Assignment on the Interpretation of Revenue Law PDF

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Essay on the Interpretation of Revenue Law. 2,000 word limit...

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Introduction Taxation is principally a matter of legislation and thus it is essential to understand how tax statutes are interpreted. However, this interpretation has caused numerous problems for courts for several reasons, including the nature of language used by the legislature, the use of “archaic legislation,”1 and the tendency of legislators to use complicated terminology during the drafting process. Throughout my essay I will be discussing the relevant canons of construction and importance of the correct interpretation of tax statutes with reference to relevant legislation and case law. I will ultimately trace the evolution of the purposive approach to interpretation in Irish law from what was traditionally a strict, literal approach.

Canons of Construction The common law has introduced a number of solutions to the complications surrounding interpretation through the development of canons, maxims and presumptions of statutory construction. The three canons of construction, which are the most relevant for my essay, are known as the literal rule, the golden rule and the purposive rule.2 The strict literal rule has historically been the approach in our jurisdiction for the interpretation of tax statutes. This approach gives words their literal and normal meaning, even if such a reading leads to an absurd or unjust result. The purposive approach is now followed in our jurisdiction following the case of The Revenue Commissioners v. O’Flynn Construction & Ors and the Interpretation Act 2005. This approach involves interpreting a provision in light of the intention of the legislature. Error error error error error error error error error error error error Background 1 Catherine O’Sullivan , “The Importance of Correct Statutory Interpretation technique, The Case of Minister for Justice, Equality and Law Reform v Dolny” 45(1) (2010) Irish Jurist 146. 2 McCormick, Rhetoric and the Rule of Law (Oxford University Press, 2005)

Article 22 of the Constitution states that no taxes may be created without the approval of the legislature; The Chairman of Dáil Éireann shall certify any Bill which, in his opinion, is a Money Bill to be a Money Bill, and his certificate shall, subject to the subsequent provisions of this section, be final and conclusive. Further, it was established in the 1987 case of Gillian v. Governor of Mountjoy Prison that an international agreement cannot be imposed into the domestic legal order without approval from Dáil Éireann if such an agreement imposes charges on public funds.3 Mr. Justice Rowlatt’s statement in Cape Brandy Syndicate v. IRC4 has been regularly cited with approval over the years in many jurisdictions. In WT Ramsay Ltd. v. CIR, Lord Wilberforce established the “Ramsay principle” by echoing Rowlatt J’s famous words, stating that “[a] subject is only to be taxed on clear words, not on intendment or on the ‘equity’ of an Act.”5 In the Cape Brandy case, it was established that the parliament’s interpretation of the Act of 1915 has the same binding authority on the court. This literal approach to interpretation was further encouraged in IRC v. Duke of Westminster,6 where Lord Tomlin noted that the legislative document must be read as a whole in order to establish the substance of a transaction. The traditional principles enunciated in Duke of Westminster were reciprocated in McGrath v. McDermott; “the function of the Court in interpreting a statute is limited to ascertaining the true meaning of each statutory provision.”7 However, in O’Flynn, which will

3 State (Gillian) v. Governor of Mountjoy Prison [1987] ILRM 279 4 Cape Brandy Syndicate v Inland Revenue Commissioners: CA 1921 5 WT Ramsay Ltd v IRC [1982] 6 IRC v. Duke of Westminster [1935] All ER 259 7 McGrath v McDermott [1988] IR 258

be discussed further, the Chief Justice stated that McGrath v McDermott actually purported to apply the purposive interpretation, rather than the strict literal approach.8 Henchy J discusses the three basic rules of statutory interpretation in the case if Inspector of Taxes v, Kiernan,9 where it was established that the word “cattle” could not be interpreted to include pigs. He stated that the word in question should be given its ordinary or colloquial meaning and should be construed strictly to prevent fresh imposition of liability, and that the Judge should draw primarily on his own experience of the word’s use. The Interpretation Act 2005 reflects the long-standing position as set out in Crilly10, where the courts clearly indicated their reluctance to abandon the exclusionary rule, i.e. the common law rule of interpretation that states that parliamentary debates or ministerial statements cannot be used as an interpretative aid. The intention of the legislative provision must be derived from the words chosen by the legislature itself to express its intention.11 S.10 of the 2005 act emphasises the necessity to give the statute a meaning, and that the words in the statue must be taken into consideration. This provision takes inspiration from Finlay CJ in McGrath, “[t]he function of the courts in interpreting a statute of the Oireachtas is strictly confined to ascertaining the true meaning of each statutory provision.”12 In JJ Quigley v. Robert Harris,13 Laffoy J applied the well-established principles of statutory interpretation as outlined above, noting in particular that the principle of strict interpretation applies to both charging and relieving provisions equally. It was held here that ambiguity in a taxing statute will be interpreted in favour of a tax payer.14 However, the Dolny case15 illustrated that judges and lawyers alike were not as familiar with statutory 8 The Revenue Commissioners v. O’Flynn Construction & Ors 2011 IESC 47 para 69 9 J D Mulvey (Inspector of Taxes) v. R M Kieran I ITR 563 10 Crilly & Farrington v Eastern Health Board & ors, [2001] IESC 60 11 Emer Hunt and Turlough Galvin, “Impact of the Supreme Court in O’Flynn Construction on Statutory Interpretation” 1(2012) Irish Tax Review 12 McGrath v McDermott [1988] IR 258 13 Quigley v Harris [2008] IEHC 403 14 Ibid 15 Minister for Justice Equality and Law Reform v Dolny, [2009] IESC 48 (2009)

