Oireachtas Joint and Select Committees

Wednesday, 7 December 2016

Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach

Taxation Matters Relating to Kerry Co-Operative: Revenue Commissioners.

2:00 pm

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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We have received apologies from Deputies Pearse Doherty and Michael McGrath. Deputy John Brassil is substituting for Deputy Michael McGrath and Deputy Martin Ferris is substituting for Deputy Pearse Doherty.

I remind everybody to turn off mobile telephones as they interfere with the sound quality and transmission of the meeting.

The first item on the agenda is a discussion on the taxation treatment of Kerry Co-Operative Creameries Limited shareholdings with Mr. Charlie Phelan, Ms Anne Dullea, Mr. Paul Walsh and Ms Clare Lucey of the Office of the Revenue Commissioners.

I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him, her or it identifiable.

I invite Mr. Phelan to make his opening statement.

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.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I thank Mr. Phelan.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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I welcome the witnesses from Office of the Revenue Commissioners and thank them for appearing before us. I am based in Limerick where many farmers who supply to Kerry Co-operative received these letters out of the blue. The first patronage shares were issued back in 1997, 19 years ago. Yet, the issue has just come out of the blue. The question now is, why?

I wish to raise a number of points that arise from the practicalities of the contents of these letters. In Revenue's letter to suppliers, it states that to enable the recipient to avail of the opportunity to make a disclosure, the recipient should respond to Revenue with the computation of the tax together with the appropriate payment. From Mr. Phelan's statement, it appears that Revenue is looking at a different type of payment. Is he retracting what was stated in the letter sent to the farmers? People were given 21 days in which to respond to the letter, which is grossly inadequate. Would he consider extending it to 60 days, which was requested? Pending the extension to 60 days, would Revenue put a stop on all interest and penalties arising because of the circumstances? Is it possible that a test case could be heard within 60 days? On the face of it, the question is whether the payments are considered income or capital. I believe it is capital rather than income.

Under the co-operative society rules, Kerry Co-operative Creameries Limited is entitled to buy back the shares at par value, if it so wishes. The witnesses are probably aware of the Supreme Court Case of Kerry Co-Op Creamery Ltd.v. An Bord Bainne Co-op Ltd, in which the Supreme Court found that the Kerry Co-op shares in An Bord Bainne should be replaced at par value. This is about ensuring the ownership and success of the co-operative itself. The Kerry suppliers supply their milk to the plc and not to the Kerry Co-operative Creamery Limited. They were given an option on the basis that they were milk suppliers to buy shares in Kerry Co-operative Creamery but it was part of the process of planning to keep the co-operative under the control of the milk suppliers, which would be a natural thing. The suppliers had to exercise that option within three months. The suppliers paid the par value for the share, which was £1, or €1.25 in today's terms. They appear to be totally unrelated transactions. They were paid the market value for the milk by the plc. This is a separate transaction. If they sell the shares, they pay capital gains tax. Under the reorganisation of share capital in section 532 of the Taxes Consolidation Act 1997, all forms of property shall be assets for the purposes of the Capital Gains Tax Acts whether situated in the State or not, including options, debts and incorporeal property generally. I believe this is an option. The grey market to which Mr. Phelan referred is really special persons and that is not a normal market. If they happen to sell the shares in that market, they are subject to capital gains tax.

Will Mr. Phelan address my first point on extending to 60 days the period during which people must revert to Revenue, which is fair and reasonable?

My understanding is that the Revenue would have informed the co-operative on Friday 18 November that letters would be issuing. Farmers received the letters the following Monday and they were completely unannounced. The representatives of the Revenue Commissioners have spoken about the fact that they know the financial difficulty the farmers are under. With due respect, if they knew that, they would not be issuing letters looking for a commitment to pay. In this case the Revenue is looking for €24,500 from an individual. He cannot pay.

With due respect, for the sake of fair play and allowing this matter to be looked at properly, will the Revenue extend the period that people have to go back to 60 days? Will the Revenue suspend any interest and penalties arising? Furthermore, in the interim period, will the Revenue allow the test case to go ahead in order that there is full clarity on the matter? The problem is that we are dealing with people's lives, families and generations. There are consequences for people. Revenue could put people out of business with this. I call on Mr. Phelan to deal with those points.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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If we allocate ten minutes in the first round, we can include questions and answers for each member. After the questions, Mr. Phelan will answer. We will do likewise with each member. Is that agreed? Agreed. I am trying to get through this in an organised way.

Mr. Charlie Phelan:

Senator O'Donnell has raised several issues. I will try to go through them. Perhaps the Senator will remind me if I leave out anything.

The first question was why a letter came out of the blue. For the past year or so we have been looking at the valuation of shares in the context of people disposing of them and paying capital gains tax and capital acquisitions tax arising from the inheritance of shares. It was only at that point that we became aware that there was a grey market in the shares. It was only then that we really became aware that patronage shares were issued in respect of the supply of milk to the nominated purchaser. In other words, we realised that the co-operative issued a share based on each 1,000 gallons delivered to Kerry plc, the nominated purchaser, in accordance with the rules. In some ways, that explains why we are only going into it now.

Why did this happen out of the blue? In Ireland we operate on the basis of full self-assessment in tax. We accept all the returns and issue assessments based on the return that the taxpayer makes. If there is an inquiry or a concern about the risk arising, any inquiry we make will naturally come out of the blue because we do not engage with people until such time as we have some issue to address. In reality, we look at 5% or 6% of all returns by some form or inquiry. They vary from this kind of inquiry to an aspect query, which is the easiest and cheapest form to comply with, up to an investigation. These are outlined in the code of practice.

I wish to deal with some of the other points about the practicality of this and the 60 days for a test case. We have no issue with a test case but it is a matter entirely for the Tax Appeals Commission. A person cannot take a test case and have cases like it considered without raising an assessment, having those assessments appealed and allowing the Tax Appeals Commission to list one and carry on. We have no issue about the technical point and we will facilitate that.

Senator O'Donnell made reference to the 60 day period. The committee should remember that in no letter of ours to the taxpayer did we seek any money.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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The Revenue did seek it.

Mr. Charlie Phelan:

No, we showed the possible under-declaration of income.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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The letter refers to enabling the taxpayer to avail of the opportunity to make such a disclosure and calls on him to respond to with his computation of the taxable amount together with the appropriate payment.

Mr. Charlie Phelan:

I agree with Senator O'Donnell.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Do the officials accept that the Revenue was looking for payment?

Mr. Charlie Phelan:

We were looking for payment on any tax liability that might arise from the under-declaration of income. For example, let us suppose a person had 100 shares at €65 each. That means €6,500 was the possible under-declaration of income. Let us suppose someone had a loss forward. He would clearly have no liability on increasing his amount by €6,500. Someone who was at the 20% rate of tax would have a liability, as would someone on a higher rate.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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I have limited time. What I want to know is simple. Will the Revenue extend the time period to 60 days?

Mr. Charlie Phelan:

Absolutely, the code of practice provides for it. The early engagement letter was an attempt to engage. Of course, if anyone seeks to make a voluntary disclosure in accordance with the code of practice and seeks a 60 day extension-----

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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No, I am sorry. I am looking for 60 days based on the aspect query. The Revenue is looking for people to come back in 21 days. I believe the period should be extended on the grounds of fair play. This is not about one individual. Approximately 400 suppliers are involved and it potentially extends to other suppliers.

This matter requires a test case to be heard. For the sake of practicality, the Revenue should extend the period for the aspect query for people to go back to 60 days rather than 21 days. That is the first point.

The second point is that in that period, the Revenue should allow a test case to be heard. Moreover, in that period the Revenue should, on the grounds of fair play, suspend any possible interest and penalties accruing on the under-declaration of income determined by the Revenue in these letters. I am suggesting this should be done on the grounds of fair play.

Mr. Charlie Phelan:

I agree entirely on the grounds of fair play. Let me answer the question in the best way I can by going back to the letter. There is an invitation to engage with us. Anyone who comes forward and engages with us in accordance with the code of practice will be treated in exactly the same way, like any other intervention in respect of any other taxpayer. We will allow the 60 days if anyone requests 60 days to engage with us. There is absolutely no problem with that.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Does that apply under the aspect query?

Mr. Charlie Phelan:

Absolutely, we do not intend to extend it.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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If someone writes to Revenue now and looks for an extension of 60 days to come back under the aspect query, the Revenue will accept it. Is that correct?

Mr. Charlie Phelan:

Absolutely.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Will Revenue suspend interest and penalties in that period?

Mr. Charlie Phelan:

I do not think I can give a commitment to suspend interest and penalties because, as the committee members are aware, interest is a statutory provision. If there is a liability, interest is statutory. Under the code of practice of Revenue audits and interventions, penalties have a statutory basis. In some cases, there will be no penalty.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Will the Revenue allow a test case to be heard in that 60 days? That is a practical measure. It would allow farmers time to view the test case. It would allow farmers to know the outcome of the test case by the time they have to respond. It is a question of fair play.

Mr. Charlie Phelan:

It is not as easy as Senator O’Donnell suggests to allow for a test case within 60 days. For a start, the Tax Appeals Commission may not be able to hear the case within 60 days. There may be a further appeal beyond the Tax Appeals Commission to a higher court.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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With due respect, fair play is not being adhered to on the basis of the letter. Mr. Phelan has agreed to the 60 days. I respect that and I believe it will make a difference. However, the Revenue must allow that the period must go hand-in-hand with a test case being heard. Then, if a test case is heard and goes beyond 60 days, on the grounds of fair play that 60 days should be extended until the test case is heard.

