Tax is a continually contested terrain, a constant and evolving battlefield between the creative impulses of tax advisers and the constraining influence of tax authorities. The former aim to reduce the tax liability of clients by crafting canny schemes and wily manoeuvres, while the latter is intent on shutting down loopholes.

It is, according to one person who has worked for both the Revenue and in private practice, akin to a “cat and mouse” game between adviser and authority. A new scheme is devised, with the promise of slashing a tax bill. If Revenue officials believe it is too aggressive, they will seek to shut it down.

This is the story of one such scheme; a scheme of massive complexity that spanned multiple jurisdictions, multiple parties and multiple financial manoeuvres. When parts were challenged at the Tax Appeals Commission, it was necessary to produce a chart mapping the flows of money between varying entities and currencies. 

The scheme, in which 35 well heeled individuals invested €40 million, encapsulated everything from Turkish lira, financial derivative trading, Commodities bonds, spot trading and even the renovation of Georgian property in Dublin.

At its core, however, the aim of the byzantine structures was profoundly simplistic: to help individuals avoid paying tax legally.

Today, for the first time, we reveal how the scheme worked, giving detailed examples of people who put significant sums into it.

Indeed, such was the success that the after tax return on the scheme was a whopping 126 per cent. In total, the scheme sought a €20 million tax deduction on €40 million borrowings. 

Today, for the first time, we reveal how the scheme worked, giving detailed examples of people who put significant sums into it. We also reveal the Revenue’s battle to close it down and ensure that the individuals involved were unable to avoid paying tax on their windfalls.  

Drawing from expert testimony, multiple sources and legal papers, this is the anatomy of a €40 million tax avoidance scheme.

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A scheme within a scheme within a scheme

Before we reach the disputed ground and the battle with the Revenue Commissioners, it is crucial to understand how the scheme worked. And that is no simple task.

In total, some 35 investors obtained loans from the promoter of the scheme to buy shares in a freshly incorporated company. Documents in relation to the scheme have redacted the name of the company, instead referring to it simply as NCR. The aggregate value of the loans was €40 million, with the promoter sourcing the funds from the private banking arm of a financial institution.  

NCR was raising finance for the purpose of investing in a Georgian building and also investing in a wholly owned subsidiary company, SNR which in turn was investing in a financial derivative issued by Related Company that tracked the performance of the European Property Real Estate (EPRA) Index.

Confused? You should be. But, when you assess it on an individual basis, the steps start to make sense. 

Step One: Share Acquisition

On an individual basis, investors borrowed money in Turkish lira from the promoter to fund the acquisition of shares in NCR. These funds were used by the promoter of the scheme to acquire a Georgian building and to acquire a financial derivative, essentially a side bet, that tracked the performance of the European Property Real Estate Index (EPRA). Based on bank documents, the Turkish lira was immediately converted by NCR back into euro. 

The vast bulk of each investment went into the property derivative. One investor who put up €500,000 had €40,000 directed towards the Georgian property and the rest channelled into the financial derivative. 

Interest on the loan was payable in euro and calculated on an agreed forward exchange rate, which was stipulated in the loan note. 

Step two: Commodities bond to fund interest

In a connected but separate transaction, investors also put money into a bond with a related company that paid interest annually and a return on maturity that was dependent on the performance of the basket of commodities. In one example, investors put €250,000 into this bond – some €50,000 coming from personal resources and the rest from a loan from the promoter of the scheme. 

After that, the investor made annual withdrawals from the Commodities Bond to fund the interest payments due under the foreign exchange loan. Investors then included the interest earned on the Commodities Bond on the tax returns, but interest paid on the loan was not deemed tax deductible by the investors. 

Step Three: Hedging Arrangement

In yet another separate but related transaction, the investors then hedged their foreign currency exposure on the share loan by entering into a spot trade and financial spread bet with the promoter of the scheme.

The foreign currency loan taken out in Turkish lira carried an exchange rate risk, in that the cost of repaying the loan principal would not be known until the Turkish lira to euro exchange rate was set and that would only be known at on the date of repayment. The Turkish lira is a high interest, depreciating currency and so there was an anticipation that an investor wold realise a gain on repayment.

The hedging transactions matured on November 30, 2009. Due to the exchange rate fluctuations over the investment period, the cost of repaying the foreign exchange loan was €350,171, which was €149,829 lower than the euro equivalent of the loan of €500,00 on drawdown. 