interpretation techniques as perhaps they should have been.16 Catherine O’Sullivan has noted that while Dolny was incorrectly decided and thus the facts of the case are now immaterial, there remains concern that the decision may be relied upon in the future. This concern is derived from the failure of the courts to discuss the separation of powers in the relevant context, or to endorse the traditional literal approach. The Dolny decision, while no longer majorly significant, illustrates why proper statutory interpretation is so imperative.

The O’Flynn Case Up until this point, it was generally accepted that a literal approach was to be taken in the interpretation of a tax statute. O’Neill J in McGarry stated that “in construing a taxing statute, the court must adopt a literal interpretation, giving to the words their natural meaning.”17 However, following the 2011 judgment of O’Flynn,18 there has been a considerable degree of uncertainty in this area of law as the state of tax certainty in Ireland has been confused. O’Flynn was the first tax avoidance case to be heard before the superior courts. O’Flynn Constructions (hereinafter OFCL) was a construction company with reserves which, if distributed, would have given rise to an income tax liability for shareholders. Mitchelstown entered into a series of transactions which involved the sale of its reserves to OFCL which then used its own reserves to find a dividend through Mitchelstown to its shareholders. The tax benefit of this transaction was challenged by Revenue under the general anti-avoidance provisions contained in s.86 of the Finance Act 1989. While the facts of the O’Flynn case are no longer particularly relevant, the decision, which found in favour of the Revenue Commissioners, marked a new departure in Irish taxation law.19

16 Catherine O’Sullivan , “The Importance of Correct Statutory Interpretation technique, The Case of Minister for Justice, Equality and Law Reform v Dolny” 45(1) (2010) Irish Jurist 146. 17 Per O’Neill J in McGarry v the Revenue Commissioners [2009] ITR 131 18 The Revenue Commissioners v. O’Flynn Construction & Ors 2011 IESC 47 19 Deloitte, General Anti-avoidance The O’Flynn Construction Decision

In his judgment, O’Donnell J emphasised the need to give effect to the intention of the Oireachtas in interpreting s.86 and that the purpose is to be discerned “from the words used in their context, deploying all the aids to construction which are available.”20 This marks a significant departure from the traditional literal approach to the interpretation of tax statutes and means that Duke of Westminster is no longer persuasive authority in Ireland. He notes that there will be circumstances where it will not be possible to discern the intention of the Oireachtas and in these instances s.86 will be irrelevant. He rejected a purposive approach to the interpretation of tax statutes in the absence of legislation providing for such, and notes that the decision in McGrath did “expressly contemplate”21 a purposive approach to interpretation. McKechnie J’s minority judgement covers the issue of interpreting tax statutes in some detail, but it does not explicitly endorse a purposive approach either.22 He argues that the task of discerning the intention of the Oireachtas is “fraught with difficulty”23 as it requires the judiciary to avoid including subjective opinions in their decisions and to retain certainty while “respecting the remit of parliament.”24

Analysis Following the O’Flynn decision, the previously accepted literal approach has been reversed and a purposive approach must now be taken when interpreting taxing provisions which fail to reflect the exact intentions of the legislature and are thus uncertain. The majority in this case have relied on the Interpretation Act 2005 which makes provision for a purposive

