MIONTUAIRISC NA FINNEACHTA
(Minutes of Evidence)
COMMITTEE OF PUBLIC ACCOUNTS
Dé Máirt, 28 Aibreán 1998.
Tuesday, 28 April 1998.
The Committee met at 2.30 p.m.
DEPUTY JIM MITCHELL in the chair.
Office of the Revenue Commissioners: Progress in relation to prosecutions.
Chairman: The committee noted the report of the C&AG on Vote 9, Office of the Revenue Commissioner, at its meeting on 20 November 1997. At that meeting we decided to ask for a report within six months on progress on prosecutions in relation to tax evasion. The committee decided to bring forward its hearings on this issue in the light of recent events and reopen consideration of Vote 9.
I welcome the Chairman of the Revenue Commissioners, Mr. Cathal MacDomhnaill.
Mr. MacDomhnaill: Our team is reduced as the AG is abroad on an official delegation. Accompanying me are Ms Vivienne Dempsey, our senior press officer, and Mr. Paddy O’Shaughnessy, assistant principal officer. Mr. Barra Ó Murchadha, who is concerned with income tax, and Mr. Noel Kearns are attending from the Department of Finance.
Chairman: I ask that questions and answers be succinct. Perhaps Mr. MacDomhnaill will make a brief opening statement.
Mr. MacDomhnaill: I thank the committee for its support in relation to our change in prosecution policy. The new solicitor is in place and the policy is working very well. We have had a number of meetings with the representatives of practitioners. Our policy required us to switch resources, and much of the resources for prosecutions came from the investigation branch. The investigation branch is divided into three units which now specialise on prosecutions and two other units. We have also established an admissions committee, the function of which is to ensure fair and equivalent procedures in the selection of cases for prosecution. There was a case in the UK where a taxpayer contested his prosecution in circumstances which he held were similar to other taxpayers who dealt with the same accountant. The court upheld the selection of cases for prosecution provided it could be shown that fair procedures were followed. We must be very careful in this context. The admissions committee will rule on cases. So far 47 cases have been presented to the admissions committee and it has selected 20 for prosecution - I am referring to prosecution on indictment as distinct from civil prosecution. We have always had a large agenda of civil prosecutions.
Chairman: These are criminal prosecutions.
Mr. MacDomhnaill: Yes, criminal prosecutions. I can provide an update on cases if desired. We have had two convictions in 1998, one involving a seven year sentence and one involving a fine of £2,250. There is one case awaiting judgment from 1997. There is also a case from 1997 where the fine of £500 was imposed. A case has been re-entered where a ten month sentence had been suspended and has now been imposed.
Deputy Rabbitte: I have been a member of this Committee in three different Dála. How long has Mr. MacDomhnaill been Chairman of the Revenue Commissioners?
Mr. MacDomhnaill: This is my eight year.
Deputy Rabbitte: It is fair to say that over that period great improvements in the efficacy of tax collection system have been made.
Mr. MacDomhnaill: I thank the Deputy.
Chairman: You do not deny that.
Mr. MacDomhnaill: Put it this way, we like to think we have improved the situation. We carried out independent market surveys and the feedback is that there is a perception of improvement. The one area on which we have had to concentrate a little more in recent times is that of prosecution. In the other areas there is a fair degree of satisfaction.
Deputy Rabbitte: Is Mr. MacDomhnaill alarmed by what has come to light with regard to financial institutions in recent months?
Mr. MacDomhnaill: Yes, I am concerned with the revelations. However, certain information came to light in 1993 during the course of the amnesty debate in the Dáil which suggested that such activity could be taking place. My reaction is tempered by the fact that we have been engaged in discussions at EU and OECD levels and the problems of the free movement of capital since the abolition of exchange controls have been a matter of concern to all authorities. We are aware that a problem exists. If one looks at it purely from a tax evasion point of view there are opportunities for evasion. This matter was also addressed by the Commission on Taxation in its fifth report and was originally dealt with by the Income Tax Commission in 1962. We are not facing something totally out of the blue.
Deputy Rabbitte: It is not unfair to remind you Mr. MacDomhnaill that over the years you have told the Committee that the extent of evasion was being narrowed all the time. He has taken issue on a number of occasions with the figures that the Comptroller and Auditor General would advance for uncollected taxes. Against that background is not the sheer scale of what has come to light a matter of acute concern?
Mr. MacDomhnaill: There was a problem with uncollected taxes but that is not what I call evasion.
Deputy Rabbitte: I am not confusing them. I am saying that you told us two things in good faith: first, that evasion was under control and that there was no serious large scale evasion and, second, he always contested the Comptroller and Auditor General’s figures for uncollected taxes. I know the latter is a separate issue and that some of it may be considered uncollectible.
Mr. MacDomhnaill: With regard to uncollected tax, when I took over as accounting officer the nominal debt was almost equivalent to an annual budget take - it was £4.4 billion and the budget take was about £6 billion. In the last year the gross take was £18 billion and the nominal historic debt is less than £1 billion. That is dramatic progress which has come about as a result of a number of initiatives undertaken by Revenue. I do not say the problem is solved totally. We have had great support over the last number of years from the Comptroller and Auditor General in finding pragmatic ways of dealing with dud material in the accounts and not wasting valuable collection resources on moneys that are not likely to yield anything to the Exchequer. That process is ongoing and it is part of our strategic plan.
With regard to evasion, I do not think I have ever understated the fact that evasion takes place. Every year since I have been accounting officer we have been showing figures of £100 million plus for back duties collected by our investigation branch on the inland revenue side alone. We also have a customs investigation branch dealing with the investigation of evasion of excises through smuggling. I have never said evasion was not taking place.
We have a system in place and we use it to the full extent. The commitment of Revenue to tackling evasion is solid. It is dedicated and I would let down a lot of people if I did not convey that.
Deputy Rabbitte: Let us leave out the NIB which has a market share of 3 per cent. The largest bank in the country has conceded that it had 53,000 bogus accounts with about £600 million in them and it defended that in public on the basis that the practice was industry-wide. Given the size of the country, 53,000 accounts in the largest bank and an admission that the practice was industry-wide, the tax compliant citizens will want to know how that could have been going on at such a scale.