Mr. Charlie Phelan:

I have no issue whatsoever with what Senator O'Donnell has said. However, I am keen to remind the Senator that the Tax Appeals Commission is a completely independent body. To get to that stage we would have to raise assessments and allow people to appeal the assessments in order to get to the Tax Appeals Commission. Once an appeal is proceeding everything stops until such time as it is heard.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Mr. Phelan is misinterpreting me. I want one test case. Will Revenue allow one test case to be heard? Revenue should not raise assessments on the others 399 farmers. Revenue should allow the test case to be heard until such time as farmers can go back to Revenue and reply while fully aware of the outcome of the test case. That is fair play.

Mr. Charlie Phelan:

Yes, I agree with the Senator. I can probably definitely give the Senator that commitment for the years 2012 and 2013. However, the Senator will be aware that to protect the Exchequer there is such a thing as the four-year rule. We have no doubt that in cases where something is omitted from a return, we can go back beyond the four-year rule. To avoid any doubt on the matter, we intend to raise assessments for 2011 now. We will of course allow the test cast to go ahead while these are under appeal.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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I will finish on this point. With due respect, if I were to do that to the Revenue, Mr. Phelan would say it was sharp practice. The Revenue is raising it on a year because it wants to get around the four-year rule. I am sorry, but Mr. Phelan is wrong on this point. The bottom line is that Revenue has put these out. If it is down to pure revenue collection, it is wrong. If the amount is due, that is fine. At the moment, major livelihoods are at stake.

The Revenue Commissioners have agreed to the 60 days and to proceed to having a test case heard. I hope that for the 2011 assessments the Revenue Commissioners will not muddy the waters by going after half the herd, so to speak.

Mr. Charlie Phelan:

I accept what the Senator has said. I will take advice on the matter of whether we will raise the thresholds for 2011 or not. However, the TAC, Tax Appeals Commission, which is completely independent, will want more than one assessment to get a test case, so it can identify they are followers. While the Senator's view is that raising the assessment for 2011 is unfair-----

Mr. Charlie Phelan:

-----it should not affect the taxpayer's entitlement to get the same treatment that every other taxpayer who is engaged with it would get.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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It is important to be consistent.

Mr. Charlie Phelan:

I will do my best on that.

Photo of John BrassilJohn Brassil (Kerry, Fianna Fail)
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I thank the Revenue Commissioners for attending the committee meeting. This is a hot issue, particularly in County Kerry which I represent. There are several issues which I wish to raise to tease out the issue and come to a satisfactory conclusion for the 400 people affected.

In his presentation, Mr. Charlie Phelan stated it was not a change of policy. Patronage shares have been around for 20 years. It is not that the Revenue was not aware of them. They have been returned in tax returns by compliant tax farmers as long as they have had them. They have never been requested to pay income tax on them. They would see it is a change of policy. Over time, shareholders have transferred patronage shares from family members, for example. They have sought advice on the value of them and were given advice that they were to be treated at the value of €1.27. A compliant taxpayer got advice from the Revenue Commissioners, made his returns on that basis but then got this letter in the post. That was very unexpected.

Is it not normal procedure to advise tax consultants and accountants that there is an issue which must be teased out so as to arrive at an agreed position? I agree with Senator Kieran O'Donnell that this letter seems to have come out specifically to get the 2011 assessments. Is that being fair? Approximately 400 letters have gone out. How many other patronage shareholders were not contacted? When will they be contacted? How many other patronage shareholders are there in every other co-operative? I know the situation exists with Glanbia and Dairygold. There is much broader issue at stake. Under the Taxes Consolidation Act, taxpayers are to be treated equally. Unless the Revenue Commissioners get everything out to all those affected in other co-operatives by the end of this year, I would argue the 400 farmers in question are not being treated equally. They will come in under the 2011 assessment while the rest will not.

If the Revenue's assessment was 100% correct, then the 2011 shares are based on the 2010 milk yield. Does that bring it outside the four-year rule? That is another issue that needs to be teased out.

A stop should be put to this and the test case needs to be heard. All taxes and penalties should be suspended until we get full clarification of this issue. The letter the 400 farmers received stated, "To enable you to avail of the opportunity to make such a disclosure, please respond with your computation of the tax liability together with the appropriate payment". To anybody that reads like a demand for payment. It would be only fair after this meeting and everything has been clarified that each of the people involved is written to and informed of the decisions made to take the pressure off. As was stated in the submission, it has been a difficult year. People would have made financial decisions based on investments, not realising there was a €20,000 or €50,000 tax bill around their necks. We are all human beings in business. That is a difficult position to be in. One makes an investment on the basis one has a certain income and ability to pay it back but is then hit with this.

At what level was the decision to pursue this made? Was it at the very top or at regional or local level? I would like to know why 400 people in Kerry seem to have received this treatment but no one else did.

Mr. Charlie Phelan:

We do not think it is a change of policy. It is a generally accepted principle that if one gets money for something, then that forms part of one's trading income and as such should be included in one's trading profit and loss account as sales. If somebody gets something as well as money, then that should also be treated as income.

In fairness to the entire examination of the area, we were not aware of the patronage shares until recently. This started from people valuing shares at par when they, say, transferred to them, sold by them or if they died, until we realised there was a grey market. Some people would pay the CGT, capital gains tax, correctly on the grey market rate at which they sold them. Others were putting the proper valuation when they inherited the shares. It was only in the past 18 months that we discovered that the valuation around co-op shares, as distinct from the PLC shares, was an issue for us on the CGT and CAT, capital acquisitions tax, front. Recently we realised that, in addition to getting paid for milk, farmers were also getting the option to buy patronage shares at a value of €1.25. In an area where there is a grey market, our technical view is that the value of the share that one is buying should be included in one's trading account. I accept there is a difference in the technical view.

As regards the capital gains tax issue, if somebody has disposed of these shares and has paid capital gains tax, we will correct that. There may even be repayments. For example, if someone has a marginal tax rate of 20%, sold the shares and paid tax at 33%, clearly there is an overpayment and will fix that for them.

Photo of John BrassilJohn Brassil (Kerry, Fianna Fail)
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It has been brought to my attention that with the transfer of shares, the Revenue was fully informed of these patronage shares, their value and how to treat them. I contest the claim it has only come to Revenue's notice now. That needs to be teased out in the test case. If a person seeks advice from the Revenue, they have to accept that advice is accurate and accept it in good faith. I am sure the person giving the advice gave it on good faith.

We are going back to the point of fairness.

Nobody here is trying to avoid paying tax. All these people are tax compliant. They make their submissions every year, seek their tax clearance certificates and pay what they are due to pay. We are dealing with an honourable group of people who feel very let down by the system. However, we will not agree on that type of thing today. It is something that must be thrashed out in the fullness of time through the test case.

Mr. Charlie Phelan:

In fairness, I must state again that the tax system in Ireland is self-assessment, be it capital acquisitions tax, capital gains tax or income tax. By and large, what is sent in to us is accepted as it is. We engage in some inquiries relating to some transactions. We do not give a rubber stamp to everything that is submitted and say it is perfect. If we were to do that, we would have to examine every transaction included. Self-assessment means self-assessment. While one might say that we have accepted this stuff and we knew it all along, the fact is that this is the self-assessed tax people made and they put their valuations on it. During 2015 and 2016 we started to look at those valuations and found some difficulties in that area.

I will turn to the points the Deputy raised in his initial questions. He asked how many more farmers are affected. We do not know the extent of the patronage shares issue. We know it in the Kerry situation but we do not know it in the rest of the co-operative movement. However, if there is an issue for other people this is an opportunity to come forward if there is a liability. Perhaps if the technical case is heard as a test case it will put the technical point straight, once and for all, as to whether the Revenue Commissioners are correct or incorrect in this regard. That is certainly an advantage of having the case heard. In the case of Kerry, we understand that 3,400 people got patronage shares, as the Deputy mentioned.

As regards the value we put on the shares, when shares are transferred between unconnected parties, and I believe perhaps even between connected parties, they go through the board meeting to be authorised. They also go through our stamping system to be stamped, so we have a database of the valuation that was paid for or put on the shares.

The other co-operatives have been mentioned. As to the level in the Revenue Commissioners organisation where the decision was taken, every day Revenue Commissioners officials throughout the country will make decisions on various compliance activities. We set out in our business plans every year the number of things we plan to do in the year. I am not quite sure what the Deputy means in referring to whether it was taken locally or nationally, but I can assure him that the Chairman of the Revenue Commissioners-----

Photo of John BrassilJohn Brassil (Kerry, Fianna Fail)
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The reason I ask is that 400 farmers in Kerry were singled out, in my opinion. No contact was made with all the other co-operative preference shareholders across the country. Those who received the higher amount of shares were contacted and nobody else was. Under the Taxes Consolidation Act everybody is to be treated fairly and I believe these people are not being treated fairly. That point emphasises it.

Mr. Charlie Phelan:

On that point, all our interventions are based on risk. We took the 400 who received the largest quantity of Kerry Co-Operative Creameries Limited shares. I agree that this appears to be unfair but I assure the Deputy that our examination of this matter in the entire co-operative movement is at a very early stage. As I explained, we only recently understood how this works and we intend to examine it throughout the shareholder base. We do not believe we are confined to 2011 if there is a serious omission from the tax returns. Based on the risk, we will assess the level of activity taking place with the other cases. We certainly will not try to disadvantage anybody. We will not look at one section of shareholders and not at the others. I can assure the Deputy we will do that, and do it fairly, among all the taxpayers.

