On 3 June 2020, Perrigo Pharma International (“Perrigo”) opened its case in the High Court in a bid to to quash one of the most contentious tax bills levied on a company in Ireland. In November 2018, the Revenue Commissioners (“Revenue”) raised amended tax assessments against Perrigo that increased the company’s corporation tax liability for 2013 by €1.64bn.
Perrigo is the parent company of Elan Pharmaceuticals (“Elan”), having acquired Elan in 2013. The 2013 assessments were raised against Perrigo on account of the manner in which Elan, prior to it becoming a subsidiary of Perrigo, accounted for the profit on the sale of its interest in the multiple sclerosis drug, Tysabri, to Biogen in 2013.
It is understood that Elan held a Shannon Free Trade Area Tax Certificate from 1997 to 2005 (“SFTA Certificate”), and as the holder of a SFTA Certificate was entitled to avail of a lower rate of corporation tax on certain activities, such as trading in the acquisition and disposal of intellectual property (“IP”). It is believed that Elan accounted for the sale of Tysabri as a trading receipt and subject to corporation tax at 12.5%. However, Revenue disagreed with this approach and determined that Elan was not trading in IP and that the gain on the disposal of Tysabri should have been subject to capital gains tax at 33%.
It was reported in the media in 2019 that Perrigo maintain that the approach adopted by Elan is consistent with how similar sales were reported to Revenue in the past. The Perrigo chief executive is reported to have stated that the Irish government and Revenue have violated Perrigo’s legitimate expectations to rely on prior tax audits and 20 years of tax history and interactions with the Revenue.
In response, Perrigo has initiated judicial review proceedings against the Revenue decision to issue the amended tax assessments. Judgment in the case is expected in the coming months. This article briefly considers the legal concept of legitimate expectation and the thresholds that Perrigo may have to meet to succeed in its case to have the revised tax assessments reversed.
The doctrine of legitimate expectation is an aspect of the well-recognised equitable concept of promissory estoppel, whereby a promise or representation as to intention may in certain circumstances be held to be binding on the representator or promisor (Webb v Ireland IR 353). It seems clear that the plea of legitimate expectation is one which is exclusively public law in character but unlike promissory estoppel, it is doubted whether the element of detrimental reliance is necessary to ground the action.
The criteria required to establish a claim of legitimate expectation were set out by Mr Justice Fennelly in Glencar Exploration plc. v Mayo County Council (No. 2) 1 IR 84 at p. 162. That decision gave us 3 principles:
- the public authority must have made a statement or adopted a position amounting to a promise or representation, express or implied, as to how it will act in respect of an identifiable area of its activity (known as the representation);
- the representation must be addressed or conveyed either directly or indirectly to an identifiable person or group of persons, affected actually or potentially, in such a way that it forms part of a transaction definitively entered into or a relationship between that person or group and the public authority or that the person or group has acted on the faith of the representation, and
- the representation must create an expectation “reasonably entertained” by the person or group that the public authority will abide by the representation to the extent that it would be unjust to permit the public authority to resile from it.
Accordingly, for a taxpayer to have an actionable claim for legitimate expectation, it is necessary to first consider the kind of representations that Revenue is permitted to make. Interestingly, there is no specific provision in the tax code which deals with the issue of Revenue opinions. However, The Fifth Report of the Commission on Taxation defined the term “advance ruling” as “a statement by the Revenue on how they will interpret legislative provisions in a given situation”. In Pandion Haliaetus Ltd v Revenue Commissioners 1 IR 309, the High Court considered the weight to be attached to an advance ruling and held that the proper approach is to (i) look at the transactions entered into by the taxpayer; and, (ii) see if, prior to their being entered into, Revenue committed themselves to take a particular view of the tax implications involved.
However, the above approach is tempered by the decision in Wiley v The Revenue Commissioner IR 160, which sharply delimits the scope of representations that can give rise to a legitimate expectation. In this case, the Supreme Court held that it simply was not possible for the taxpayer to “pursue on the basis of expectation a remedy which would involve the carrying out by Revenue of activities which they were not empowered to carry out”. The rationale underpinning the decision was that to hold Revenue to an unlawful representation would have the dual effect of unlawfully extending the Revenue’s power and destroying the ultra vires doctrine by permitting Revenue to arbitrarily extend its power.