Mr. MacDomhnaill: That is what I refer to when I say that certain information came to light during the amnesty debate. These were the figures mentioned. A Deputy said in the Dáil that there were two streams of hot money - hot money which is abroad and hot money in the country. The chief special collector’s figure for the amnesty was just under £200 million and grossed up that would represent undeclared income of over £1 billion, perhaps £1.25 billion. The Deputy asks how this can happen. A Euromoney study has shown that there are trillions of dollars floating around in offshore funds. It is a worldwide phenomenon.
We have been charged by the Minister for Finance—
Deputy Rabbitte: What was going on in the AIB or the NIB does not fit into that trillions scenario for hot money, the origins of some of which may be very doubtful. We are talking about legitimate commercial and other undertakings within the jurisdiction where products were sold on the basis that the money would be hidden from the Revenue. In other words, straightforward tax evasion by middle Ireland while hundreds of thousands of PAYE workers were on the streets. That is not to be compared with big-time hot money.
Mr. MacDomhnaill: It is seamless. The person who has international transactions can arrange to have kickbacks and discounts which do not come back into the country. There are a lot of legitimate interbank balances involved also. If one was to study the consolidated balance sheet published by the Central Bank one would see that at the last count the indebtedness to overseas bodies by Irish financial institutions was of the order of over £80 billion. That is the scale of amounts.
Chairman: £80 billion?
Mr. MacDomhnaill: Yes. Huge amounts are flowing in and out. That is not to say we do not use all means at our disposal to tackle evasion where we find it. We cannot go through the banking system to get that information but we have powers of audit for the taxpayers.
Genuine non-resident accounts are one matter but bogus non-resident accounts are another. The main culprit in the case of the latter is the taxpayer who declares that the interest on the money is beneficially the property of someone not ordinarily resident in the State.
Deputy Rabbitte: If the AIB has conceded the existence of 53,000 such accounts, you can bet your bottom dollar that Bank of Ireland is not far behind, although it has been cleverer in its handling of the media. One can extend that to the other associated banks. That is a great deal of taxpayers in this little jurisdiction so how was it not known that it was happening on that scale? Mr. MacDomhnaill referred to the amnesty debate. I remember it as being about a different type of money and not about this kind of bogus non-resident account.
Mr. MacDomhnaill: The amnesty debate started as a debate about offshore funds but the legislation deals with all funds. I was not privy to the advice given to the Government at the time as I have never had the privilege of attending a Cabinet meeting, either as an observer or adviser. However, information must have been given to the Government of the day, and this was referred to by some Deputies in the debate, that, if the amnesty were confined to offshore funds, it would create a reverse effect and there would be an outflow of funds. That was a clear recognition of hot money in the economy. It is the only explanation for it.
Every organisation responsible for tax could suggest ways of tackling evasion if it were the only matter with which it was concerned. Mr. Justice McCracken received a suggestion for dealing with some of the problems but he rejected it on the grounds that it could be easily circumvented and would drive money and business out of the country. Ireland and the Government in isolation cannot resolve this problem. There is free movement of money across the world and much cross-frontier commerce.
Deputy Rabbitte: I accept much of that but we are allying two matters. I am talking about Irish financial institutions operating in this jurisdiction which deliberately set out to facilitate tax evasion by their significant net worth clients. Is that not a different and distinct phenomenon from chasing hot money across international boundaries? What explanation can Mr. MacDomhnaill offer the citizen who does his or her best to pay their taxes as to how it could have happened on that scale? Mr. MacDomhnaill refers to the amnesty debate. I have not read it recently but I did not think it was that perspicacious. However, I will accept Mr. MacDomhnaill’s word. If some Deputies knew this was happening, how come the Revenue Commissioners did not know it?
Mr. MacDomhnaill: There is a difference between knowledge and suspicion. When I use the word “knowledge”, I do so within the framework of which we can act upon it. We have carried out analysis of the kind I am talking about. In the late 1980s and early 1990s we tried to make the financial institutions realise that the Oireachtas entrusted them with the care and management of a substantial amount of revenue in the form of deposit interest retention tax. Revenue does not have statutory auditing powers relating to that tax. This has been examined by the Comptroller and Auditor General and it has been admitted that Revenue does not have that power. We make an aggregate reconciliation between the entries in the accounts for the banks, which we receive, and information about interest, an analysis of which we can obtain. That reconciliation is carried out to assure us that the level of deposit interest retention tax is consistent with the declared analysis of deposits in the bank as declared to the regulatory authorities. However, it does not copperfasten the accuracy because it includes an analysis between relevant deposits subject to the retention tax and non-relevant deposits. A large category of the non-relevant deposits are linked to non-resident accounts. The bulk of the non-resident accounts are genuine in that they are moneys belonging to people with Irish connections which are lodged in the Irish banking system. Other people have taken advantage of that system.
It must be remembered that Revenue first obtained the power to access information from banks in 1963. The Income Tax Commission recommended in 1962 that Revenue should be given information about deposits. That was legislated for in 1963 in the form of information about interest payments on deposits which became section 175 of the Income Tax Act, 1967. That section contained a clause which stated that, if the bank obtained a declaration from the person to whom the interest was payable that the interest belonged to a non-resident or someone who was not ordinarily resident in the country, it had to be excluded from the return sent to Revenue. There was no challenging that. Once the bank obtained the declaration, it had to act upon it. The only changes made to that system were the increase in the £15 threshold to £50 in 1965 which was increased further to £70 in 1968. However, in the years coming up to 1983, Revenue’s ordinary investigative work came across instances where deposits were being spread. In one case, there were 150 deposit accounts. We brought this to the attention of the Department of Finance, who brought it to the attention of the Government, and major changes were made in 1983.
Deputy Rabbitte: There were 150 accounts?
Mr. MacDomhnaill: There were 150 accounts all under the £70 threshold so that they would not have to be reported. An amendment was made in 1983, the threshold was lowered without notice and a new regime was introduced. Under that, the banks were given authority to seek an affidavit if they were dissatisfied as to the bona fides of the non-resident declaration. That was the first opportunity the banks had of challenging it.
Deputy Rabbitte: What is Revenue doing about what has been revealed? What is it doing about the 53,000 bogus accounts admitted to by the AIB? Is the file closed?
