Mr. Charlie Phelan:

I welcome the opportunity to attend today's meeting to discuss the recent issues which have arisen relating to the taxation of what are known as patronage shares issued by certain co-operatives. I am assistant secretary in the Office of the Revenue Commissioners with responsibility for the south-west region. I am joined by my colleagues, Anne Dullea, principal officer and district manager of Kerry tax district, and Paul Walsh, principal officer, and Clare Lucey, assistant principal officer, both of whom are from the Revenue Commissioners legislation service.

I propose to give an overview of the Revenue Commissioners recent examinations relating to the issue of patronage shares and their subsequent disposals as well as some background on the basis for the recent issue by the Revenue Commissioners of an inquiry letter to a certain group of taxpayers. The Revenue Commissioners term these inquiries as "aspect queries" and this has been widely reported. For clarity, I have attached at Appendix 1 a glossary of the terms from the code of practice for Revenue Commissioners audits and other compliance interventions.

I should also state my obligation to uphold taxpayer confidentiality as provided for in section 851A of the Taxes Consolidation Act 1997. Much of what I have to say is for illustrative purposes, to assist the committee in gaining an understanding of the broader issues giving rise to the committee’s deliberations today. I cannot identify any taxpayer or group of taxpayers, as provided for in section 851A.

Ireland has a self-assessment tax system. It is a fundamental principle that returns filed by compliant taxpayers are accepted as the basis for computing tax liabilities. When information comes to hand which suggests that returns submitted are not correct, the Revenue Commissioners will make appropriate inquiries. These inquiries are intended to be in the form which is most efficient in terms of time and resources and which imposes least cost on the taxpayer, while addressing the perceived risk. In this case the inquiries made were by way of aspect queries, which are not regarded as Revenue Commissioners audits and do not restrict a taxpayer’s right to make an unprompted qualifying disclosure. It is therefore important to highlight that by conducting the interventions in such a manner and affording taxpayers the benefits associated with making an unprompted qualifying disclosure, the Revenue Commissioners are ensuring that affected farmers are being treated in a fair and reasonable manner.

To give some background, early last year the Revenue Commissioners carried out various compliance interventions into the non-reporting by taxpayers of disposals and transfers of shares in the relevant co-operative. Where no tax was paid or declared by the taxpayer, tax yield was generated from these interventions. On a closer and more detailed examination by the Revenue Commissioners of the history of acquisition of co-operative shares, it was noted that certain shares were acquired in more recent periods, as patronage shares. From a detailed examination of the rules of the co-operative and its financial statements, the Revenue Commissioners became aware that approximately 600,000 patronage shares were issued to members in the years 2011, 2012 and 2013 as a direct result of the trading relationship between the relevant farmer and the co-operative, or the purchaser nominated by the co-operative. Accordingly, the basis on which patronage shares were issued means that the market value of the shares issued, after allowing a deduction for any amount paid for the shares, should be treated as a trading receipt of the relevant business of the farmer.

There has been no change in Revenue Commissioners policy relating to this issue. It is well-established under general taxation principles that a person is taxable by reference to the value received for services rendered or product sold. Predominantly, this value is generally received in the form of cash payments. However, where value is provided in the form of non-monetary benefits, such as shares, the same principle applies. I have provided some information charts at Appendix II and III, for illustrative purposes only, of the different views on the technical aspects of our inquiries and the process involved.

In this case, the patronage shares were received by suppliers of milk as a consequence of, and in proportion to, the quantity of milk supplied to the quantity of milk supplied to the co-operative or the nominated purchaser. I understand that one co-operative share was issued for every 1,000 gallons of milk supplied. For example, a farmer supplying 100,000 gallons of milk received 100 co-operative shares. Our initial letters to the taxpayers concerned confined our inquiries to milk suppliers who have received the most shares during 2011, 2012 and 2013. As the co-operative did not receive the full market price for the shares issued, the Revenue Commissioners view is that the true value of the shares received at par is correctly assessable as a trading receipt of the farmer's business and therefore assessable to income tax.

The shares essentially represent a form of payment received for the milk supplied by the farmers and, therefore, the value of the shares forms part of the trading income for the relevant years.

Arising from the initial inquiries into the disposal of co-operative shares, a database of valuations has been compiled by Revenue comprising the prices which were paid on disposals between unconnected third parties and, as such, the valuations used in the letter should represent the open market valuation of the shares during the relevant years. While the co-operative shares are not quoted, the shares command a significant price when sold privately on the grey market. The valuations used by Revenue in the letters are based on the average valuations for which the shares traded on the grey market over the relevant years.

Another factor in determining the share valuations as being greater than the par price paid for them is evidenced by the share interest paid by the co-operative in question. All shareholders of the co-operative received share interest per share held during the past five years as follows: 2011, €1.88; 2012, €2.60; 2013, €2.99; 2014, €1.50; and 2015, €2. These share interest payments could not be expected from a share purchase value of €1.25. These types of dividends would be expected from a far greater share valuation if purchased on an open market. For example, at an expected return on investment of 5% or 2.5%, a €2 dividend would value the share at €40 or €80, respectively.

It should be noted that the letter which issued was an invitation to engage with Revenue as regards the tax position for the years 2011 to 2013, inclusive. Revenue must pursue and collect any taxes owing but is cognisant of the fact that the tax implications arising may not have been fully understood by the relevant taxpayers and their advisers. Early engagement will facilitate a discussion between the individuals concerned with a view to bringing this matter to an early and satisfactory conclusion, including, if necessary, agreeing a mutually satisfactory phased payment arrangement, where a liability exists. I would add that Revenue is very much aware that 2016 has been an exacting year for farmers, particularly those in the dairying industry, but we are committed to finding an equitable solution to enable farmers to meet any outstanding liability. The next steps in the particular cases contacted to date are as follows: where the income was included at a fair valuation in the trading accounts of the taxpayers concerned, we can conclude our inquiries quickly on engagement with the person concerned; where the income was not included in the trading account and the taxpayer does not agree the technical position, we will assess the under declared income to tax. The taxpayers concerned may then appeal those assessments to the Tax Appeals Commission; where the income was not included in the trading account and the taxpayer does agree the technical position, we will assess the tax and work with the person to agree a payment arrangement; and where there is no engagement or no agreement, it is our intention to assess the estimated income under declaration for the taxpayers concerned. The taxpayers concerned may then appeal those assessments to the Tax Appeals Commission. Certain advisers both to shareholders and to the co-operative are of the view that a test case should be taken to verify the veracity of the Revenue technical position in this matter.

Revenue will facilitate this by raising the appropriate assessments in each case. Once the assessments have been raised, any taxpayer who wishes to make an appeal against the assessment must submit a written notice of appeal within 30 days to the Tax Appeals Commission, TAC. The Tax Appeals Commission, an entirely independent statutory body, has sole responsibility for accepting or refusing appeals. Where the appeal has been accepted, the TAC will make the decision as to how the appeal is to be conducted. Section 949E of the Taxes Consolidation Act provides an option for the appeal commissioners to consolidate appeals which raise common or related issues. Alternatively, the appeals commissioners may decide to adopt procedures under section 949AN of the Taxes Consolidation Act which permits the Tax Appeals Commission to make a ruling on a case in line with a previous determination where the new case has a common fact or matter with the previous case. In such cases, an initial test case would be heard and a stop placed on the remaining follower cases pending the determination of the test case.

I assure members that any taxpayer who engages with the process outlined in the earlier part of my statement and discharges a liability in accordance with the Revenue's view in the matter will not be disadvantaged in the event of a different outcome arising from any case before the Tax Appeals Commission.

I would be happy to take any questions.