Photo of Tom NevilleTom Neville (Limerick County, Fine Gael)
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I am grateful you facilitated my attendance today, Chairman, given that I am not a member of the committee. I represent County Limerick and a number of patronage shareholders have contacted me as well as Senator O'Donnell. Obviously, as Kerry is a bordering constituency there would be some overlap. I am here to articulate the concerns of farmers in rural Ireland who have been hit out of the blue with major tax bills. It is their understanding that the Revenue Commissioners are looking for tax money straight away. They are big bills. We are talking about bills the size of the average industrial wage. Farmers, particularly in my constituency, have been hit extremely hard by the price of milk since my election and even before that. To have this arrive out of the blue before Christmas is causing panic in the agriculture sector. To be honest, it is negative psychologically for farmers who are trying to pursue their career in such difficult circumstances.

The style of communication and the way it has been delivered are a problem. That is the view of those on the ground. As we have seen with the financial institutions when they have tried to call in loans, the issue is the style of communication, how it is articulated and how it is delivered in the letter, as Senator O'Donnell said with regard to fair play. That is the first point. Second, the perception is that they will be hit with the big bills straight away. They wonder how they will keep their farms alive, given what they have gone through over the last 12 months. Then there is the knock-on effect on rural Ireland. How does one keep rural Ireland alive? Agriculture is its backbone and sustains and maintains it. That is what we are trying to deliver and progress. If younger farmers, in particular, are hit with that, it is another psychological blow for them when they are trying to progress the industry and when we are trying to get more people back into sector.

I wish to follow up on the technical aspect of Senator O'Donnell's question. Mr. Phelan said 60 days would be allowed under the aspect query if a farmer writes in to seek it. That is my understanding. I am not a tax consultant or an accountant. Mr. Phelan also said that the assessment side could not be left while this is going on because it is a separate entity or it has separate decision making powers. Is that correct?

Mr. Charlie Phelan:

Yes. The TAC is completely independent of the Revenue Commissioners.

Photo of Tom NevilleTom Neville (Limerick County, Fine Gael)
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Chairman, I wish to make a proposal. If it is the case that we cannot get a straight answer to that, and I mean no disrespect to Mr. Phelan as he cannot answer the question, then that body should appear before the committee as well as the Revenue Commissioners to answer our questions. We have joined-up questions that are relevant to two different bodies to which we need immediate answers. I propose that in the interests of clarity. Understandably, the committee will wish to discuss it but given the fact that we cannot get a straight answer on it today from the witnesses, I propose that any stakeholders involved in this and who are obliged to answer questions to the public be invited to sit together here so when we, as elected representatives, pose our questions they can be answered correctly by whatever body can answer them. A number of questions posed today obviously need to be answered by other, separate bodies. That is my suggestion.

Mr. Phelan mentioned that the Revenue Commissioners came across this 18 months ago. Why was something not communicated to the farming organisations or the public that this might be coming down the tracks? I understand Mr. Phelan's comment that they could not communicate it until they saw something in black and white. However, given Mr. Phelan's experience and background on these issues, obviously he saw this coming down the tracks 18 months ago. Why was there no communication to farmers or farming organisations that this might be an issue? How do the Revenue Commissioners propose that co-operatives ensure that active farmers stay with co-operative shares? The basis for this was keeping active farmers involved in co-operatives to keep them alive. If the tax bill is imposed on the patronage shares in all circumstances, it means the active farmers cannot stay with these co-operatives.

Going back to what Senator O'Donnell said about penalties, will they be imposed, and if so, how? What is the calculation in this regard? Again, from speaking to the farmers, I understand it is a question of the tax bill, the penalties, the time, what is coming down the tracks and what is next. As was mentioned earlier, these farmers are doing the right thing, making declarations, being upfront, trying to pay their taxes and trying to do the best they can to keep a business that is under pressure alive. I would be grateful for responses to my comments.

Mr. Charlie Phelan:

I will try to respond to the comments in the same way I did previously.

First, regarding a straight answer to the question of the Tax Appeals Commission, as I said, it is an independent body, but I know for definite that it will need an assessment before an appeal can be made. If it wants a group of assessments to do a test case, we will facilitate that as much as we possibly can by getting it to that stage.

There are two real issues in the entire matter. One is the technical element, that is, whether Revenue is right or wrong. We do not take lightly the decision to treat shares purchased at a discount as a taxable income. We think it is absolutely correct that the difference in the value should be added to one's trading profit and loss account. We are certain that we are right in this regard. In the event that we are wrong, the only way of getting a different opinion is through the Tax Appeals Commission.

The second issue Deputy Neville raised concerns the difficulties farmers face and the difficult year we have had. We published a document concerning results in the farming sector. We are well aware of the trends in farming. It is quite a good document and concerns the position of farming within the overall structure in Ireland. It is available on our website. Our collector general's office, particularly during the recession, has got very good at making phased payment arrangements over a number of years and months for businesses. Whatever people want, we can accommodate them. I agree that the technical element may require a test case. We have some agents who agree with our position and are considering making voluntary disclosures and paying the amount of tax due, albeit that if a test case is taken, they want the same treatment as would result from the test case. We can guarantee this will happen for those who engage and get rid of this matter and we will certainly arrange the phased payment. If we get over the technical matter, the difficulty with payment is not a problem for us in making long arrangements.

As I said earlier, the interest on penalties is statutory. In many cases a penalty does not arise. Our approach to this has been to minimise the penalties because the letters went out as aspect queries. We did not try to carry out audits. We tried to keep the penalty at the cheapest possible level under the code of practice. Again, it is administratively easier for us to carry out bulk inquiries under the aspect query regime. It is also very cost-effective for everybody concerned and eliminates or minimises the penalties in many cases.

Photo of Michael MoynihanMichael Moynihan (Cork North West, Fianna Fail)
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I thank the Chairman for allowing Members of the Oireachtas who are not members of the committee to contribute and I thank the Revenue Commissioners.

My colleagues have put the case very strongly. This is a fundamental issue in the farming community and for the recipients of the 400 letters sent out in November. There can be no disputing that the wording of the letter was very heavy-handed and there was no sense of fair play in the way the letter was dropped into their letter boxes that Monday morning. I do not want the witnesses to comment on this because that is exactly how it is seen.

I wish to raise a few matters. In the conclusion of Mr. Phelan's opening presentation he referred to the possibility that the test case may differ from what the Revenue Commissioners believe it to be. Therefore, he has some doubt as to whether the test case may be different. In response to Deputy Brassil's point, Mr. Phelan referred to the possibility that Revenue may be right or wrong. This leads me to believe there is an issue that the Revenue Commissioners are not fully certain of their ground. If this be the case, it has implications for what Senator Kieran O'Donnell requested, namely, having a test case fully tried before anything happens. There should have been a test case and Revenue should have been 1000% certain of its ground before any letters were issued. On two occasions this afternoon Mr. Phelan has alluded to the possibility of some doubt in this regard. Why is it that in the case of a farmer who had these shares and sold them for a variety of reasons, this is sent through Revenue, which then collects the 33.33% capital gains tax and duly thanks the farmer? Kerry shareholders sell their shares, the capital gains is collected, the tax clearance certificate is issued and, lo and behold, Revenue states it is looking into the matter. One could say this has been going on for decades; it has certainly been going on for years.

I am led to believe that in a different circumstance, in which shares in a co-operative movement were sold and a test case taken to the Revenue Commissioners as to whether they should be taxed as income tax or capital gains, the Revenue Commissioners stated very clearly and definitively that they would have to be taxed as capital gains tax. I understand there is an appeal case before the Revenue Commissioners to the effect of the opposite of what the witnesses are stating is now the case. I understand an individual taxpayer has an appeal case stating that his shares, which he sold and on which he paid capital gains, should have been taken in as income tax. However, Revenue in the first instance has refused the case so, as I understand it, the witnesses are completely contradicting what he so strongly defended or determined in another case. I would like to know why this is the case. As I and many of my colleagues know full well, a number of farmers are prepared to make an assessment and then takes it to the Tax Appeals Commission. The question I put to the witnesses is if one person takes an assessment and then takes it to the Tax Appeals Commission, does the clock stop for every other farmer? The Revenue Commissioners have been empowered and entrusted with a whole pile of rules and regulations since the inception of the State and have been applauded for what they have done in various circumstances. Surely to God it behoves them, if there is a scintilla of doubt in their minds - I am in no doubt but that there is - to stop it until a test case determines what the position is.

The other point I put to the witnesses is that if a farmer gets his Kerry share, surely to God the income from that share only becomes an income the day he sells it. It is a piece of paper until that date. The Revenue Commissioners readily collects the 33.33% in capital gains prior to his selling it. If for 2017, for argument's sake, the share price drops 20% or 10%, how can the Revenue Commissioners make a valuation of a share that may be 20% less the following year? It does not make sense. Not to bore the committee, but the first point is that there must be a test case. The witnesses have alluded to the possibility that Revenue may be right or wrong and to the fact that if a different opinion comes out of the appeal case, the status quo remains. Therefore, they have a doubt about it. Why not put everything on hold until this is cleared up beyond doubt?

Mr. Charlie Phelan:

I will split the questions a little and ask Mr. Walsh to respond to some parts of them.

First, there is no doubt at all in the mind of the Revenue Commissioners that this amount of money should be included in the accounts and subject to income tax. The Revenue Commissioners would not engage lightly in trying to have a test case heard to verify something.

There are many cases around the barter position of goods, including a very old one involving gold in exchange for money. That money is taxable. I can provide some detail of the case law for treating these shares as income. We do not need take a test case to verify that. Let there be no doubt about it that the Revenue Commissioners are fully convinced at the highest level in the organisation that this amount of income is subject to income tax.

As regards, capital gains tax, CGT, there is no doubt that CGT is due on the sale of a share but the base price - the price at which it is deemed to have been acquired - and not the €1.25 value must be included in the income tax returns. As regards the specific case in question I will ask my colleague, Mr. Paul Walsh, to respond on the case law in that regard and to elaborate further on what I said.