The key element of a judicial review is that it allows a court to review the manner in which an administrative decision is made, rather than the actual substance of the decision itself. In a judicial review, the court is concerned with the legality of the decision-making process and not necessarily its merits. In Duggan v. An Taoiseach I.L.R.M. 710 Mr Justice Hamilton stated:
“The doctrine of legitimate or reasonable expectation, being in accord with equitable principles, is recognised by the courts and if a person establishes that he has a legitimate expectation of receiving a benefit or privilege, the courts will protect his expectation by judicial review as a matter of public law”
The availability of judicial review is a significant addition to the taxpayer’s armoury against tax assessments raised by Revenue. However, the preponderance of case law suggests that, no matter the perceived injustice or unfairness that results, a taxpayer cannot have a legitimate expectation to be given a right to which they are not legally entitled under the tax code and a plea of legitimate expectation cannot be used to compel Revenue to take an action if they do not have the power to do so.
Concerning the scope of the plea of legitimate expectation, a distinction has traditionally been drawn between a legitimate expectation, on the one hand, that certain procedures would be followed as a result of some representation scheme or policy, and, on the other, that a substantive benefit would be conferred when some statutory discretion came to be exercised. Making a claim on the latter has not traditionally been met with success for reasons set out by Mr Justice McCracken in Abrahamson v. The Law Society of Ireland 1 I.R. 403:
“Where a Minister or a public body is given by statute or statutory instrument a discretion or a power to make regulations for the good of the public or a very specific section of the public, the court will not interfere with the exercise of such discretion or power, as to do so would be tantamount to the court usurping that discretion or power to itself, and would be an undue interference by the court in the affairs of the persons or bodies to whom or to which such discretion or power was given by the legislature.”
In the Perrigo case, Revenue determined, among other things, that the taxpayer was not trading in IP and that the sale of the IP should have been accounted for as the disposal of a chargeable asset. The question of whether the sale of the IP constituted “trading” is a question of fact, which typically would not be susceptible to judicial review. However, the matter at issue is not whether the disposal of the IP constituted trading but whether the conduct of Revenue was such that it constituted a representation that Revenue accepted that the Company was trading. However, even if Perrigo establish that the conduct of Revenue gave rise to an expectation that the disposal of the IP would be treated as trading, it will be interesting to see if it will give rise to a substantive benefit, such as vacating the amended tax assessments.
Tax Appeals Commission
The Tax Appeals Commission (“TAC”) (first tier tax tribunal) does not have the authority to make an order of certiorari to quash tax assessments raised by Revenue on grounds of legitimate expectation or otherwise. Therefore, a claim for legitimate expectation should be brought by way of judicial review in the High Court. Judicial review proceedings exist in addition to the taxpayer’s statutory right of appeal of a tax assessment or decision of Revenue to the TAC. Indeed, a tax appeal may be adjourned to facilitate the taking of judicial review proceedings. Moreover, in judicial review proceedings, costs typically follow the event. This means that if a taxpayer succeeds in a legitimate expectation case, it may recover its costs from Revenue, while in the TAC, if the taxpayer wins, costs cannot be recovered from Revenue.
The Perrigo case presented a number of complex issues for the court to consider and as the matter is currently sub judice we do not wish to second guess the outcome. The case was heard by Mr Justice McDonald over a period of 10 days. When legal argument concluded, the court reserved its decision and the matter was adjourned so that McDonald J could consider the arguments and prepare a written decision. We look forward to the judgment on what is likely to be a seminal case in the area of tax law and in particular, legitimate expectation. However, the High Court decision might not be the end of the matter; both parties have a right of appeal and with €1.64bn at stake, it is likely that the losing party may choose to exercise their right of appeal. If the judicial review is ultimately unsuccessful, we suspect that an appeal will also have been filed with the TAC and these proceedings will revive. The matter is listed for mention in mid-October, when the decision may be issued.