Mr. MacDomhnaill: We can audit ordinary businesses but we cannot audit banking books. We can examine the declarations but that only produces the name, address and foreign country of the declarer. In the case of section 175, it is effectively a return made to us of the people who receive the gross interest. In 1986, the retention tax was introduced and, as a result of that, the returns of interest disappeared as far as Revenue is concerned because section 175 only relates to interest paid without deduction of tax. The interest was subject to a retention tax and was no longer caught by the return requirement. As regards the retention tax, non-residents were recognised from the beginning as being outside the return so they were also recognised as being outside the retention tax. A further declaration was introduced where people who wished to could declare themselves to be non-residents for the purpose of the retention in which case no retention tax would be deducted. The interest was gross so it came under the reporting arrangements of section 175.
Therefore, they need to have a declaration under section 175 as well and that is where the affidavit procedure can apply.
Deputy Rabbitte: Would I not feel very aggrieved if, for example, I had my savings in a credit union? Recently there was a controversy about credit unions and declarations when savings were above a certain amount. The credit union association also stated that it would be virtually certain that tax was paid on that money by the time it was deposited in its local branch. In this situation you cannot be sure that the money was ever exposed to tax.
Mr. MacDomhnaill: We know that many of the deposits are very small. For example, in one bank there are 10,000 deposit accounts of less than £100. Therefore, we know it is not always a business manifestation. From recent material that we have received we know there are ordinary PAYE employees involved, as well as business people, in these insurance bonds and it would be untrue to say it is all undeclared profit.
I agree with the Deputy that there is a strong suspicion that people who go to the lengths of making declarations of non-residence or transfer the money overseas are probably drawing that money from undeclared profits.
Deputy Rabbitte: Will you be able to track that money?
Mr. MacDomhnaill: We can only audit one business at a time. We get no information from examining the notices of any transactions on the deposit account. We know the name and address of the depositor but not the amount deposited. Luckily, section 18 of the Finance Act, 1983 allows us to access accounts by enabling us to go to the High Court and look for details in respect of the person we are investigating.
We have been trying to get the banks to adopt transparent procedures. For example, their internal audit should look at these declarations. They should also have their external statutory auditor look at them. We have no authority to insist on these measures but we have informed the banks that we would be reassured if they adopted them.
If, while conducting an in-depth investigation, we discover that some of the hidden money is in a domestic account we can ask the taxpayer to get information from the bank to produce the accounts. Unfortunately, the taxpayer will not always do that. For example, our first case under section 18 was referred to the Supreme Court where we lost because of the court’s very narrow interpretation of the section. The courts decided that the breach of confidentiality between bank and client was very dramatic in 1983 and subsequent Supreme Court action in the mid 1980s. The climate has now changed because the Revenue Commissioners have done an awful lot to bring about a culture change. The original Income Tax Commission stated: “the fundamental thing in tackling evasion is to bring about a right attitude of mind among the citizens at large in relation to taxation matters.
Deputy Rabbitte: Can the AIB’s 53,000 bogus accounts be reopened? Do you propose that they should be reopened? Can you reassure the Committee that there are no such practices or any new version of these practices underway in today’s banks and financial institutions?
Mr. MacDomhnaill: I cannot talk about a case.
Deputy Rabbitte: Fifty-three thousand will suit me.
Mr. MacDomhnaill: Since 1986 we are entitled to seek assurances along with the safeguards I have described if there is no declaration or a declaration which should have been contested.
Deputy Rabbitte: Is DIRT the only issue involved?
Mr. MacDomhnaill: In relation to a deposit account belonging to a resident or non-resident all we can get is deposit interest retention tax.
Deputy Rabbitte: If that is the case we all could use
this mechanism. Why are we all giving you money when we can open such an account?
Mr. MacDomhnaill: First, to do it you must tell a blatant lie. Second, you may have to follow that up with an affidavit and swear.
That is a starting point. If a person has a business we will audit that person. When we find these accounts we will inquire whether retention tax has been deducted. If it has we will close the case and the bank has done all that is required.
Deputy Rabbitte: Can you open these accounts and examine their contents?
Mr. MacDomhnaill: Yes, if we look at these accounts and discover the retention tax has not been deducted then we can pursue the matter indirectly.
Deputy Rabbitte: That is from 1986 onwards.
Mr. MacDomhnaill: At present, whether the account dates back to before 1986 or not, if we discover an account in the name of a resident taxpayer and retention tax has not been deducted then it is either the bank who has failed to make the appropriate deductions or there is a bogus non-resident declaration. In either of these cases we will challenge the bank. We have not uncovered anything near to the amount Deputy Rabbitte mentioned, but there is information in the public domain which must be addressed. If that information turns out to be accurate then there is a lot of retention tax to be reclaimed. The substance of some of these statements is being challenged by the banks concerned. Members will have seen the chairman’s statement at a recent shareholders meeting which will mean that these figures have not been left unchallenged.
Deputy Rabbitte: I am puzzled by Mr. MacDomhnaill’s last point. Documents were available and were the source of an article by Liam Collins published in The Sunday Independent which stated what was discovered and how bad it was, etc. I am not sure how the Chairman of the Bank or anyone else can subsequently resile from that. If the bank admitted its involvement, was interviewed on the basis of that story, conceded its veracity and defended it on the basis that it was an industry wide practice, how can the problem be reduced?
Mr. MacDomhnaill: I do not know the source of this information. Like the Deputy, I also rely on the media for such information. Unfortunately, I cannot discuss confidential information which I received from internal sources. If the Deputy examines the public statement he will realise that a conflict has emerged between the two statements.
Deputy Rabbitte: Think of the success Mr. MacDomhnaill and I would have if we set up a public relations company when he retires rather than our current vocations. I am not won over by attempts to resile from what has come into the public domain.
Chairman: Can Mr. MacDomhnaill tell me where he got the figure of £80 billion?
Mr. MacDomhnaill: This is the indebtedness of the Irish financial institutions to the external market, including the IFSC.
Chairman: Have Irish financial institutions borrowed from abroad?
Mr. MacDomhnaill: Some of that money will be counter balanced by financial institutions having balances abroad with other financial institutions which could amount to £40 billion at any one time.
Chairman: That is approximately twice our GNP.
Mr. MacDomhnaill: Yes.
Chairman: It is four and a half times our annual budget.