Mr. Paul Walsh:

When this matter was raised the Revenue legislative service gave its advice to the south west region on the correct tax treatment. We were satisfied that the value that the farmers received on the issuing of the shares gave rise to a income tax charge. Farmers who settle with us on the basis of this advice will not be disadvantaged should a case go before the Tax Appeals Commission and a different result emerge.

We are satisfied there is tax due in this regard. We have had meetings with the Institute of Taxation and other tax agents on the matter. At no point has anybody come up with a technical analysis to the effect that this charge does not stand up or is not technically correct. They have argued about the 60 days, 21 days, the interest, the penalties and so on but they have not engaged with us at any point to the effect that the tax technical position is incorrect.

In regard to the Deputy's question regarding the position regarding non-monetary benefit versus cash, I refer him to the UK case law in this regard which dates back to 1904. It is well established that where a person gets value for providing a service that value must be assessed. In the vast majority of cases, the value will be cash based but where a person gets other than cash - a non-monetary benefit - the non-monetary benefit must be taxed at the market value. It has been established in recent times that shares have a value greater than the cost base and that is the value on which we seek to obtain income tax.

In regard to capital gains tax, when the shares are ultimately sold CGT is the correct computation but the base cost will be the market value which the taxpayer has paid income tax on. The difference between that market value and the ultimate sale price will then be subject to CGT.

Photo of Michael MoynihanMichael Moynihan (Cork North West, Fianna Fail)
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Am I correct that an appeal has been lodged with the Tax Appeals Commission in relation to a determination by the Revenue Commissioners that co-operative shares sold are liable to capital gains tax rather than income tax but which the shareholder believes are liable to income tax rather than capital gains tax?

Mr. Paul Walsh:

I am not aware of that case.

Photo of Michael MoynihanMichael Moynihan (Cork North West, Fianna Fail)
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That case exists. The Revenue Commissioners made a determination in relation to co-operative shares that were sold and that determination is currently before the Tax Appeals Commission yet Mr. Walsh says he is not aware of it and that Revenue stands over what it is pursuing in this.

Mr. Paul Walsh:

I am not aware of any case that is similar to the case before us today.

Photo of Michael MoynihanMichael Moynihan (Cork North West, Fianna Fail)
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I respectfully request that Mr. Walsh check that and report back to me.

Mr. Paul Walsh:

I will do so.

Photo of Martin FerrisMartin Ferris (Kerry, Sinn Fein)
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I thank Mr. Phelan and his colleagues for attending this meeting. Like most of the Deputies and Senators that have spoken here today I come from an area most affected by this issue which involves money owed by 400 or more farmers. It strikes me as strange that this matter has become an issue after 19 years. What happened in the intervening years that this liability was not detected? Like my fellow elected representatives I am well acquainted with the value of the success of Kerry Co-operative to the local economy and the national economy. It is makes a huge contribution nationally in terms of the number of people it employs and internationally in terms of its produce. As I said, I cannot understand why this issue has come to the fore now. I am not an accountant. What we are speaking about is a loyalty share in return for every 1,000 gallons of milk produced. A loyalty share is a share of loyalty to the economy, local and national. I have difficulty understanding how a person, having not realised the value of that loyalty share, could be tax assessed on it and liable for penalties occurred over time. I am unclear at this point as to whether the penalties will be applicable to the value of the share on date of acquisition or on the current value of the share. It was stated earlier that Revenue will do everything it can to minimise penalties and so forth. If Revenue is statutorily required to apply penalties how then can they be minimised?

I concur with the suggestion made by Senator Kieran O'Donnell and Deputy John Brassil in regard to the 60 day suspension until such time as a case can be determined. It would be a recognition by Revenue of the value of Kerry Co-operative. Again, the question for me is, why now? Somebody telephoned my office this morning and said that there is a letter of comfort dating back a number of years, which is a political letter of comfort. I would like a comment from the witnesses, if possible, on whether if a letter of comfort exists it is no longer applicable.

Mr. Charlie Phelan:

On the value, the letters that we issued attribute €65, €75 and €90 as the grey market value of the share in the years 2011, 2012 and 2013. That is based on the stamp documents on open market transactions. They are the values we have taken as being the realistic value of the share received. As regards the penalties, under the code of practice, and statutorily, the Revenue has powers to mitigate penalties in certain circumstances. In some technical matters, there are no penalties at all. The interest is a statutory amount, which the Revenue has no powers to mitigate. I agree with the points made about a 60 day suspension. We do not have any issue with that. The real issue for us is the mechanism to allow the 60 days. We have no problem with someone engaging with us. We will have no collection action within the period provided for under the code of practice in respect of people who come forward and engage with us. There are many terms around that code of practice, many of which have been included in the glossary at the back of the pack provided.

In regard to the letter of comfort, I am not aware of a letter of comfort having issued from the Revenue Commissioners. Mr. Walsh, who has been working in that area for a lot longer than me, may like to comment on that but I am not aware of any such letter having issued from Revenue.

Mr. Paul Walsh:

I am not aware of it. Does Deputy Ferris know the origin of the letter?

Photo of Martin FerrisMartin Ferris (Kerry, Sinn Fein)
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No, but I hope to find out in the next 24 hours.

Photo of Danny Healy-RaeDanny Healy-Rae (Kerry, Independent)
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This is a very serious matter in regard to which all of my colleagues have made important points.

What many of us cannot understand is why it is that the Revenue Commissioners are only now getting into action. Mr. Phelan gave away a bit when he said the Revenue Commissioners only recently understood how this works. The first thing that needs to be clarified is that the farmers from Kerry or anywhere else who supplied Kerry Co-op with milk and who got shares did no wrong. They depended on professional people like the Revenue Commissioners and their accountants, who they paid dearly to present their accounts and to send them in to the Revenue Commissioners, year by year. Clearly, something new must have happened. There must have been some new inspectors, or some new operators, who saw something that the fellows before them did not see. This is a new departure from what happened in the past.

As previous speakers have said, a test case must take place. However, I would have wished that such a test case had taken place before the Revenue Commissioners sent these demanding letters to farmers, of whom there are more in Kerry than anywhere else. I know many of them and, at present, they cannot sleep or eat. It is coming up to Christmas and families are in disarray. I repeat that the farmers did no wrong. They went by the rules. The accountants who represented them are professional people and knew what the Revenue Commissioners wanted, and they acceded to their rules. Something new has happened. However, if something new has happened, the farmers should only be liable from when the Revenue Commissioners recently understood this, whether that was in the past six or 12 months or, as the Revenue Commissioners believe, in the past 18 months. Surely, however, they cannot make a tax law retrospective in order to hit these fellows, so to speak. As committee members have said, these farmers have their books done and they know what they have to spend, even for Christmas. Many do not have much because the price of milk did not give it them this year and the price of beef was just as bad, and if they were in north Kerry, they saved no grain. Therefore, many of them are in a serious predicament.

I ask that a test case be taken first and that the Revenue Commissioners ease off with their letters and demands. Some 400 farmers have received letters but there are more than 3,500 shareholders, and there are also the shareholders in other co-ops throughout the country. We wonder why it was Kerry that was selected for this unfair attack at this time. If a Bill has to go through the Dáil to ensure the Revenue Commissioners do not apply the rules retrospectively on this issue, so be it. Each representative in these Houses will have to unite to make sure no unfairness is being meted out to this group, whether it is 400 or 3,000 people. It seems wrong when there were so many professional people involved besides the farmers.

I know farmers and I am a farmer myself, so I know what is involved. Farmers do not have time to look around them. Between calving cows and trying to provide fodder, there are so many different things to deal with, including safety. People are often working on their own and are enduring a tough time. In many cases, the farmer's wife has to go out separately to work to provide an income to put the food on the table. As I see it, many of these farmers are only doing what was done in the past to hand down to their son, if they are lucky enough to have one.

I cannot see that it is fair that a farmer has to take tax out of his share at the start because the value of the shares is fluctuating every day. They could be worth €1 today and 70 cent tomorrow, but next week they might not be worth 30 cent. As another speaker said, the day the shares are sold is like the day cattle are carried to the fair. A farmer might think he will make €500 and he will hear in the pub that he will make €600 with no bother, but when he goes to Kenmare mart, the cattle might not make €300. That is how I see it. The day the farmers sell the shares is the day they are liable because, as was said, they are only paper until that happens.

Farmers have paid their capital gains tax in the past. I know some elderly people who will not get the old age pension because of the shares, so they have to cash them in to keep going, despite having paid their capital gains tax. The farmers in Kerry did no wrong. If the Revenue Commissioners only woke up to this a year or a year and a half ago, they should not be able to go back to 2011 to collect tax on something the farmers did not know they were responsible for declaring.

Mr. Charlie Phelan:

On the point that this is new, it is nothing new. We were very surprised given that all of the farmers who had made submissions and sent in their accounts over the years are very compliant in making their tax returns. We were most surprised that people had not included the extra value they got with their trading account and we are absolutely surprised that all of the professional people advising them, who are aware of the bonus shares and the way they were paid, did not include this because we are quite certain it is part of the trading income. In fact, when we issued the letters, there was a need to issue a tax briefing because people were surprised themselves. We found it to be absolutely surprising that this issue was not within the accounts. It is not new at all, in our view, that it is a taxable amount of money.

I do not know what to say about it being a new departure. We do not believe it is a new departure. It is probably a very early stage of our examination of this entire matter, whether it is confined to the agricultural sector or involves other sectors. However, where people get value along with their cash, it is subject to income tax, in our view.