20 The Revenue Commissioners v. O’Flynn Construction & Ors 2011 IESC 47 per O’Donnell J 21 Ibid 22 Ciaran Ramsay, “The Revenue Commissioners v O’Flynn Construction Company Ltd, John O’Flynn and Michael O’Flynn: Supreme Court Decision” 1(2012) Irish Tax Review. 23 Conor Kennedy and Diarmuid Rossa Phelan, “O’Flynn Construction: the Need for Tax Certainty” (2014)2 Irish Tax Review 100 24 Ibid

approach and concedes that the interpretation of a statute should reflect the intentions of the Oireachtas as established from the reading of the Act as a whole. The purposive approach to the interpretation of a tax statute came as a surprise to many in the tax profession and academics alike. Litigants in a tax case will now need to consider the background to the legislative process as this might play an important role in interpretation. Conor Kennedy has noted the uncertainty which remains where the purposive approach is followed, stating that “[i]t makes the application of the law dependent on practice, not on the law…[and] makes the law more dependant on intermediaries and on fees.” The O’Flynn decision also leaves a number of issues remaining which a Supreme Court may have to deal with in the future. For example, if it assumed that legislative background remains a relevant consideration, it is unsure from what sources such a background should be obtained. The dangers of such uncertainty include the possibility of Revenue authorities finding in evidence explanatory notes seeking to clarify the purpose of legislation.25 Ambiguity also remains with reference to the exclusionary rule. As discussed supra, the judgment in Crilly was anxious to preserve the exclusionary rule, but we are now left unsure of its relevance. The decision is the most relevant authority at present on the interpretation of tax legislation and is therefore a decision of major impact on personal economic freedom.26 Moving forward, caution should be exercised by tax planners regarding interpretation of legislation and as regards the possibility of an underlying, non-tax rational for transactions.27

25 Emer Hunt and Turlough Galvin, “Impact of the Supreme Court in O’Flynn Construction on Statutory Interpretation” 1(2012) Irish Tax Review 26 Conor Kennedy and Diarmuid Rossa Phelan, “O’Flynn Construction: the Need for Tax Certainty” (2014)2 Irish Tax Review 100 27 Ciaran Ramsay, “The Revenue Commissioners v O’Flynn Construction Company Ltd, John O’Flynn and Michael O’Flynn: Supreme Court Decision” 1(2012) Irish Tax Review.

Conclusion Throughout my essay I have traced the evolution of the purposive approach to statutory interpretation in relation to taxing legislation, an approach which does not reflect the beliefs of Rowlatt J. in Cape Brandy Syndicate v. IRC. Tax certainty is necessary as to promote the rule of law and the objectives of the Government. The Commission on Taxation received submissions in 2008 regarding the efficiency of the Irish taxation system in order to establish the framework for the creation of future tax policy. The Department of Finance was one of many parties which noted the importance of tax certainty, stating that …certainty is invaluable. Providing this maximum degree of certainty and predictability in the application of corporate and other business taxes may in itself lead to higher levels of investment and economic growth.28 A purposive interpretation of tax statutes results in the persistence of uncertainty and it is therefore submitted that a strict literal approach should be taken in this area of law, with the recommendation of an amendment of s.5 of the Interpretation Act 2005 to exclude a purposive approach to tax statutes.

Bibliography Cases 

Cape Brandy Syndicate v Inland Revenue Commissioners: CA 1921

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Crilly & Farrington v Eastern Health Board & ors, [2001] IESC 60

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IRC v. Duke of Westminster [1935] All ER 259

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J D Mulvey (Inspector of Taxes) v. R M Kieran I ITR 563

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McGarry v the Revenue Commissioners [2009] ITR 131

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McGrath v McDermott [1988] IR 258

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Quigley v Harris [2008] IEHC 403

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State (Gillian) v. Governor of Mountjoy Prison [1987] ILRM 279

28 Submission by Department of Finance to Commission on Taxation, July 2008

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The Revenue Commissioners v. O’Flynn Construction & Ors 2011 IESC 47 para 69

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WT Ramsay Ltd v IRC [1982]

Statutes 

Interpretation Act 2005

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Finance Act 1989

Articles

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Catherine O’Sullivan , “The Importance of Correct Statutory Interpretation technique,

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The Case of Minister for Justice, Equality and Law Reform v Dolny” 45(1) (2010) Irish



Jurist 146.

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Ciaran Ramsay, “The Revenue Commissioners v O’Flynn Construction Company Ltd, John

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O’Flynn and Michael O’Flynn: Supreme Court Decision” 1(2012) Irish Tax Review.

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Conor Kennedy and Diarmuid Rossa Phelan, “O’Flynn Construction: the Need for Tax

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Certainty” (2014)2 Irish Tax Review 100

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Deloitte, General Anti-avoidance The O’Flynn Construction Decision

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Emer Hunt and Turlough Galvin, “Impact of the Supreme Court in O’Flynn Construction

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on Statutory Interpretation” 1(2012) Irish Tax Review

Textbooks McCormick, Rhetoric and the Rule of Law (Oxford University Press, 2005)...