Mr. MacDomhnaill: If one looks at the Exchequer returns and notes how the borrowings compare with current expenditure, it dwarfs them by a large measure.
Chairman: The reality is that all this has happened because of the total lack of a prosecution ethos in the Revenue Commissioners over the years. This matter has been raised by the Committee many times. No individuals similar to Lester Piggott, Earnest Saunders or Patrick Gallagher have been prosecuted in Ireland. Such people have been prosecuted in the North and in England over the years, but there have been no similar prosecutions in Ireland. There is an attitude problem in the Revenue Commissioners and among the white collar class. They consider that white collar people are not criminals and it is only a matter for the working class.
Mr. MacDomhnaill: Once again I totally reject that view. We have had a positive prosecution policy since 1991. If one looks at the history of this matter, a number of commissions have looked at the civil prosecution policy and have recommended that it should be the dominant mechanism for tackling evasion. There is not a capacity either in the courts or the Revenue Commissioners or the Garda Fraud Bureau to tackle huge numbers on an indictment basis. We get penalties in our civil prosecution arrangements which are far greater than any of the penalties we have secured by going down the prosecution route. It is not unusual for heavy penalties to be imposed. In an indictment prosecution one is looking for a custodial sentence. That is the difference
Chairman: It is obvious no salutary lessons have been learned. People have been evading tax and that is a criminal offence. There have been no salutary cases, such as the case against Lester Piggott. The Revenue Commissioners has conspicuously failed in its duty to give those salutary lessons in the context of the widespread evasion that is crippling the PAYE sector because it is carrying the burden. Does Mr. MacDomhnaill agree the Revenue Commissioners has been in dereliction of its duty?
Mr. MacDomhnaill: It is easy to say that, Chairman.
Chairman: It is evident.
Mr. MacDomhnaill: No. I have been here on several occasions and similar statements have been made. The fact of the matter is that I have given the Committee details of the prosecutions which have been carried, the cases which are now under investigation and the success of the new prosecution policy. The Commission on Income Tax and the commission on taxation endorsed the policy that the bulk of our anti-evasion work should be through civil prosecutions. That has been endorsed by independent commissions. It is not only the position of the Revenue Commissioners.
As far as the Revenue Commissioners are concerned, we have turned around a large section of our investigative branch to deal with prosecutions. As a result, the opportunity cost of that is some millions each year. We were bringing in over £10 million a year through our in-depth investigations alone. That dropped last year to £5 million because the investigators who would have been doing that work are now doing prosecution work. One must recognise that money will be lost on this. In indictment prosecutions, one is seeking a custodial sentence. I can give an example which shows that the extremes of the penalties will be invoked where the situation deserves it.
Chairman: Where is the evidence? There is no evidence whatsoever.
Mr. MacDomhnaill: There is evidence. We secured a jail sentence of seven years in one case this year alone and other cases are coming up. It may not get publicity but it is happening.
Chairman: Mr. MacDomhnaill is testing my patience.
Deputy Cooper-Flynn: Under what legislation can the Revenue Commissioners compel banks to give information to it?
Mr. MacDomhnaill: I already mentioned the sections.
Deputy Cooper-Flynn: That may have been before I arrived. I apologise if I missed it.
Mr. MacDomhnaill: The original section 17 of the Finance Act, 1963, has been carried into the 1967 consolidated income tax Act in section 175. That relates to returns of interest paid without deduction of tax. It is now confined to pension funds and corporate bodies by and large because deposit interest retention tax has taken individuals out of the reckoning and the non-resident declarations have taken the balance. We can also look for sight of the declarations made in connection with the deposit interest retention tax which was introduced in 1986 under section 37 and a number of associated sections in the Finance Act, 1986. All these are contained in the Consolidated Act.
Deputy Cooper-Flynn: Apart from deposit accounts, how does the Revenue Commissioners compel banks to give it information about, for example, offshore insurance bonds? Is it covered by the same Act?
Mr. MacDomhnaill: That is under another section. In 1992 with the advent of the Single Market and the removal of exchange controls, there was concern that there would not be a level playing field in relation to banking and insurance. A section was introduced which obliged the intermediaries to notify the Revenue Commissioners if they open foreign bank accounts on behalf of Irish residents. In 1993 that was extended to insurance policies in a section again intended to ensure a level playing field. Under the Single Market, all life offices across the market can sell insurance policies to Irish citizens. Previous to the Single Market, one had to be licensed with the regulatory authority in Ireland to do that business. As a result it was felt that a taxing regime should be introduced. A special tax measure was introduced in 1993 to make the cashing in of such policies a capital gain for capital gains tax purposes. Attached to that section was a subsection making the reporting requirements of intermediaries applicable to this area also. That is how we have been able to get information about such policies.
Deputy Cooper-Flynn: It is entirely legitimate since the relaxation of exchange control measures for Irish residents to purchase offshore unit trusts, etc. Can the Revenue Commissioners go to any bank in the State and ask it for the name of somebody who owns an offshore insurance bond?
Mr. MacDomhnaill: There is an obligation on the banks to tell us if they acted as intermediaries. However, if the life office is not established either fully or with a branch somewhere in the single European entity, they would not have that right unless they got a licence from the regulatory authority in Ireland. A foreign insurance company outside the Single Market must get a licence from the regulatory authority in Ireland. It would not get a licence to conduct insurance business in Ireland without having a branch in the country.
Deputy Cooper-Flynn: Do many of the banks in Ireland, which have intermediaries and operate this type of arrangement under which these bonds are sold, automatically make a declaration to the Revenue Commissioners in relation to all the people who purchased the life bonds?
Mr. MacDomhnaill: If they act as an intermediary. That is the key point.
Deputy Cooper-Flynn: Are all the banks who sell products which are not their own and are therefore acting as intermediaries making declarations on an ongoing basis?
Mr. MacDomhnaill: I would not say all the banks are selling policies outside the Single Market. Most of the banks have associated insurance companies through which they channel insurance business. These are all taxed. The reason the section was introduced is that some countries have a look through for tax and gains. They only tax the gain in the hands of the final recipient. In relation to life offices, we tax the gains on the insurance company. The benefits are added to the policy net. To equate that situation a capital gains tax charge was constructed around policies which are not done through a branch of a foreign insurance company in the State or directly with an Irish insurance company.