Photo of Danny Healy-RaeDanny Healy-Rae (Kerry, Independent)
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Mr. Phelan said he only recently understood how this works. That signifies to me that it is new to the Revenue Commissioners and it is certainly new to the farmers and the professional people, such as accountants and tax advisers. They were not aware there was a liability even though they are professional people and had to go through the rigours to become accountants. They have letters after their names and they are in touch with the Revenue Commissioners daily, but they, I and no one else can understand how it is only happening now. If it is right, a test case will prove that, and so be it. However, whatever happens in the test case, farmers should only be liable from that time. That is my view, for what it is worth.

Photo of Brendan GriffinBrendan Griffin (Kerry, Fine Gael)
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I thank the Chairman for allowing non-members of the committee to ask questions. As he knows, I have been in touch with him in regard to requesting this meeting, and I appreciate the work of the committee in bringing the Revenue Commissioners before us. I welcome the witnesses. From the outset, I acknowledge the importance of the work of the Revenue Commissioners and thank the witnesses for coming before us. They do not always have a popular job but someone has to do it.

I do not pretend to be an expert on taxation and this is quite a complex area. I am working off the advice I am given from the Revenue Commissioners and from other advisers. I can see the red book on taxation on the table before us. It is like some sort of extended version of War and Peace, so it is a bit intimidating even to look at it. I am only going on what I can decipher in terms of the information available to me. However, I would concur with previous speakers on many of the points made.

In particular, my colleague, Senator Kieran O'Donnell, eloquently made the case for some leeway here, for scope to be given to those concerned on the time demands that have been put on them. I will put it straight to the officials. I cannot recall anything in my constituency in Kerry that has caused so much upset. I have literally had grown men and couples crying in my office and sobbing over the phone about this, very distressed and very worried. Particularly in the lead up to and throughout Christmas, constituents will be worried about this, wondering what will happen. People already under enormous pressure are feeling a huge mental strain as a result of these letters having been issued.

Therefore, I reiterate the calls that have been made by numerous previous speakers to look at whether something can be done and whether a letter can issue to the original recipients at least to assure them that there is time being given, that this matter is being considered, and that test case would be allowed to take place. That would give people some solace and at least ease some of the acute pressure that is on them, both financially and mentally. I cannot say that it would remove it but it would be a help. I call on the officials to do that as a matter of priority. It is something that would be important to do because I cannot emphasise enough how distressed constituents are as a result of this, in all parts of Kerry and in surrounding areas. That is something that I would first ask the officials to do as a priority.

Will the officials clarify further for me whether they envisage that there is potential liability they can pursue in respect of 2007, 2008, 2009 and 2010? Listening to some of the discourse today, that is something that I am quite worried about.

Deputy Brassil about 2011 shares being issued in respect of the 2010 milk production. The officials might clarify whether that is outside of the four-year remit. Perhaps I missed the answer, but they might repeat it.

In dealing with other Departments, for example, the Department of Social Protection, there is a general principle regarding a member of the public who has been advised one way or another such that the person does not avail or is not aware of an entitlement or is not able to apply for something. Does a similar principle apply with Revenue? If a person has advice or has something from Revenue that says one thing but later Revenue comes looking for a rebate or whatever else based on something different, does a person have the right to produce whatever evidence he or she has to say that he or she was informed or advised in a particular way on a particular date, and does that work in favour of the citizen? The officials might advise me on the position there.

From speaking to advisers, my reading of this is along the lines of what Deputy Michael Moynihan was saying. It seems there is virtual value and it is a virtual income that is being assessed here and it is not real until a benefit is derived from it. It seems to go against all the principles of taxation that I am aware of. It is quite a fundamental question. In my view, if this principle holds, it is a fundamental change in our overall tax policy. It means that there are many other things that all of a sudden are taxable or perhaps subject to back tax, which will be incredibly worrying for a significant number of people.

What is the overall amount due to Revenue in the Kerry Co-op issue in respect of the years we are talking about and what is the overall amount in other cases that the officials are not looking at currently? Will they give us a rough idea of the figures involved?

What if taxpayers have a liability outstanding and it is found that they need to pay back money? What are the implications, for example, for someone who might have applied for a college grant in respect of 2012 for his or her child to go to college, was over the threshold but, had this liability been paid at the time, would have been under it? What are the implications for such issues, for medical cards and for other potential benefits that the citizen may have accrued? What does it mean also for areas of tax offsets and for different other areas of taxation that they were not able to benefit from because of this matter not having been included? If the officials could answer some of those questions, I would be grateful.

Mr. Charlie Phelan:

There are a number of questions. I will take them, and split some of them, and I will ask Mr. Walsh to answer some of them as well.

As regards a letter to the taxpayer clarifying it, we will certainly write again to all of those we have written to. We will put everything that is in the public domain as we see it into that letter and explain the next steps, a lot like what we have said. We will certainly write to all of the taxpayers and engage with them. Some of them have engaged with us, but we will certainly respond to all of the 400 taxpayers to put more information in there for them.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Will Mr. Phelan put the 60 days in that letter?

Mr. Charlie Phelan:

We will outline the terms in accordance with the code of practice, which, indeed, provides for the 60 days.

Photo of Brendan GriffinBrendan Griffin (Kerry, Fine Gael)
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I ask Mr. Phelan to be conscious when drafting that letter of the mental state of some of those receiving it. I can assure him that I am concerned for some who I have met in my constituency as a result of this matter. It is something I would emphasise that he would bear in mind.

Photo of Paul CoghlanPaul Coghlan (Fine Gael)
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My apologies that I am late because of my attendance at another committee.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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We have other speakers.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Senator Coghlan is not in the Upper House now.

Photo of Paul CoghlanPaul Coghlan (Fine Gael)
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I appreciate very much that the Chairman is taking non-committee members.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Go ahead, Mr. Phelan.

Photo of Paul CoghlanPaul Coghlan (Fine Gael)
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Before Mr. Phelan-----

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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We will come back to the Senator in a minute. He knows the game.

Photo of Paul CoghlanPaul Coghlan (Fine Gael)
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There could be duplication here. To make it easier, could we round it up before Mr. Phelan replies?

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Mr. Phelan can go ahead and reply.

Mr. Charlie Phelan:

I will go back to the bit about the unfairness. Our charter of rights would ensure that we give everybody as fair a deal as possible. I remind the committee that right now we are running an advertising campaign to encourage taxpayers to ensure they claim their PAYE credits or tax credits before the end of the year in order that they do not fall out of the four-year time limit. Certainly, if there is any benefit to be given to taxpayers, the Revenue appreciates the charter of rights and sticks to it rigidly. I will ask Mr. Walsh to come back to the other bits.

On the technical bit about the virtual paper, etc., I do not want to rehash the argument about the virtuality of it but I understand what the committee members are saying.

The amount due to Revenue is not an easy sum to do because it depends on the individual circumstances. Where somebody has no income in the year or a loss, if one adds some income to it, certainly it has no tax effects, but the committee members can do some of the mathematics on this. It is in the public domain that there were 600,000 patronage shares issued in these three years and the mathematics of applying values to that are reasonably easy, but we could not put a tax figure on it because it depends on the circumstances of the taxpayers.

Photo of Brendan GriffinBrendan Griffin (Kerry, Fine Gael)
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Is Mr. Phelan saying that taxpayers would have a lower tax bill in other areas if this is included and that the outstanding amounts here could offset other areas?

Mr. Charlie Phelan:

Yes. For example, it will not have any effect on a farmer who only got ten shares, who is milking 20 cows and who is even below the thresholds to pay income tax at all.

On the other point about the other benefits, such as medical cards, I do not know what effect it has on people for 2012 and I could not possibly answer that question for Deputy Griffin. Clearly, it is something of interest as well to be dealt with.

I will ask Mr. Walsh to clarify the position of 2007 to 2010, inclusive, and whether the 2011 payment is for 2010.

Mr. Paul Walsh:

On Deputy Brassil's point, where he stated the shares were issued in 2011 but actually it relates to the 2010 milk supply and then it is proper to go back to 2010 and assess it in 2010, under the tax rules and principles, one is taxed when one receives the value.

Even though a person may have supplied the milk in 2010, he or she only got the value for that in 2011. In the same way, if a person only got the value in 2012 or 2013, we could not go back and say the person should have paid tax in 2010 and look for the tax on the due date in 2010 and interest from 2010. It is when a person received the value that he or she is assessed on the tax. Even though it relates to the supply of milk in 2010, one got the value for that when the shares issued.

Deputy Michael Healy-Rae made the point about the valuations fluctuating. They did fluctuate over the years in question. In our letter to farmers we said these were the average values over the years in question. They far exceeded the nominal value of €1.27 that was paid for the share, and those were the values that were put into the letter. The point has come up a few times that it was just paper that the farmers received and they had no value. They clearly had a value. We established that in recent years. The shares were traded far and above their issue price. One can debate what precise valuation will apply to each particular farmer.

That goes back then to the issue of a test case, which Revenue is quite willing to facilitate, but again that is a matter for the Tax Appeals Commission. There are two issues for the commission. One is the principle of whether there is an income tax liability having regard to the value of the shares when they were issued and the next part is what is the valuation. While we may have a test case and we will be able to establish the principle in the test case, the valuation will depend on each farmer and the particular date when their shares were issued, so we might not have a resolution from a test case because there is the second element of the valuation to be determined as well.

A point has also been addressed on the penalties. I accept Deputy Healy-Rae’s point that the farmers have done no wrong. Where the farmer has acted on professional advice and the professional advice was not to include the market price, then it would be very difficult for Revenue to establish fraud and neglect on behalf of a farmer.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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That would not prevent Revenue from applying penalties and interest.

Mr. Paul Walsh:

No, I am talking about penalties here specifically.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Penalties. The interest will still apply in this situation.

Mr. Paul Walsh:

The interest is a statutory payment and if there is tax due, tax is due.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Penalties will not apply in this situation.