As the gain arose on the repayment of a liability, it was not subject to capital gains tax as that tax only applies to gains arising on the disposal of chargeable assets. A profit of €87,663 was generated on the maturity of the financial spread bet. 

As Tax Appeals Commission documents show: “The currency fluctuation risks were removed by taking out a 100 per cent hedge with Promoter such that the currency gain on repayment was fixed at the outset. The effect of the hedging transactions acted as a 100 per cent hedge of the Turkish lira 800,000 loan. The economic effect of the 100% hedge was to realise a fixed gain.”

Step four: Winding up the investment

On 5th December 2005, the investors entered into a put option agreement with promoter of the scheme, which enabled them to realise the investment by calling upon Promoter to purchase his shares. 

The price payable by Promoter for the shares was set at the original amount subscribed for the shares plus a proportionate share of 25 per cent of any increase in the value of company that invested in the Georgian property over the initial reference level and a proportionate share of 75 per cent of any increase in the value of the derivative over the investment period.

On 30 November 2009, by agreement between the parties, the investor shares were redeemed by NCR. The price payable for the shares in NCR was equal to the original amount subscribed and a return of €2,147 was generated on the maturity of the Commodities Bond. This was in addition to the annual interest which was earned on the Commodities Bond.

For the investors involved, it must have seemed almost too good to be true. For officials in the Revenue Commissioners, it simply was too good to be allowed through. 

In addition to the gains on the investment, the beauty of the scheme was that investors could claim for interest relief on the investment due to the loan structure. 

In the case of one investor who appealed the Revenue’s challenge on the scheme, the total interest relief claim between 2005 and 2008 from a €500,000 investment was €254,000. 

For the investors involved, it must have seemed almost too good to be true. For officials in the Revenue Commissioners, it simply was too good to be allowed through. 

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In Ireland, a number of leading tax advisers have carved out lucrative niches developing intricate manoeuvres to reduce their clients’ tax bill. However, under a change of law some years back, tax advisers must notify the Revenue of any tax structure that that is potentially controversial.

Taxpayers who engage in sophisticated tax planning arrangements, but fail to make a protective notification, face stiff penalties if their schemes attract the Revenue’s attention at a later date and Revenue or the courts rule against them.

Freedom of information documents released by the Revenue Commissioners give a flavour of the schemes that come to the Revenue’s attention. In one case for example, the Revenue received 142 protective notifications from 108 individuals claiming to be part of a syndicate, and also claiming to be trading in financial instruments.

The scheme centres on moving complex financial instruments and dividends through secretive offshore tax havens. The syndicate is claiming that they purchased right to a dividend from a company in a tax haven and that the dividend is not taxable. In addition, the members claimed a loss from the trade, which they wanted to use to offset against their tax bill in this jurisdiction. The scheme was challenged by the tax authority. 

And it was through his notification scheme that the Revenue first began to examine the Turkish lira scheme. Before long, it started to challenge a number of the individuals involved. 

Another scheme centred on employee benefit trusts. Under this scheme, which was probed by the Revenue, individuals take a loan from the trust. Then they take a second loan from a third party and use this money to repay the first loan. It does not stop there. Another third party then steps into the process to formally take on the individual’s obligation to repay the second loan.

This new party buys the loan for a fee which is substantially smaller than the amount actually due. The net result is that both the individual and the Irish company they work for claim no income tax liability, despite the individual effectively being paid significant sums.

And it was through his notification scheme that the Revenue first began to examine the Turkish lira scheme. Before long, it started to challenge a number of the individuals involved. 

One investor, however, a solicitor, refused to take the Revenue’s efforts lying down, taking a case to the Tax Appeals Commission. Documents in relation to this case, which was hear in recent months, give more insight into the mechanics and marketing of the scheme.

A solicitor and an “unstoppable train”

A solicitor in practice for 30 years, the investor had an interest in property investment and had viewed properties on a number of occasions in the late 90s and early 2000s. However, he did not proceed as he did not have a significant amount of funds on hand. He made a number of tax-based investments, such as films through the section 481 tax break.

He had worked with the promoter of the scheme before, taking out half of a €100,000 investment unit that they had previously marketed.

His recollection as to how he became aware of the investment was imprecise, according to the commissioner, and he said that he could have received the documentation either from Tax Advisor Name Redacted or from Promoter directly.

He said there there was no downside in investing in NCR other than theoretically he could lose money.

He confirmed he had also received a tax opinion letter from tax adviser and a number of slides in relation to a “Tax Efficient Leveraged Commercial Investment Proposal”.

