as regards some individual cases. It is also true that we might have come across information that could be exchanged with other administrations. We would have used this mechanism in some investigations, but to a limited degree.

In general terms, if the Revenue comes across an evasion mechanism that relies on the use of facilities outside the jurisdiction, it will pursue matters through the individual financial house here or through the taxpayer or his or her agent, rather than through the Revenue authorities in a neighbouring country.

Mr. Daly

In some of the investigations, we received information either from the taxpayer or the financial institution, the insurance company or whatever. That would be the primary target area. In other cases, certainly if we had evidence of fraud or evasion by some individual, we would invoke either a double taxation treaty mechanism, if relevant, or the mutual assistance directive within the EU, sending a request to the authorities concerned for specific information.

On a more general point, which I mentioned earlier as regards the UK and Australia now following our model, we have meetings from time to time, at heads of tax administration level etc. and exchange details of our methodology and what types of approach have worked.

In his reply, earlier, to Deputy Boyle, Mr. Daly gave the number of cases that went from the appeal commissioner to the Circuit Court, the High Court and the Supreme Court. In how many of those cases were the appellants successful?

Mr. Daly

In the Circuit Court for 2000-04——

How many hearings were there?

Mr. Daly

In the Circuit Court, unless it was a capital acquisition tax case, the hearing would always have been at the request of the taxpayer. There were 20 cases. In six of those the finding was for the taxpayers. In two there was a settlement, which I presume was on the steps of the court. In eight cases there was a finding for Revenue and four are still live somewhere in the system. That is the position as regards the Circuit Court. I believe I said there were 24 cases in the High Court. Three were found in favour of the taxpayers, three were settled, one case was for Revenue and there are six cases still live.

In the Supreme Court there were four cases. Three found for the taxpayers and one for Revenue. We were less successful than I had previously thought.

Will Mr. Daly take another look at the High Court figures as they do not appear to add up?

Mr. Daly

I am sorry, there are two cases undergoing judicial review. There were three for taxpayers, three settled, one for Revenue, 15 live and two under judicial review.

Is it possible for members of the public, as taxpayers, their agents or the professions involved to access all the precedents of cases such as these?

Mr. Daly

If something emerges, either in an appeal or in a settlement, we publish a summary of the main issue. It is certainly available internally and I am pretty sure we publish it as well. We have a precedents database on our website, as I understand it.

Does the office of the appeal commissioner have a similar precedents database on its findings?

Mr. O’Callaghan

We report cases that seem relevant but we are behind in that regard because of staff shortages. However, we report such cases but there are not many on our website, as yet.

On the tax relief available on pension contributions, is there any estimate of the tax foregone in respect of that relief in the most recent 12-month period for which information is available?

Mr. Daly

There was something in yesterday's budget booklet, but it related to 2003. I am in real danger of giving the Chairman the wrong information here. I should hate to contradict yesterday's budget booklet, even accidentally.

The pensions figure was €2.8 billion in 2003, which is the latest year. That relates to the tax foregone in terms of the credits and reliefs afforded.

Is the Revenue satisfied that all claims are legitimate?

Mr. Daly

We carry out a pretty thorough examination in terms of the approval of schemes in the first place and of their operation. I certainly am not aware of anything that might indicate there is a problem.

Mr. Purcell

I have no concluding remarks to make unless the Chairman or Deputy Joe Higgins have any questions, or need clarification in respect of either the report or my earlier remarks.

We may note Votes 8 and 9 and dispose of chapters 2.7 to 2.10, inclusive. Is that agreed? Agreed.

The witnesses withdrew.

The committee adjourned at 2.20 p.m. until11 a.m. on Thursday, 14 December 2006.