Mr. Paul Walsh:

Where we have established that the farmer was acting on professional advice.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Before I call on Deputy Healy-Rae, I will just take up a point made by Deputy Griffin because it is a broader question now than just being confined to Kerry Co-operative. The Revenue Commissioners have written to 400 suppliers. They have put their toe in the water and established the technical fact that is being pursued and then the amounts of money thereafter, but there are other co-ops and a previous speaker said they might have a similar type of share structure in place. Out of regard for the co-op movement itself and the various companies that have developed, would it not have been better for Revenue to do a scoping exercise throughout the country and establish the extent to which this practice was going on and to alert the farmers, their representatives and the professionals to the fact that Revenue has now established that there are a certain number of individuals who have not been compliant with their tax? If Revenue had come at the situation from that angle, people would have been informed of the manner in which Revenue was reaching its assessments rather than picking 400 and putting its toe in the water and being obliged to take a test case.

Mr. Phelan said the number of days can be extended to 60, but that is only if the taxpayer triggers engagement with Revenue. What Senator Kieran O'Donnell wants is a suspension without engagement in order that those concerned can react to the letter, which appears to be a demand of payment. Revenue must clarify the 60 day situation, whether it is on engagement or after engagement or if Revenue accedes to the wish of the committee that activity would be suspended for the 60 days. I believe the letters to be letters of demand.

Another point made by speakers is that accountants and financial advisers have always engaged with Revenue. Deputy Ferris was keen to point out that the issue has only now arisen. Why has Revenue not engaged in the past with the accountants representing the farmers or the co-ops in order that a fuller picture could be established for the public in the situation? That is the nub of the issue. Why write to 400 farmers when Revenue should have clarified the full picture first, informed the co-op and the other businesses associated with the co-op and then assist the farmers and their professional representatives to understand that something was wrong? Mr. Phelan said it came as a surprise to him and Revenue that the co-ops did not know. If the professionals representing the farmers did not know, how in the name of God could Revenue expect the farmers to know? Revenue is applying the tax law as laid out by this House in terms of its approach to collecting the money, but this is a very unusual set of circumstances and it is very unusual that professionals would not be aware of what has been described to us today and that they would not inform their clients.

The final point that needs to be clarified for members is that what Revenue is asking in terms of the Tax Appeals Commission, which is an independent body, is that it will require a number of cases to be adjudicated upon by Revenue, with a clear indication that there are followers. It is not just one case. Is it correct to say there has to be a number of cases and there has to be a clear line of sight saying there are followers and therefore there will be a test case? Members asked the question but I think the answer is being misunderstood. It is not that Revenue is allowing a test case. Revenue is encouraging the taxpayers to take this course of action to lead to a return of a number of taxpayers and to lead thereafter to an independent adjudication from the Tax Appeals Commission. Having listened to the witnesses from Revenue, it is not as straightforward as it might seem to members. There is much that needs to be done by the taxpayer to trigger all sorts of things to answer the questions that have been posed to Revenue. I am just setting out the situation for members and trying to clarify the confusion about some of the questions that have been answered in respect of the situation.

Mr. Charlie Phelan:

On a small point, we will take the committee’s advice and guidance on clarifying the situation for the taxpayers to whom we have written. We will bring them right up to date. If you wish, Chairman, Mr. Walsh could respond more on the-----

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I will call Deputy Michael Healy-Rae first and then Senator Paul Coghlan and then Mr. Walsh can respond.

Photo of Michael Healy-RaeMichael Healy-Rae (Kerry, Independent)
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Thank you, Chairman, for allowing this debate. I thank the witnesses for being present to answer these very important questions. The one thing that is very important for us as public representatives is to let Revenue know in a very ordinary and human way that the letters have struck the fear of God into honest-to-God farming families who did nothing out of the way. By its own admission, Revenue said the farmers did not do anything fraudulently or on purpose. They did not mean to do anything. All they did was receive the piece of paper in the post, which has no value until it is traded. If that were to happen, the farmers would gladly pay capital gains tax. They know they would have an obligation to do so.

Why, therefore, in the name of God, would the Revenue Commissioners write to them in the manner they did, a couple of weeks before Christmas? This is being inflicted on farmers. As my brother, Deputy Danny Healy-Rae, rightly stated, it does not matter at this stage whether a farmer has cows or sheep, is producing beef jor engaged in tillage. The one thing every farmer has in common is that none of them is making money. No one involved in the agriculture sector is making money; he or she is struggling along. We have to ask, therefore, why Revenue thinks it should send these letters now. Why were they not sent two or three years ago? I have been listening closely to the delegates' answers.

I raised this matter with the Taoiseach in the Dáil earlier today. Perhaps the Revenue Commissioners' representatives might confirm that more letters will be issued to the same farmers claiming a specific amount of money. As Deputy Brendan Griffin said, we appreciate the work done by the Revenue Commissioners. Somebody has to do it, but Revenue does not comprise an enormous pool of people. I know that senior people working with the Revenue Commissioners are raising their eyebrows at what has happened. They are questioning it and asking whether the Revenue Commissioners are factually correct in what they have done. They honestly believe they are not. Therefore, there are people working with the Revenue Commissioners who are dubious about what has been done. That is extremely worrying. One can always say doctors differ and patients die, but what I have heard is serious.

I am thinking of an excellent interview given by Mr. Seán Brosnan, chairman of Kerry IFA and a sound individual, on the Agri-Time programme on Radio Kerry in which he talked about what exactly these patronage shares meant and how they worked. He asked whether the people who had sent the letters a number of weeks ago knew what they were doing. Did they understand the system? I honestly doubt that they did. My late father always said one should never blame a person for making a mistake provided they admitted to it. If the Revenue Commissioners have made a mistake in this case, no person in Ireland would blame them if they were to say, "Yes, we made a mistake. We were wrong. We should not have done that." In that case no one would crow at them. We do not operate like that. However, I question what Revenue has done and ask how right do the Revenue Commissioners think they were. How do they think they would do in a test case and how would it stand up in court? I am fearful about what this is doing in terms of people's state of mind at what is a critical time when they are trying to balance their budgets. I know farmers who have paid their taxes but who had to borrow every penny to do so. They are now trying to repay the banks, yet they have received these letters.

I honestly doubt that the people working with the Revenue Commissioners know what this is doing to the families involved who are sick with worry. They are trying to figure out what they should do. They are in a very bad way, which is why we are fighting for them here. We want to tease out this issue to see if Revenue's representatives can answer us comprehensively on, first, how right they think they are and, second, if they think it will stand up in court. Will they write again in the coming days? If they will, it is only fair that they should let people know. That information only came to light earlier today and has been made known to the Taoiseach, but no one from the Revenue Commissioners has told us publicly. Revenue's representatives should understand the reasons we are so exercised about the matter. I have to be parochial and talk about the situation in County Kerry. I have not seen Deputies in the county come together and unite on any issue in such a way in a long time. We all fully appreciate what this is doing to farm families who are being terrorised by the actions of the Revenue Commissioners.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Does Senator Paul Coghlan wish to contribute?

Photo of Paul CoghlanPaul Coghlan (Fine Gael)
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Yes, I do and I am grateful to the Chairman for allowing me to speak. I am sorry that I was late and I am trying to pick up on what has been said. I will be forgiven, therefore, if I ask questions that have been answered already.

I am anxious to know what is the basis for this taxation. People are concerned to know what is the status of patronage, loyalty and bonus shares. How are they valued by the Revenue Commissioners and on what basis are they being traded? Am I right in saying they are not plc shares? Are they a category of a co-op share? If so, they are only paper shares until they are converted to plc shares. It is my understanding that only plc shares can be traded in the stock market.

Revenue's representatives referred to a test case and said they would write another letter. I am glad that they will do so. Perhaps it might be possible for us to see a copy or draft of that letter for information. The Chairman has said there are many other institutions and co-ops throughout the country. Perhaps, therefore, there are other similar instances in which such categories of share have been issued and those involved have not received such letters. Perhaps farmers in County Kerry are being treated as guinea pigs in this case.

Mr. Charlie Phelan:

I will reply to the questions asked as best I can. It is a real statement that the shares have no value until traded.

Photo of Paul CoghlanPaul Coghlan (Fine Gael)
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Are there preference share costs?

Mr. Charlie Phelan:

Both can happen. There are spin-outs, but there has not been a spin-out since 2013. Let us take traded shares and indicate how we apply a value. The documents that were traded were stamped by the Revenue Commissioners. We know the values that were applied in 2011, 2012 and 2013. In the letters we applied these values where there was a possible under-declaration of income. Shares are traded among people who are either connected or unconnected to each other, whereby I agree to buy yours or you agree to buy mine. There is no evidence of a denial that trading has been taking place.

Photo of Paul CoghlanPaul Coghlan (Fine Gael)
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It has to be agreed.

Mr. Charlie Phelan:

The documents have to be stamped.

Mr. Charlie Phelan:

By the Revenue Commissioners. There is stamp duty applicable at different rates in the same way as it is applied to land transfers. They are all taxed instruments and we take real values into account. That is the traded element and it has to be agreed by the co-op that a transfer has taken place. We have no evidence of it being denied.

On why we did not look at this issue for years, we are concerned that the number of omissions from income returns is significant. I am concerned that committee members might ask if we should have been looking at it in earlier years, or what we should be doing about it. I was asked about contact with the individuals concerned and the wider community, including representatives, the association and this committee. Fundamentally, there is self-assessment, whereby one fills in a tax return and sends it electronically to the Revenue Commissioners. One declares one's income for the year. We try to-----

Photo of Michael Healy-RaeMichael Healy-Rae (Kerry, Independent)
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On a point of order, with the Chairman's indulgence, I cannot let Mr. Phelan go any further. He has insinuated that we might want the Revenue Commissioners to look further back.

