Automotive industry supplier lost tax battle with Revenue

A business that supplies components to the automotive industry has lost a €3.38 million battle with the Revenue Commissioners over corporation tax and dividend withholding tax (DWT).

The Tax Appeals Commission (TAC) ruled that a Revenue corporation tax assessment of €1.77 million for the years 2015 to 2018 and a DWT assessment of €1.6 million in 2017 and 2018 issued to the company should stand.

The main issue between the firm and Revenue was the company paying a cumulative €14 million to employee benefit trusts which the company claimed was part of an overall strategy to reward and incentivise employees.

However, Revenue argued that “there is no factual or legal support advanced for the contention that the employee benefit trusts were devised and operated for any other purpose than the avoidance of tax”.

The company recorded cumulative gross profits of €28.2 million from 2010 to 2014 but cut its corporation tax bill by paying €14 million in “pension costs” to the trusts.

In 2013 and 2014, the beneficial owner of the business, referred to as GO in the anonymised ruling, received two distributions from the trusts, totalling €10.7 million.

Revenue successfully argued that the sole purpose of the trusts was to extract funds from the business in a tax-free manner.

Revenue further argued that the deduction claimed by the business for the purchase of the trusts was denied for corporation tax purposes, on the basis that no deduction is allowable in computing the profits of a trade in respect of a distribution.

Revenue also stated that the payment of funds by the business to acquire the employee benefit trusts constituted the acquisition of capital assets and therefore cannot be claimed as an allowable deduction for corporation tax purposes.

Tax appeals commissioner Claire Millrine concluded that it was clear from the evidence that the employee benefit trusts had nothing to do with rewarding or incentivising the employees of the business, but were put in place with the sole purpose of benefiting the beneficial owner of the company, GO.

She said the company had failed to identify any commercial rationale for the transactions.

Ms Millrine said that when an amount of money was transferred by the company to the various trusts, the motivation was for the tax-free benefit of GO and to secure a tax deduction for the entire amount from the gross profit.

GO is not resident here and not an employee of the company, which is a component manufacturer to the automotive industry.