Deputy Cooper-Flynn: What type of information is provided to the Revenue Commissioners in such declarations from intermediaries?
Mr. MacDomhnaill: We are provided with details of the person concerned.
Deputy Cooper-Flynn: The name and address.
Mr. MacDomhnaill: It is up to us to take it up.
Deputy Ardagh: Regarding the point about cases such as that involving Lester Piggott, I wish to ask Mr. MacDomhnaill about his duty to maximise and ensure that all taxes due are paid. Does Mr. MacDomhnaill believe that the methodology used by the Revenue Commissioners has brought about their intention that everyone should pay the tax which is due and only that? If time and effort was spent on ensuring that prosecutions were brought about during the period in which the system that has now proved so efficacious was in place, would that have resulted in less compliance at this point?
Mr. MacDomhnaill: I would like to confirm that all tax is collected in civil prosecution cases. Deputy Ardagh referred to payment of the “tax which is due and only that”. We collect interest and penalties in those cases. The difference in the new prosecution policy is
that we are seeking custodial sentences because this Committee and a number of people, including former Ministers, have asked that Revenue should indicate that the full rigours of the law will be applied. We achieved a conviction in a recent case in the west but the judge did not impose a custodial sentence. He took the view that the person concerned was a professional and if he were imprisoned his business would collapse and his employees would be affected. That is something we will have to resist because every business person would be in the same position.
We do not decide whether a custodial sentence is handed down. We obtain evidence, convince the Director of Public Prosecutions that there is a case to be answered and it is then the responsibility of the courts to impose custodial sentences. However, we seek custodial sentences in all of the cases under discussion.
Deputy Ardagh: That is a new phenomenon within the Revenue Commissioners and it was brought about by pressure from the public and politicians in recent years.
Mr. MacDomhnaill: The Commissioners felt that a preponderance of civil settlements was the correct route to take. However, thanks to the efforts of Members of this Committee, the attitude of mind that sees tax evasion as a crime has been achieved. Anyone who states that and promotes that idea is ad idem with Revenue. You are on the same side of the fence as Revenue when you say that. We are not contesting that. We have a commitment in law but we also have an obligation to all complying taxpayers - the vast bulk of the money we receive comes from these people - and our strategic commitment to them is that the percentage who do not comply will be dealt with via the full rigour of the law. Therefore, anyone who advocates that attitude is supporting the Revenue Commissioners and we identify with those statements.
We have dedicated resources and put in place a major training programme which includes using people in the UK with more experience in prosecutions than ourselves who operate on the same common law base and have the same difficulty in proving fraud. We are making a submission in conjunction with the Department of Finance in respect of our reconsideration of Revenue powers and our powers of information. In the area of streamlining, the Garda have done the same. Another important contribution to this is section 32 of the Criminal Justice Act, 1994. An example of the use of that section occurred in Cork in the past number of days and it involves financial institutions having to satisfy themselves regarding the bona fides of the owners of deposits. The provisions of that section will be very helpful in this area.
Deputy Ardagh: Mr. MacDomhnaill stated that the investigation branch has been separated into three branches, one of which is the prosecution branch. In addition to the solicitor, how many people are employed in that branch and what are their grades?
Mr. MacDomhnaill: There are three Prosecution units located in the Investigation Branch, each is comprised of one senior inspector and two higher grade inspectors. While traditional in-depth investigation work continues to be done in certain cases by two other units of the Investigation Branch, the balance has now shifted towards prosecution investigation work. Criminal investigation work is extremely resource intensive, being concerned with ensuring that the stringent requirements of the criminal courts as regards evidence are met.
In addition, we have a prosecution policy unit which is headed up by the principal inspector, in charge of the entire Investigation Branch. A senior inspector, a part-time higher grade inspector and a higher tax officer deal with the policy unit which examines international developments, the success of the Garda Fraud Bureau and use of section 32 of the 1994 Act to discover the extent to which we can avail of them. The policy unit will also have an input into the examination we are conducting on behalf of the Minister into Revenue powers. As part of this, we have despatched teams to visit a number of EU member states to obtain firsthand information, some of it highly confidential, about obtaining the best formula which will not leave Ireland out on a limb in terms of loss of resources without an effective remedy. There is also the admissions committee.
Deputy Ardagh: What is the total number of people employed in these units?
Mr. MacDomhnaill: The total number of investigators is 15. These are senior, highly trained and almost irreplaceable personnel.
Deputy Ardagh: Does that include the three members of the admissions committee?
Mr. MacDomhnaill: In respect of the admissions committee I counted a part-time higher grade inspector and a higher tax officer who are not part of the overall total.
Deputy Ardagh: Who comprises the admissions committee?
Mr. MacDomhnaill: The principal inspector in charge, a senior inspector, a higher grade inspector and a secretary who is a higher grade tax officer. The assistant secretary in charge of the audits and prosecutions is heavily involved in the work of the admissions committee.
Deputy Ardagh: What criteria are used to select a case to go to the admissions committee?
Mr. MacDomhnaill: The Deputy has touched on an area where a great degree of sensitivity is involved. There is freedom of information but we regard some of this as protected information. We will be releasing as much of the information as possible but the criteria have caused great concern among the practitioners. I have had a number of meetings in recent months with practitioners on this issue. The president of the Institute of Taxation has been to see me on two occasions because that body obtained legal advice concerning the status of practitioners in this area and that of voluntary disclosure.
Deputy Ardagh: Have cases been put forward to the admissions committee on a quantum basis or have they been put forward on the basis that those involved contravened the Amnesty Act? I understand that provision was made for mandatory prison sentences under this Act if total tax in excess of £100,000 was not paid of if it was subsequently discovered that payment of this amount of tax was due. Do any of the cases put forward relate to that amnesty?
Mr. MacDomhnaill: The Deputy has touched on another important point. Sentences, are the prerogative of the courts. There are full and unmitigated mandatory penalties including imprisonment in certain circumstances but prosecutions are a matter on which only the courts can decide. The mandatory part of the legislation related to the full and unmitigated penalties or imprisonment following conviction.
With regard to the criteria involved, we first consider the grievousness of the evasion.