Our attitude, and I know I can speak on behalf of all of the Deputies here, is that Revenue has looked back on enough and we do not want Revenue to go back any further. Mr. Phelan just said a moment ago that we wanted Revenue to go back further years. We never said that.

Photo of Danny Healy-RaeDanny Healy-Rae (Kerry, Independent)
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We never said that.

Photo of Michael Healy-RaeMichael Healy-Rae (Kerry, Independent)
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No person over here said that. I cannot allow Mr. Phelan away with saying so. This matter is on record. I would like Mr. Phelan to put the record straight for the benefit of the Chairman, please. No person over here said any such thing. Is that correct?

Mr. Charlie Phelan:

I am sorry Deputy if I iterated that. I certainly did not mean to say that the Deputy was looking for us to go back.

Photo of Michael Healy-RaeMichael Healy-Rae (Kerry, Independent)
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That is the way it came out.

Mr. Charlie Phelan:

I am sorry if I misled anyone and I ask that the record be corrected.

I will return to dealing with the taxpayers. There is no easy way of telling a person that there is an issue with his or her tax. We need to deal with the taxpayer concerned. We do not want to write to somebody else stating that a taxpayer has an issue. I have 30 years of experience working in the Revenue Commissioners. I have dealt with many thousands of audits in my time and settled many audits as an auditor over the years. Therefore, I know and understand business, farming and the difficulties involved. I am slightly concerned that the Deputy has said that employees of the Revenue Commissioners have told him that we are wrong. I can assure the Deputy that we are quite certain that our technical interpretation of this matter is correct. Therefore, I am very surprised by what the Deputy has said and I would like to engage with him in a discussion of those points.

In terms of papers of assessment with Revenue-----

Photo of Michael Healy-RaeMichael Healy-Rae (Kerry, Independent)
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I mentioned further letters being issued.

Mr. Charlie Phelan:

Yes. It is our intention, and I have set out in my paper, to raise the assessments for 2011 to protect the Exchequer because of the four year rule. We will engage with the taxpayers in a way that allows the 60-day period that Senator O'Donnell mentioned. We will work on a mechanism that will make that happen in the fairest way.

Photo of Michael Healy-RaeMichael Healy-Rae (Kerry, Independent)
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Can we decode that phrase as meaning the Revenue Commissioners will write to taxpayers again in the coming days?

Mr. Charlie Phelan:

It is our intention to raise an assessment for 2011 on the 400 cases in respect of-----

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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With due respect, I wish to make a critical point. I do not wish to labour this matter but I will do so.

Photo of Michael Healy-RaeMichael Healy-Rae (Kerry, Independent)
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I ask the Revenue officials to talk in plain English. Will Revenue issues more letters in the coming days?

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I suggest Revenue responds to Deputy Michael Healy-Rae.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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I wish to clarify my point. Mr. Phelan has stated that Revenue is in the process of raising assessments. The letter issued by Revenue was dated 18 November and is due a reply by Friday, 9 December. We ask that Revenue writes to the 400 people involved stating that nothing will happen for 21 days plus 39 days. I ask that Revenue does not raise assessments for the next 39 days, which is a fair request. Furthermore, I ask Revenue to find a mechanism that allows a test case to take place prior to the lapse of the 39 days. With due respect to Mr. Phelan, he is very good at his job and I mean that in the best possible way. He has worked for the Revenue Commissioners for 30 years. As I have limited time here I want us to leave here today knowing what Revenue will do. Will the letter state that Revenue will raise no assessments for another 39 days thus giving people 60 days' grace? Is that correct, Mr. Phelan?

Mr. Charlie Phelan:

With respect, earlier I said that we would take counsel on whether we will raise 2011 assessments. In my statement I said that the next step is to raise the 2011 assessments with people.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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I have asked simply that Revenue allows 60 days. I ask Revenue to facilitate that no assessment be raised until 60 days have elapsed. As many as 21 days will have be used by next Friday, 9 December, and I ask for another 39 days. Mr. Phelan has said Revenue wishes to work with us. It is unfair and goes against the spirit of co-operation that Revenue will write to the 400 people and raise the assessments of 2011. I urge Revenue writes to the people informing them that they have been allowed 60 days whereby no assessments will be raised in that time and that Revenue will seek a mechanism with Kerry Co-op and its advisers to facilitate either the tax appeals commissioners or some process within the Revenue Commissioners to carry out a test case.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I ask the Senator to allow Mr. Phelan an opportunity to give a clear answer.

Photo of Brendan GriffinBrendan Griffin (Kerry, Fine Gael)
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I support what Senator O'Donnell has sought. It is the overwhelming message coming from the committee.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I ask Mr. Phelan to give a clear answer to the question.

Mr. Charlie Phelan:

I shall give a clear answer in as far as I can. Let us remember that the letter that we issued asked people to respond to us within 21 days. In the normal course of events, under the code of practice, what we would expect is for somebody to come back and confirm whether he or she has an issue. Let us say a person confirmed he or she has an issue and thus needs 60 days, the 60-day period does not start at the beginning but at the time the person confirms he wants to avail of the period in order to make a voluntary disclosure.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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That is the point I made earlier.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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I will cut to the chase. The letter basically tells people that to avail of the opportunity to make such a disclosure they should respond to Revenue with a computation of tax together with the appropriate payment, which is within the 21-day period. What we seek today is straightforward. We want Revenue to issue a letter before next Friday because people are petrified by the 21 days' notice. We want Revenue to state that it will now facilitate 60 days thus allowing the 21 days gone but adding 39 days and it will allow for a test case to be heard before the 60-day period has elapsed. We want Revenue to state that it will not raise the assessments. Revenue has the power not to raise assessments.

Mr. Charlie Phelan:

I will reply in two steps starting with the letter that we have issued and then the code of practice. We are bound by the code of practice to engage in accordance with the code of practice so there is no 39 days.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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No, let us clarify the matter. I respect the fact that Mr. Phelan is a very experienced man. We want this matter spelled out in plain simple language. Mr. Phelan knows what we have asked for. We want him to issue a letter to the 400 suppliers stating that Revenue will facilitate them with 60 days. It is within Revenue's remit to do so under the code of practice, from what I can see. I ask Revenue to state that it will not raise assessments until the test case has been heard and for the test case to be heard within the 60 days. I ask that Revenue to engage with Kerry Co-op and its advisers to facilitate a test case being heard. I am worried that Mr. Phelan will leave here today having told us that he will write to people but he will inform them that Revenue will raise assessments. Raising assessments would totally defeat the purpose of what we have sought.

Photo of Michael Healy-RaeMichael Healy-Rae (Kerry, Independent)
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I am sorry for interrupting but such a letter would totally defeat what I call the fair play in terms of dealing with people who are the taxpayers of Ireland, whether they are from the farming community or another community. All we are asking is that when a test case is proposed and taken place surely be to God it is only right, fair, honest and proper to allow procedures to take place. For Revenue to go terrorising people again is wrong. Revenue went at this matter in the wrong way in the first instance. With respect, instead of Revenue learning from its mistakes it proposes to put its shoe in this matter again in an improper fashion. The point that has been made today by members has been made in an honest manner. For God's sake, I ask Revenue to please allow the test case to go ahead and not to put its size nine shoes in it. That is all that we ask.

Photo of Brendan GriffinBrendan Griffin (Kerry, Fine Gael)
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Senator O'Donnell has made a very fair request.

Photo of Michael Healy-RaeMichael Healy-Rae (Kerry, Independent)
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Yes, a very fair request.

Photo of Brendan GriffinBrendan Griffin (Kerry, Fine Gael)
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We deserve an answer confirming if his request will be granted.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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A direct answer, Mr. Phelan.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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That is it, yes.

Photo of Michael Healy-RaeMichael Healy-Rae (Kerry, Independent)
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We do not want to be sent around the garden. I ask that Mr. Phelan gives us a straight answer.

Photo of John BrassilJohn Brassil (Kerry, Fianna Fail)
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I understood that everybody had spoken and members could raise subsequent queries.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Yes.

Photo of John BrassilJohn Brassil (Kerry, Fianna Fail)
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I strongly agree with the request made by Senator O'Donnell. I shall raise another matter and will allow Mr. Phelan to answer.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Is the Deputy asking a different question?

Photo of John BrassilJohn Brassil (Kerry, Fianna Fail)
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I wish to raise a number of issues.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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All right. Let us have clarity.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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We need answers.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I ask the Senator to wait. I ask Mr. Phelan to give clear answers to Senator O'Donnell's question.

Mr. Charlie Phelan:

To be fair to all taxpayers, if there is tax owing for 2011 we are statutorily obliged to seek to collect that tax. I have said that I will seek counsel on whether we will do so for 2011.

If there is tax due for 2011, we are statutorily obliged to collect it. We cannot collect the tax unless we put it into charge. We put it into charge by raising an assessment. I will certainly take the committee's views and advice and I will consider and take counsel on whether or not we will raise any of the assessments for 2011. If we recognise there is tax due, we are statutorily obliged to raise those assessments.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Will the Revenue Commissioners write to everyone before Friday?

Mr. Charlie Phelan:

I have already said we will be delighted to write to everybody before Friday setting out as much information as we have here. We want to deal directly with the taxpayer. It is the taxpayer who is most concerned. We will not deal with people who are not absolutely authorised by the taxpayer to speak on their behalf. We will do that when people are authorised to speak on their behalf but we need to talk directly to taxpayers.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Will the Revenue Commissioners extend the timeframe?

Mr. Charlie Phelan:

We will find a mechanism to extend the timeframe.