He explained that he was aware there was a potential for uplift in the capital in terms of a 25 per cent share in any uplift in value of main investment property, and a 75 per cent share in any increase in value of the EPRA derivative. He confirmed that he was not familiar with the EPRA index at the time he made his investment.

He said there there was no downside in investing in NCR other than theoretically he could lose money. He said that the property market was an “unstoppable train” at the time of the investment. He said it was plainly obvious from the information memorandum that there was a tax benefit from the transaction. 

According to Commission documents:

“He indicated that the NCR investment was attractive to him as there was good potential for uplift with a low risk profile. He also confirmed that he anticipated that his income would continue at the same level as in previous years, and hence the tax efficiencies potentially achievable appealed to him.”

He stated that the tax relief on the interest on the borrowings was a significant factor in prompting his investment, but it was not his “sole motivator”. He said he was naive as to the structure of the investment.

“It was very beautifully restored”

As part of the deal, he became a director in NCR. However, he “wasn’t required to do very much in that regard”. He recalled attending two meetings and said that he received notifications of what seemed to him to be very routine type meetings. It was never brought to his attention that any serious matter would have to be addressed at any of the meetings, he said.

It was his understanding that of the €40 million raised, only a small part of it, specifically €8 million, was invested in the property.

He visited the property prior to his investment and said that he considered the property to be a “magnificent building”. He said that “it was very beautifully restored” and that his only other impressions were that “it existed”, that “it was quite large” and that “it was in very good nick”.

He signed a number of legal documents including a power of attorney. He indicated that he could recollect receiving invitations to board meetings but that he did not have any documentation to support this.

It was his understanding that of the €40 million raised, only a small part of it, specifically €8 million, was invested in the property. He suspected that his investment and his acceptance of the position of directorship coincided, but that in any event he accepted the events came close together. He did not benefit from the rental income and said that it did not affect the price of the share redemption.

Legal documents in relation to the case state:

“In cross examination he confirmed that on reflection, he had only attended one board meeting. He possibly was mistaken about any prior meeting and that his attendance at Investment Property Name Redacted could be in relation to his inspection of the building.

“He recollected two phone conversations with Tax Advisor in relation to the performance of his investments. However, he could not recollect the specifics of the call. The calls related to “how things were going” in the sense of how the overall investment was performing, rather than in relation to the Respondent’s inquiry. He understood the latter was a request for information only, rather than the disallowance of relief. He did not take notes of any phone conversation and could not recall the content of the calls.”

When cross-examined as to whether the after-tax return of 126 per cent was a significant factor in his investment, he confirmed that it was “certainly a factor”. 

He accepted that it was a very attractive investment based solely on tax and that a very large part of the return on the investment was €215,613 tax saved on interest. When re-examined as to whether he would have made the investment unless he was assured a very high return on the other elements of the investment, given that absent the tax saving, the numbers turned negative he stated; “I suppose if I had looked at this as carefully as we are now one might have taken that view but I obviously didn’t”.

At the hearing, the Revenue questioned him heavily about his role as a director of the holding company. Commission documents state the following:

“When questioned as to the whether his directorship was of a nominal nature he stated ‘Well I think looking back on it that looks to be the case, but that I didn’t know that …in December 2005.’

“He confirmed that at the time of the investment, he considered the loan was applied for “bona fide” purposes and was “not as part of a scheme or arrangement, the main purposes or one of the main purposes of which is the avoidance of tax” and that this was still his belief. Based on the advice he received, he was investing in commercial property in relation to which there was a likelihood, albeit not a guarantee of, an entitlement to tax allowances on the interest.”

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Witness number one: Des Peelo

Des Peelo is a well-known, well respected chartered accountant represented Charlie Haughey and Bertie Ahern. A former lecturer and government adviser, he has also been a director of numerous companies. In this case, he was called as an expert witness on behalf of the investor. 

He agreed that he was not able to determine whether tax was a main benefit of this scheme as the tax aspects were not within the scope of his engagement. However, he accepted the repayment in the amount of €474,984 was equal to the profit from the financial spread bet and the profit on the currency exchange rate.

The investor, he said, “shelled out €100,000” and needed to recoup this amount before he could even start talking about a profit. He confirmed that his summary and opinion based on his review related to the investment market in 2005 and that he understood the investment, the subject of the appeal was considered as tax deductible investments.

Other investment products like tracker funds were not available at the time of the investment, so the only option to invest in a diverse way was via unit linked funds.