This is not about technical interpretation matters, slip ups or once-off occurrences. It is probably structured, deliberate evasion. We would also be concerned if, having made a settlement with somebody in the past, that person turned up again. Having had the benefit of a previous civil prosecution, the person would now be a candidate for a criminal prosecution. They obviously have a wrong impression of the seriousness of the matter if, having accepted a civil settlement, they reverted to evasion. That is one of the issues we examine.
However, none of this is finalised. We are having close consultations with the Revenue Solicitor and the Director of Public Prosecutions about the matter. Initially we must set out criteria for our auditors. The criteria the auditors will look to when sending cases to the admissions committee will be more widely drawn and probably will be published. However, the criteria that will be used by the admissions committee will remain confidential.
Deputy Ardagh: It is my understanding that the banks came to an arrangement with the Revenue Commissioners some years ago with regard to DIRT payable on non-resident accounts which the banks knew were not non-resident accounts. Is that true?
Mr. MacDomhnaill: I do not wish to talk about individual cases. There is no question of the Revenue Commissioners being able to verify an amount of retention tax. We try to carry out the verification as best we can in terms of the aggregate amount. What concerns us is whether, if we come across an individual case, we can prove in relation to that case that the retention tax has not been paid and that the return has not been made. The maximum fine in such a case is currently £750. Previously the fine was £500. We have sought that fine in a number of cases from the official concerned.
The major banks have given strong instructions to their officials not to countenance bogus non-resident accounts.
Deputy Ardagh: Was a payment or settlement made by any financial institution in compensation to the Revenue Commissioners for the wrong use by their customers of non-resident accounts?
Mr. MacDomhnaill: This answer should not be misinterpreted as applying to recent cases in the news. On a minor scale, we have been paid sums of money in relation to cases where we were able to individually establish that retention tax should be paid. Our primary approach to these cases is not to give credit for the retention tax to the taxpayer concerned; we reimpose tax in full on the interest.
Deputy Ardagh: Of what magnitude was the payment from the financial institution or institutions involved?
Mr. MacDomhnaill: There are different orders of magnitude. In one instance where we were able to identify a number of evasion cases in a certain branch of a particular bank - again not to be confused with the ones that have been mentioned - the aggregate was a six figure sum.
Deputy Ardagh: In that case were the account holders also brought to task in relation to the tax?
Mr. MacDomhnaill: Of course. Penalties, interest, tax and publication would have been in order for all of them.
Deputy Ardagh: My recollection of the 1970s and 1980s was of the £50 interest. You said an individual had 150 different bank accounts. At that time there was anecdotal evidence that people with small means had bank accounts everywhere. They tended to be people who had an income of £200 to £300 in interest and who had saved hard over a period of years. They were usually hard working, PAYE workers who felt it was wrong that they were taxed so much on their savings. There was a culture whereby one could go to a local bank branch and complain. It would be suggested that, rather than withdraw the money, it could be changed to a non-resident account.
At the time, the Revenue Commissioners were like a car caught in a wind tunnel in that everything seemed to be shooting over their heads. They did not know about these things because it was not proved to them that it happened. I accept that the ethos has changed.
Mr. MacDomhnaill: The 1983 amendments were introduced on foot of information made available by the Revenue Commissioners, not the financial institutions. The other matter that must be borne in mind is that monitoring of retention tax and access to and knowledge of it is not available to the Revenue Commissioners directly from the banks. We can only get it through individual investigations.
Deputy Ardagh: The Minister for Finance said in his Budget Statement that if the Revenue Commissioners believed new laws were necessary, the Department of Finance would not be slow to introduce them. Is there a desire for further legislation which would permit the Revenue Commissioners to examine the bank accounts of individual taxpayers?
Mr. MacDomhnaill: We are looking at that. We identified all these shortcomings in terms of information powers for the Revenue Commissioners. However, we realise they are not there on the whim of the Government of the day. These measures exist. One need only look at the debates on the subject over many years. I was involved in the 1963 situation and the tenor of the debates has always been that there are other considerations. I appreciate that a problem such as this, in terms of funds, is much less soluble now with exchange controls removed than it would have been pre-1993.
We are consulting with other Revenue authorities and the matter is being debated at EU and OECD level. The Revenue Commissioners have participated in these discussions. Every revenue authority believes it should have access to more information. However, one must be able to say to the Government or Minister of the day whether that will be effective. There might be a rush of money in the beginning but, if all the funds end up elsewhere and one is back to square one, one has simply driven the money out of the economy. I must be able to give a guarantee that giving me these powers will be effective in terms of the long-term tackling of evasion without causing an outflow of funds.
Even when this comes up at European level, the opinion is that a solution cannot be found within Europe because the funds will just flow out of Europe. The same thing can be said about the national entity because the funds will simply flow out of that entity. A huge economy such as Germany tried to impose a withholding tax on non-resident interest and had to back down. It is far less an open economy than we are. I could say yes, give me all these powers and we will unearth a huge amount of back-duty very quickly. That obviously would be the case. But what happens in the long term?
Deputy Ardagh: I accept what you are saying but I believe the excuse has been used a lot by politicians that if we bring in laws to deal with tax evaders that funds are going to flow out of the banks at such a rate that the country is going to be bankrupt. I do not accept that and the more I discuss it with my fellow politicians the less I accept it. The attitude we should be adopting is that everybody who has money in the bank should be able to state have a look there, have it available to that the revenue at any time can say that I got this truthfully, honestly and it is my money. I do not think we should be in a situation where our laws would allow any type of ill gotten funds to be in position. I accept also what you say that this is a European wide situation. I would like to see action being taken on it. I would like to see the Revenue Commissioners having a particular high placed official ensuring that this matter is brought up at income tax and revenue matters throughout Europe as expeditiously as possible and dealt with.
Mr. MacDomhnaill: I could not take issue with any of that. However the Revenue Commissioners operate within the law and if the Oireachtas members change the law we will operate that as well. I do not want to appear irresponsible and be quoted as saying revenue can use all these powers. I want to say that there is a wider picture and it is a policy question after that. It will, I am sure, because this is going to be looked at very closely in the Dáil itself, by the Moriatary Tribunal because one of the terms of reference of the Moriartary Tribunal is to assess the adequacy of revenue powers in relation to the protection of the tax base from off shore based evasion. I think it is going to come up one way or the other in the wider agenda as a major policy question and all these things will have to be brought together. I am sure progress can be made and we can get extra powers. You can be absolutely sure that if we get them they will be used. I would like to give assurance to the Committee that within the powers available to us, even by the indirect means our inspectors and investigators have not been backward in challenging institutions with whatever morsels of information they get by comparison with the figures that have been quoted at large.