Photo of John BrassilJohn Brassil (Kerry, Fianna Fail)
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There are a few things I would like Mr. Phelan and his team to consider on top of all the points that have been made already. In his opening statement, he stated that "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." That is factually incorrect. They got shares based on their quota not on the amount of milk they produced. If the 100,000 gallons that Mr. Phelan referred to was from a farmer who had a 50,000 quota, he got 50 shares. That reinforces the point that these were loyalty shares paid to farmers for sticking with their co-op and reinvesting in them. It was more a reward for staying than a payment. That is a critical point. It again points out the amount of information that was not there and is now coming to light. I would like Mr. Phelan to take that on board.

We are getting an extension of time which is great. I have no doubt that a test case will be taken which could take a month, six months or 18 months. I do not know how long. Mr. Phelan probably has a better indication than I do. It could take a long period of time. Farmers will be looking for tax clearance certificates in 2017 for 2016 because if they do not get a tax clearance certificate their payments for all sorts of things will not be made. Can Mr. Phelan give a clear undertaking that this issue will be dealt with separately and tax clearance certificates will be issued to these farmers to allow them to continue their business because it is a big worry for them? If this issue is in the ether somewhere and they are told they cannot be given one until the issue is sorted out, it is just opening another huge can of worms. I would like clarification on that if Mr. Phelan can give it to me.

I will add to the debate on the value of the share and how the Revenue Commissioners came to assess it. My information is that in the grey market, the number of shares traded amount to about 1% of Kerry Group shares. It is very difficult to come to a valuation based on a 1% trading. That will come into this debate down the road. Given the point made by Deputy Moynihan, which is fairly critical, if there is a ruling from the Revenue which is contrary to the one the witnesses arrived at, all bets are off. That needs to be locked down. If there is a case whereby the Revenue has determined that capital gains is to be based on these shares and not income, a complete reversal of what this letter is looking for, then to me all bets are off. The Revenue Commissioners should start 2017 with a clean sweep and outline the way it will be dealt with from 2017 onwards.

Deputy Ferris mentioned a letter of comfort. Does it exist? If it does, it has severe implications. Mr. Phelan said he has done many audits. I reiterate the point that if advice was sought on the transfer of shares for inheritance purposes and clear advice was given by Revenue that the value of these was to be at €1.27, it is hugely significant. Mr. Phelan said he is surprised that practitioners did not bring it to the fore. I argue that practitioners brought it to the fore, raised it, got a valuation and acted accordingly. All that will be taken into account in the test case and whichever way it comes out, we will have to accept it. I need to make those points. I seek a direct answer on the tax clearance going forward because it is very important for farmers.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Do remaining members have a specific question they want to ask that has not been raised already? If there is, we could ask Mr. Phelan now because we will adjourn shortly.

Photo of Brendan GriffinBrendan Griffin (Kerry, Fine Gael)
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I have a question along the lines of what Deputy Brassil just asked and what Deputy Ferris has previously asked about the letter of comfort. I also asked about the principle of a Department or agency giving advice to a citizen. there is an issue that when it can be proven that advice was given on a matter of fact that it then stands up in the future that the advice cannot be taken back. Was a letter of comfort issued in respect of this practice, not necessarily from Revenue but from any authority?

I am not in any way suggesting that this is what I want to see happening but was Mr. Phelan suggesting that following this we can go back and look at 2007, 2008, 2009 and 2010? Is that something Mr. Phelan is saying Revenue is intending to do? That is bringing it to a whole new level. Mr. Phelan has heard the concerns here and surely that will not be what will happen next year.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Are there any other specific questions?

Photo of Tom NevilleTom Neville (Limerick County, Fine Gael)
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The Deputy mentioned 1% of shares. I would like clarity on how the value of the shares was calculated. Has a discount factor been applied because of the lack of market value for the shares as they were traded on the grey market? Kerry's board had to approve the sale. If all the shares were on the open market at the same time, the value of the share would probably drop because there would be more supply. Has that been taken account of in the calculations? How has the value of the share been calculated? I want clarification on that.

The second question is on the letter. It is imperative that the style of communication is looked at when these letters go out. To Mr. Phelan it is factual information because he has a tax background. I have the utmost respect for that but I do not. The style of communication and the language used has to be looked at. The ultimatums that are perceived and the perception of the vocabulary in the letter frightens the daylights out of people. The Revenue Commissioners should have a look at the style of communication.

The second question is on the calculation.

Photo of Danny Healy-RaeDanny Healy-Rae (Kerry, Independent)
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In his own words, Mr. Phelan only recently understood how this works. I am asking that following the test case, if Revenue is found to be right, it only starts charging people tax from that point forward because it is wrong to be going backwards when nobody knew they were doing anything wrong, including their accountants and officials helping them submit their accounts.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I will ask Mr. Phelan to reply to all of those questions and then I will bring the meeting to a close. In his reply, will Mr. Phelan address a question that I have? Will the Revenue Commissioners look at the transcript of this meeting and flag the questions. If an answer has been given where more detail is required, will Revenue give it? If the decision of the Revenue Commissioner has changed in any way relative to the information given today, will it also flag that for us? Will Mr. Phelan let us have a copy of the correspondence that will be issued? It need not contain any names but only the wording, as Deputy Neville has said. The purpose is to address by letter to the committee the concerns following this meeting and having examined the transcripts and to include with it a copy of the correspondence that will be issued from here on.

He might answer the various questions that were put to him and then I will bring the meeting to a close.

Mr. Charlie Phelan:

I confirm we will look at the transcript and we will isolate any questions and any commitments we have given. We will correspond with the Chairman about the letter we are going to issue. Perhaps there is a mechanism for us to do that with the Chairman.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Yes.

Mr. Charlie Phelan:

We will do that immediately, today and tomorrow. We may not meet the Friday deadline for getting the letters out but we do our best.

On Deputy Brassil's question on the issuing of tax clearance certificates, that is the easy part of it. We have automated the tax clearance certificate process and it is a simple operation. One makes one's tax returns, pays one's tax and applies for a tax clearance certificate online and it is instantly given - that is the procedure. As to how this issue will affect the issuing of a farmer's tax clearance certificate, if there is an assessment of a farmer's tax and he appeals it, that has no affect on the system, he will still get his tax clearance certificate. That is no problem there, it will not affect the issuing of the farmer's tax clearance certificate. That is the easiest aspect of it.

Regarding the value of the 1% of shares traded and the discount that might be applied to shares, a very small percentage of the shares are traded, and Kerry Group plc's trade in shares does not represent a huge volume either but, nevertheless, there is a market. We have taken the value from the stamped documents that came to us and we have used those average values in the letter. Whether that is critically correct in each individual case, we are clearly not certain because it may depend, as Mr. Paul Walsh said, on the time of the year.

As regards a discount factor if all the shares came on the market today, interestingly, that was one of the arguments put forward in one of the old cases. The argument was made that the individual could not trade his shares at that moment in time because if he did so, all the shares would be traded together and it would restrict the value, but in that case it was decided that the value was the value that was available rather than a discounted value due to some unforeseen circumstances. I am interested in the Deputy's point about a ruling to the contrary. I certainly could not countenance that an outside agency, or even a State agency, giving a ruling on a tax issue would not be a matter that the Revenue would normally view, but many of the things that people would say about Revenue would be authorised by Revenue, so I would not make a comment on that.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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This is the letter of comfort that Deputies Ferris and Griffin mentioned and if they have sight of that letter of comfort or a copy of it, or if they know from where it came, they might inform the Revenue.

Photo of Martin FerrisMartin Ferris (Kerry, Sinn Fein)
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I wish to clarify that this was a telephone call that was made to my office.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Okay.

Photo of Martin FerrisMartin Ferris (Kerry, Sinn Fein)
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I am not making any accusation against anybody. A letter came to my office that a letter of comfort was in existence - it was a political letter of comfort.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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If there is evidence of it, the Deputy could provide it.

Mr. Charlie Phelan:

That would be very helpful.

Photo of Brendan GriffinBrendan Griffin (Kerry, Fine Gael)
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Did anyone in Revenue ever tell an individual taxpayer that in these specific circumstances that the taxpayer was kosher, that everything was kosher? Has that happened?

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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That will have to be checked out. Mr. Phelan might proceed.

Mr. Charlie Phelan:

On the point concerning the payment of capital gains tax, it certainly paid at the disposal point. Whatever tax is due is based on the disposal price.

On Deputy Neville's point about the style of communication, as I said earlier, it is not easy to tell a taxpayer that he or she has an issue. I agree with the Deputy that the style was pretty strong in its language but we believe it was an invitation to engage with a code of practice. Perhaps the language dealing with an non-professional is a little different but if one brought that letter to one's accountant, it would be well understood by him and what engagement with the code of practice involved. A code of practice is a set of rules but one would not include all those rules in a letter. I take the Deputy's point about the style of communication and we will certainly improve on what we are going to say to these people, particularly bearing in mind the Christmas period. We will put as much comfort as we can in what we will say. We are aware of the issues in farming and concerned about the issues facing farmers. We will fix that and I thank the Deputy for pointing that out.

The example I gave of 100,000 shares was a simple one. The examples I gave were for illustrative purposes. We are relying on the rules of the co-op, and they are contained in a public document, which I pulled off the company's website. It states 4,546.09 litres, which is 1,000 gallons. That is where we took that figure from. I accept that it refers to the quota.

Photo of John BrassilJohn Brassil (Kerry, Fianna Fail)
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Yes. It is based on quota not on the amount of milk produced, which reinforces the point.

Mr. Charlie Phelan:

Yes. I agree.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I thank the members and the officials from the Revenue Commissioners attending. The meeting is adjourned until 9.30 a.m. tomorrow.

The joint committee adjourned at 4.15 p.m. until 9.30 a.m. on Thursday, 8 December 2016.