In cross-examination, he indicated that on his review of the documentation, it appeared to him as a matter of interpretation that the borrower could have an exposure in respect of the loan. He conceded that there could be an alternative view. He did not comment on whether an investor would require some mechanism to repay the loan in the event tax deductions did not materialise. 

He said the investment in NCR was attractive to investors in providing diversity and lowering risk. Other investment products like tracker funds were not available at the time of the investment, so the only option to invest in a diverse way was via unit linked funds.

Commission documents state: 

“The investment was attractive in terms of competition and that the anticipated tax benefits were an additional benefit. The typical investments at the time involved flipping investments. He differentiated the former from the investment in NCR on the grounds that the investment in NCR had a span of realisation that was shorter than the typical 5 to 7-year lifespan of other investments.”

Enter the promoter of the scheme

A director of the company promoting the scheme also gave evidence. The promoter said that the office at the centre of the scheme was acquired in 2005 for €1 million a further €1.5 million was spent on its refurbishment. The intention, he said, was to manage the property as a serviced office. Given the cost of the upgrade, it was decided to bring in other investors. 

He said he had invested in the property in a personal capacity and thought the investment was fair in that it provided an interesting mix of opportunities – for example, the investor had an upside but had no downside in the building and there was an upside in the EPRA index with no downside due to capital protection. 

He stated that it was an illiquid investment as the investors were tied in for four years. He gave evidence that the counterparty to the transaction was a private company, the Promoter, rather than a big bank.

He said the investors’ contribution represented 40% of the purchase price of €8 million, with the balance funded by bank borrowings that the company undertook itself. He stated that at a certain point when things got bad the bank did foreclose and there was no loss to the investors.

In relation to the rationale for not giving the investors a 100% uplift in the EPRA index, he said that as the company would suffer a 25% tax, the investors were getting 100% of the after-tax profit of the company.

In relation to the investor’s directorship between 2005 and 2009 as recorded in the company’s financial statements, he confirmed he was invited to attend meetings. He was also an investor and director of that company. 

When it was put to him that all of the transactions were planned from the outset to operate together as they did, he accepted that it was intended that they operate as a cohesive unit.

The promoter was quizzed on the tax element of the scheme. Officials documents record his evidence as follows:

“He confirmed the total tax deduction sought in the amount of approximately €20 million equated to the commodities bond. When referred to the slide entitled “financial return”, he agreed that there was €8.6 million saved in tax through the arrangements. He said that there was no requirement that the borrowings had to be in any particular currency but simply an assumption was made for the purpose of the financial model that it was Turkish lira. He said the tax savings would be lower if they borrowed in euros. In relation to the after-tax saving of 126%, he could not recollect if it was in the slide pack given to the investors. He acknowledged that he would have played a significant role in preparing the information memorandum.”

It continued:

“He verified that rather than borrowing in euros the investors borrowed in Turkish lira to secure a higher tax deduction and that it made sense for any investor borrowing in foreign currency to hedge that transaction. He stated that all investors chose to borrow to fund 80% of the bond loan. He confirmed that there was an expectation of making a gain rather than a loss on the foreign currency but there was the potential to make a loss in the event the foreign currency appreciated.”

When it was put to him that all of the transactions were planned from the outset to operate together as they did, he accepted that it was intended that they operate as a cohesive unit. He said that it was intended to minimise upfront capital expenditure for investors to make the investment commercially attractive to investors, as borne out by the subsequent facts.

He acknowledged that there was no necessity for 33 non-executive directors to run the company and he explained that 33 was the number of investors required to release the desired level of capital for investment purposes. He said that tax motivations prompted the requirement to be a director.

On both sides of the transaction

Marcus Stanton is a chartered accountant specialising in structured finance. A former investment banker, he has been a non-executive director of a number of quoted companies. He gave expert testimony on behalf of the Revenue Commissioners. 

He gave a detailed outline of the structures involved in the scheme, describing it as complex. 

Out of the Appellant’s total investment of €453,750 in the property derivative, he said just €34,000 was doing the work on the property side and the rest was just being placed on deposit to give him his principal back. 

He accepted that it was legitimate for promotors to be mindful of tax efficient considerations when structuring investments.

Moving on to the Turkish lira loan, he concluded that the benefits of the hedging was to morph a treasury loan to a euro loan. He referred to an extract from his report where he stated: 

“Neither the Turkish lira loan nor the Turkish lira itself had any economic functionality in their arrangements and I therefore see no commercial purposes to the Appellant borrowing in Turkish lira and, at the same time, taking 100% hedge back into euros”. 

