The Chartered Accountants Tax Case Digest this month considers Justice McDonald’s decision in a case in which Perrigo challenged the legality of a notice of amended assessment issued by Revenue. The transaction on which the amended assessment was raised related to the 2013 sale of Perrigo’s intellectual property rights to pharmaceutical products, sold under the brand name Tysabri, used in the treatment of multiple sclerosis and Crohn’s disease. Perrigo has taken a two-pronged approach against Revenue: one is to appeal the notice of amended assessment through the Tax Appeals Commission on the grounds that Revenue has incorrectly characterised the sale of the Tysabri IP as a capital transaction, rather than trading; the second approach, being the case at hand, was a judicial review of the amended assessment on the grounds of a breach of legitimate expectation which was so unfair as to amount to an abuse of power and an abuse of Perrigo’s constitutional property rights.

Legitimate expectation

Perrigo presented four different claims of legitimate expectation to the Court. Justice McDonald’s decision does not consider the transaction itself, but whether Perrigo ought to expect that the transaction would be treated trading based on the relevant representations made by the Respondents. The four categories of representations on which Perrigo relied were:

1. A certificate issued by the Minister for Finance
2. A Tax Briefing issued by Revenue in October 2004 (“TB 57”)
3. The conduct of the parties, in particular the course of dealings between them, including meetings, correspondence, the returns filed by Perrigo to Revenue, the provision of accounts and computations and assessments issued by Revenue over the years which raised no question of the nature of activities carried on by Perrigo
4. The combined effects of the three factors above

Justice McDonald referred to the judgment of Fennelly J. in the Supreme Court in Glencar Exploration plc v. Mayo County Council (No.2) [2002] 1 I.R. 84, in setting out the three “preconditions” that must be established to make a claim based on legitimate expectation:

1. The public authority must have made a statement or adopted a position, expressly or implied, that amounted to a promise or representation as to how it would act;
2. The representation must be addressed to or conveyed, directly or indirectly, to an identifiable person or group, in such a way that it forms part of a transaction entered into between the person and public authority, on which the party acted in good faith; and
3. It created the reasonable expectation in the person that the public authority would abide by the representation.

The certificate issued by the Minister for Finance

A Shannon Certificate was issued by the Minister for Finance on 20 February 2002, with effect from 1 July 1997 in relation to the 10 percent rate of corporation tax applying to certain activities carried on in Shannon Airport. The certificate expired in December 2005; however, Perrigo claimed it was still relevant to the Tysabri IP disposal. The certificate described the trading operations of the company as being intellectual property rights management and treasury services. The description of intellectual property rights management included “exploiting”, “dealing in” and “disposal” of intellectual property rights. Justice McDonald considered that those words must be read in the context of the description of activities as a whole. He found that the ordinary meaning of the words included in the certificate did not extend to the outright disposal of intellectual property. He considered this conclusion to be strongly reinforced by the nature of the application for the certificate, in which there was nothing to suggest that the outright disposal of IP would be covered.

It was found that Perrigo had failed to establish that the Respondents had made a representation through the issuance of the Shannon Certificate, and as such, a claim to legitimate expectation could not exist.

Tax Briefing issue 57, 2004

TB 57 was published in response to a number of queries Revenue had to manage when the general rate of corporate tax was reduced to 12.5 percent. It confirmed that:

“The 10% tax regime for companies in the IFSC and Shannon applies only to income arising from trading activities. Therefore, such activities already meeting the requirement of these regimes will qualify for the 12.5% tax rate.”

The court concluded that TB 57 cannot be considered to amount to a representation and could not provide a basis for a legitimate expectation claim. This was considered consistent with a “warning” that whether any particular operations are trading is to be determined after the events in question have taken place. It was also noted that TB 57 requires the taxpayer to form their own view as to whether a transaction is trading.

The course of dealings between the parties

Perrigo provided details on the financial statements and tax computations submitted to Revenue each year, which they contended illustrated very clearly that the Tysabri IP had been treated as trading stock or circulating capital. This was in addition to details of meetings and copies of emails in which Revenue stated: “… the work we have done to date does away with the need for a formal risk review…”. Perrigo contended that Revenue’s failure to raise any query based on the information provided gave rise to an implied representation that the transaction’s tax treatment was acceptable.

The Court found that Perrigo had failed to prove that Revenue knew or must have known that IP disposals formed part of the trade of the company. While recognising that a representation could be made by Revenue arising from its conduct, due to a lack of proof, Justice McDonald found there could be no such representation in this case.

In addition, Perrigo contended that by raising an assessment on the filing of the 2013 return and not subsequently amending the assessment, Revenue had declared themselves satisfied with the contents of the returns. Perrigo relied on the provisions of subsections 954(2), 954(3) and 956(1)(a) in Part 41 TCA 1997, in force during the time. Perrigo argued that the tax inspector was required to take active steps to make an assessment on a chargeable person. On the basis that IP had been treated as trading stock without any expression of dissatisfaction from the inspector, Perrigo consider that Revenue must be taken to have been satisfied with the returns, as unlike the system that operates today, the active participation of inspectors was required in making an assessment.

Justice McDonald found this argument to be based on an incomplete consideration of the relevant provisions contained in Part 41 TCA 1997 and that Perrigo had failed to take account of the combined effects of section 956(1)(b) and section 955(1) TCA 1997. Accordingly, he found no grounds on which Perrigo could advance a legitimate expectation claim based on their dealings with Revenue.

The combined effects of the Shannon Certificate, TB 57 and the course of dealings

Having considered each aspect individually, Justice McDonald concluded that the combined effects of each aspect did not amount to a representation that could support Perrigo’s legitimate expectation claim.

The assessment is so unfair as to amount to an abuse of power

Perrigo submitted this argument as its fall-back position in the event that the Court concluded that no “clear representation” had been established. Having considered the relevant case law, Justice McDonald could not see how Perrigo could claim that Revenue had acted unfairly where they had no basis to a legitimate expectation that an amended assessment would not issue. It was found that Perrigo had failed to establish there was anything in the course of dealings between the parties that would make it unfair for Revenue to have exercised its statutory powers to issue an amended assessment.

Perrigo’s constitutional rights

As Perrigo sought to rely on the same material addressed in the context of legitimate expectation and the unfairness issue, on the basis that those arguments had failed, Justice McDonald found that the constitutional argument also failed.

Conclusion

Justice McDonald dismissed Perrigo’s challenge on the grounds that Perrigo had failed to establish any basis for a legitimate expectation that the notice of assessment would not be amended. We await the second prong of Perrigo’s challenge to the notice of amended assessment, with the question of whether the disposal of the Tysabri IP constituted a trading or capital transaction to be resolved before the Tax Appeals Commission in due course.

The full judgment in this case is available from: - https://www.courts.ie/acc/alfresco/86dfd10f-9923-44ec-9e6b-ffa8bcb0ef1c/2020_IEHC_552.pdf/pdf