Deputy Ardagh: Deputy Rabbitte mentioned they were net high worth clients generally. It would be accepted that many of the people who had these non resident bank accounts were ordinary hard working PAYE workers who were paying their tax, they saved some money and put it aside. That is was not a golden circle. It is a general malaise in the whole of the nation with regard to tax evasion and trying to avoid taxes as best they can.
Mr. MacDomhnaill: I take that point but I would come back to the point made by Deputy Rabbitte that in a lot of cases it is not the interest. I do not think that someone is going to go to an elaborate arrangement simply to avoid the retention tax on the interest especially since 1992 when you had a special, initially 10 per cent rate, for special savings up to £50,000. That would cover most of the people you are describing. For the sake of a 10 per cent rate of tax on an interest rate which is probably at the moment, even on demand deposit, five or six per cent at most. It is not a huge amount of money. The big problem in relation to evasion concerns the very funds themselves and whether they represent undeclared profits or income. I do not mean information but evidence that will stand up and will be accepted by the Director of Public Prosecutions. That will be a big factor but, in all cases that come to notice, we will seek to address these other issues in the prosecution policy, subject to available evidence.
There might be cases where larger amounts of tax are settled in the civil process, even where reprehensible arrangements have been encountered. If we are unable to produce the evidence we might still have to settle on a civil prosecution. However, subject to that, we will try to grade it and we will have criteria for auditors in terms of penalties which they impose. All large cases come to me, as the Accounting Officer, to be countersigned and in the process they will be looked at by a number of senior officials on the way up.
Deputy Ardagh: Under the Freedom of Information Act what further information is available to the public in relation to the guidelines on penalties? What further information is available which you believe might even hamper your efforts?
Mr. MacDomhnaill: That protection is in the Act. If there is a matter whose disclosure would undermine the State’s capacity to maintain the tax base, it is exempt. However, there is a public interest question to be addressed and such questions can be adjudicated on by the Information Commissioner. The heads of Departments have had a number of meetings which were addressed by the Commissioner and by the Comptroller and Auditor General. We will try to secure an understanding in relation to what will and will not be exempt and that will only unfold over time.
We already have over 10,000 pages of information on our system for access under the freedom of information legislation.
Deputy Durkan: You mentioned a selection of cases for criminal investigation. How are they selected?
Mr. MacDomhnaill: They are selected on the basis of the normal auditing that takes place. I believe the auditors’ criteria for sending cases to the admissions committee will be published.
The difficulty is that if one is going to opt for a prosecution on indictment, one must be very careful, as soon as one recognises one is taking that route, to issue a caution before one moves any further into the investigation. There are constitutional safeguards and many cases can be fouled up in terms of procedure if they are not recognised early. We ask the people carrying out the audits to try to recognise as soon as possible if a case should go to the admissions committee. It might be referred back. Half the cases that went to the committee so far have been referred back and will be dealt with through civil prosecution.
We will also get information from third party returns and from items that come into the public domain in various ways. Recently, the Supreme Court endorsed the right of the visual media, which had received information and whose right to use it was challenged, to use that information and to make it available to the regulatory authorities. If such information involves tax evasion it should be made available to us and the Supreme Court has endorsed that fact. We expect to get information in that way more readily in future than in the past because the people concerned have the protection of the Supreme Court. Heretofore such people might have been afraid of being sued for giving the information to the Revenue Commissioners.
The culture against tax evasion has moved on tremendously in the last ten years.
Deputy Durkan: You said suspicion is not enough and that you need evidence in pursuit of a case. How do you pursue suspicions? I accept that you cannot discuss certain areas. How have you been able to prosecute successfully cases in which you suspected evasion? Can you give a rough average of such cases?
Mr. MacDomhnaill: When we began in 1989, following recommendations by the Commission on Taxation that there should be salutary criminal prosecutions, the Director of Public Prosecutions took the view that criminal prosecutions for fraud, whether it was tax or otherwise, were matters for the Garda Síochána to investigate. When we concluded that a case was suitable for criminal prosecution we were obliged to hand the investigation to the gardaí. Many cases of tax fraud will involve general fraud as well, such as forgery and so forth, and in a number of cases the gardaí investigated the general fraud rather than the tax fraud. In all, 30 cases were referred to the Garda Síochána.
Since we started our recent campaign we have been able to send cases directly to the Director of Public Prosecutions. The fraud cases referred to the Garda Síochána had to take their place in the queue for attention from the Garda Fraud Bureau. When they were brought to the point where the Director of Public Prosecutions said they could be prosecuted, the cases were referred to the Chief State Solicitor and had to join another queue. As a result a great deal of time had expired before some of the cases were brought before the court or were brought to the point where the DPP could finally sign off. A number of them failed because of the time lag.
Our answer to that problem was to eliminate the duplication and secure direct access to the DPP. This was achieved in the last few years, through agreement with the Garda Síochána and the Department of Justice, Equality and Law Reform under the aegis of the Minister for Finance, and we can now send cases directly to the DPP. We have sent 22 cases so far. Of those, three are before the courts at present, the DPP has decided to prosecute in another two, we are awaiting instructions from the DPP in another two and 15 are still under investigation.
Deputy Durkan: You referred to cases where banks or insurance companies act as intermediaries. Is it true that it is easier to obtain information and records from these intermediaries?
Mr. MacDomhnaill: We have sent out notifications under the section but in most cases nil returns are made. If a financial institution acts as an intermediary in opening an off-shore account, it must report it. However, if the person opens the account himself/herself, there is no report.
Deputy Durkan: In that case, the investor would have knowledge of the benefit of not having the bank or insurance company acting as an intermediary?
Mr. MacDomhnaill: Absolutely.
Deputy Durkan: You would have no knowledge or way of detecting what was happening in that account?
Mr. MacDomhnaill: We have no knowledge of what is happening in an account anyway. We only know an overseas account has been opened. Any accounts opened prior to 1992 are not covered and transactions can be taking place full-time in those accounts without any reporting requirement.
Deputy Durkan: What year was the legislation on intermediaries introduced?