He then referred to the subsidiary company taking out a derivative with Barclay’s Capital. He concluded that the money has gone around in a circle and the money went back to Promoter. He concluded that due to the offsetting provisions in all the agreements whereby Promoter was on both sides of the transaction, that the Appellant’s sole exposure was to €50,000 which he had lost at the outset. 

He agreed that it was necessary for promotors of investments to advise as to the features of the investment as well as the probable tax treatment of the investments. He accepted that it was legitimate for promotors to be mindful of tax efficient considerations when structuring investments.

He agreed that it would be much riskier to put 100% into the derivative. He said that it is not so much the appetite for risk that would influence investors in making capital protected investments, rather it related to the degree of sophistication of different investors. He acknowledged such products could be attractive to unsophisticated investors.

In relation to the loan, he accepted that there was a Turkish lira loan. He said he agreed interest payments were made. However, he stated that from an economic perspective he considered the interest payments were not made.

The three issues at stake

Following detailed submissions, the Tax Appeals Commission distilled the dispute down to three key issues:

  1. Was the 2005 tax assessment made on time?
  2. Was the scheme in breach of anti-avoidance provisions by being for the sole or main benefit to reduce a tax bill?
  3. Did the investor fulfil his directorship responsibilities?
  1. Was the 2005 tax assessment made on time?

The Revenue had argued that while the tax return had been filed on time, the tax arising from it had not. However, the commission found that the return was lawful and there were no other issues in this respect

2. Was the scheme in breach of anti-avoidance provisions by being for the sole or main benefit to reduce a tax bill?

To determine whether the tax relief was “the sole or main benefit that might be expected to accrue to that person from the transaction”, the parties agreed that an objective analysis be conducted.

In undertaking such an analysis, the commission said it is not necessary to find conclusive proof of the person’s intent but to determine whether it was reasonable to conclude that the sole or main benefit of an arrangement was to obtain a reduction in a tax liability. 

It added: “If an arrangement was undertaken as part of a core commercial activity and the form of the arrangement was not driven by tax considerations or by obtaining a reduction in tax, it is unlikely that the sole or main benefit was to obtain a tax advantage. However, if an arrangement or transaction can only be reasonably explained by a tax advantage, it seems likely that the sole or main benefit was to secure the tax advantage.”

Based on the projections being promoted at the start of the scheme, the commission found it that the tax element was crucial. 

It found: 

“Therefore, by placing on one side of the scales the tax benefit of €107,807 and generous expectations of the commercial benefits of €36,174 on the other, it is clear that the scales are disproportionately weighted in favour of the tax benefit. Therefore, one could only conclude that the sole or main objective of investing in NCR was to obtain a reduction in a tax liability and relief should be denied accordingly.”

2. Did the investor fulfill his directorship responsibilities?

The Appellant was appointed as a director of NCR on 5th December 2005. From the evidence adduced, he only attended one director’s meeting on 7th December 2009 at which he resigned. However, and notwithstanding receiving notification of director’s meetings, he failed to attend any of the following meetings: 

(a) 21 February 2007 

(b) 2 May 2007 

(c) 20 August 2007, and 

(d) 19 May 2009

Consequently, the commission found that he had not. Furthermore, given that the investor did not perform any duties as a “part-time director” as required by TCA, section 250, the relief for the interest paid on the loan to acquire the shares in NCR is not available for all years under appeal.

Endgame

Given the marketing material on which an objective investor would have placed reliance, shows that the Investor’s return on investment was predominately generated by the tax relief.  In this regard, the commission concluded that the sole or main objective of investing in NCR was to obtain a reduction in a tax liability. As a consequence, it rejected the appeal.

And with that, it was over. One of the most complex cases to come before the commission boiled down to two simple decisions:  

It also found that the investor did not perform any active duties as a “part-time director” as expected by TCA, section 250 and therefore could not be considered to be a “part-time director.” 

As such, the relief for the interest paid on the loan to acquire the shares in NCR for all years under appeal was denied.  

And with that, it was over. One of the most complex cases to come before the commission boiled down to two simple decisions: the scheme was no other real purpose other than the avoidance of tax and the investor had not fulfilled his duties of directorship. 

It is anticipated that the case may well be appealed. If so, the names of all parties will be free to publish. 

The cat and mouse battle continues. 

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