The Tax Appeals Commission (TAC) has dismissed an appeal by a retail bank that wanted to use its trading losses to write off a tax bill for almost €1.5 million on rental income from repossessed properties.
The unidentified bank had challenged an assessment by Revenue for tax of €1,489,195 for the period 2011-2013 on rental income of repossessed properties after borrowers had defaulted on their mortgage repayments.
The TAC heard that the bank had calculated the taxes due on such rental income but had sought to shelter its liability using its own trading losses from banking for the relevant years.
However, Revenue told the bank that the liability on the rental income was not corporation tax and therefore it could not claim tax relief in respect of its trading losses.
Ireland's main banks including AIB, Bank of Ireland and Permanent TSB have avoided paying corporation tax in recent years, and will for many more years to come, because of their ability to continue to write off losses made during the economic crash against their profits.
Dispute
The TAC said the main issue in dispute between the bank and Revenue was the interpretation and application of various sections of the Taxes Consolidation Act 1997.
The bank claimed the legislation allowed certain trading losses to reduce relevant corporation tax. It maintained it was liable for corporation tax on such rental income it its own right rather than in a fiduciary capacity on behalf of borrowers.
It also maintained the phrase “liability to tax” which is contained in various sections of the legislation was “ambiguous” and did not provide for legal certainty.
However, Revenue claimed the legislation was never intended to allow relief for a bank’s own trading losses where it was merely acting as “a collection agent”.
It pointed out the bank had lent money to individuals or companies who had fallen into arrears and it became a mortgagee in possession of properties or appointed a receiver in order to enforce its security over the underlying debt.
The tax authorities noted the bank treated such rental income differently to rents from properties it owned where it did not act as a mortgagee.
“The rents collected by the banks as a mortgagee in possession through a receiver do not constitute its profits for the purposes of the Taxes Consolidation Act,” Revenue said.
TAC commissioner, Conor Kennedy, acknowledged the "unusual wording" of section 96 (3) of the Act contained a "certain peculiarity" whereby the tax on the rental income of a mortgagee is calculated on the borrower's circumstances.
Intention
Mr Kennedy said it appeared the intention of the Oireachtas was that a mortgagee in possession was merely acting as a facilitator in the collection and payment of tax. He accepted there was an inherent difficulty in interpreting the legislation because of the conflict of deeming the rental income to belong to the bank and the requirement to calculate the tax based on the borrower's circumstances. Mr Kennedy said it was "not easy to reconcile".
While ruling that Revenue’s tax demand for €1,489,195 should stand, Mr Kennedy observed that there was criticism that part of the legislation relating to the calculation of tax from such rental income was “unworkable both legally and practically”.
He cited a recent Supreme Court ruling which stated that legislation must be, as far as practicable, "clear and discernible" and that there were some laws where the words too often were "simply not as clear as they should be".