Mr. Mac Domhnaill: It was introduced in the Finance Act, 1992.
Deputy Durkan: Before that, was Mr. MacDomhnaill aware of the necessity to introduce legislation to assist him in his business?
Mr. MacDomhnaill: No, the motivation behind that section was that because exchanged control was being removed, people could open personal accounts, which they could not do previously.
Deputy Durkan: Mr. MacDomhnaill mentioned that third party accounts would give you information in some areas. Are there any circumstances where information from third party accounts would be of benefit to him in detecting sums likely to be lodged in offshore accounts, in the case of insurance companies and banks? I know he answered a similar question already. To what extent is the information from third party accounts effective?
Mr. Mac Domhnaill: Information from third party accounts is very effective. However, there are limitations - the biggest one being the financial sector. We can audit other accounts, pick up information and follow transaction through. This is a vital part of the examination of the commercial operation. We do not have the same power to inspect bank records. Therefore, we cannot look through the transactions in a domestic bank and follow them through offshore.
Deputy Durkan: In relation to audits carried out by banks and financial institutions, I may have read somewhere that some audits uncovered questionable practices in financial institutions. Would that have been brought to the attention of Mr. MacDomhnaill?
Mr. Mac Domhnaill: The Deputy is referring to a specific case.
Deputy Durkan: I apologise, I do not wish to refer to a specific case.
Mr. Mac Domhnaill: In 1991, we approached all the financial institutions on the basis of our own analysis of the movement in accounts. It was also mentioned in the Commission on Taxation that there was not a level playing field. The big word advertised in those days was “confidentiality”. Anybody would have known there was regular advertising by building societies of confidentiality, which was a code word for saying they did not have to make a return of interest.
In effect, building societies had a retention tax régime long before 1986. The Commission on Taxation said this arrangement facilitated evasion. In 1986, the retention tax was not removed but extended to all the other financial institutions instead. As the Commission saw it, the same type of régime can be said to facilitate evasion because it has removed the obligation on those institutions to make returns of interest to Revenue.
Deputy Durkan: Notwithstanding what Mr. MacDomhnaill said about movement of money out of the country as a result of the pursuit of particular policies, would it be fair to say that offshore accounts cater for larger rather than smaller investors?
Mr. Mac Domhnaill: One bank has nearly 10,000 non-resident accounts with less than £100 pounds in them. In the analyses I have seen, which do not give names but are done by case size, the really big accounts are relatively small in number.
Deputy Durkan: If the practices of different financial institutions are not in accordance with taxation law, notwithstanding Mr. MacDomhnaill’s earlier reference to large scale movement of finances out of the country, is it within the ambit of his responsibility to pursue them to obtain knowledge to that effect?
Mr. Mac Domhnaill: Yes, we pursue banks. As I said at another committee, in one year alone, we retrieved £8 million as a result of examinations in the financial sector. As regards non-resident accounts, the main culprit is the person who makes the false declaration. In 1983, when the revenue offences section was being legislated, I was in the bull pen beside the Minister. That section was watered down on Report Stage. One now has to show that they knowingly and willingly accepted a bogus non-resident account, which is not easy to prove. The person will not say it is his/her money but that it belongs to his/her brother in Chicago or whatever. A heavy onus has been put on banks to challenge their customers. Before 1983 they had not the right to challenge them at all. They had to accept the declaration and act on it.
Deputy Durkan: As regards hot money which is generated from within the economy, from where does it originate? In the submission of accounts to Mr. MacDomhnaill’s Department, it must become obvious during audits that there some flaw in procedures. It should not be possible to siphon off sums of money on a regular basis, given that an audit takes place. In audits, has the Department been able to detect something which might lead it to believe that the kind of practices we are discussing were taking place?
Mr. Mac Domhnaill: When we examined this in 1991, we could see the trend. The associated banks non-resident deposit amount was static and the non-associated banks amount, mainly building societies, was going up at a dramatic rate. This could be juxtaposed with the advertisement of confidentiality. The Commission on Taxation commented on that. Moneys being siphoned off on audits is how we find out about non-resident accounts. It is through the audit and investigation process that we eventually unearth moneys on deposit, whether overseas or domestic, which have not been disclosed previously.
As well as dealing with that taxpayer and imposing tax, interest and penalties, we can also go to the financial institution and challenge it to see how this account did not attract retention tax. That is all that can happen at the moment. If the bank applies retention tax, the job is done.
Deputy Durkan: Will EMU make Mr. MacDomhnaill’s job easier or more difficult? As we approach the crucial date, Revenue will be concentrating on that and the introduction of the single currency and free movement. What measures are necessary to safeguard Revenue’s position as a taxation authority.
Mr. Mac Domhnaill: We have a fantastic tax yield - it has been increasing steadily and is very strong in regard to our GDP. The biggest single factor in promoting a good tax yield is a culture of voluntary compliance.
We invest a great deal of resources in servicing taxpayers and trying to simplify matters in order to make compliance easier. The quid pro quo is that where evasion is detected, we pursue it resolutely.
As the Chairman stated, we have not been successful in our prosecution policy. However, we now have a new agenda and do not have to go through the Garda Fraud Bureau or encounter delays. I am confident that we will have a substantial number of successful prosecutions over the coming years. There are problems associated with this; there is a question of whether, without the advice of practitioners, all voluntary disclosures will dry up.
Different regimes operating in a number of other countries have still not managed to eliminate evasion. We are looking at the systems in place in these countries which hold offshore investments. In turn, offshore accounts from other countries - even within the EU - are held in these countries. We are considering the measures which are in place and which, to varying degrees, are more rigorous than those which apply here. Sweden is perhaps the most far-reaching in regard to the reporting arrangements for resident and non-resident accounts.
Notwithstanding the fact that many other countries have a withholding tax, banks there are still obliged to make returns to the revenue offices. That goes beyond the system which operates here but one must consider whether these measures are successful in keeping evasion below the level which prevails here. In the end, a policy decision will have to be made.
Deputy Durkan: Is there not a danger that, when PAYE or self-employed taxpayers see that there appears to be a relatively large scale avoidance procedure in operation in some quarters, they will become disillusioned? They may perceive themselves to be discriminated against as they cannot avail of the benefits of these procedures. Is there a possibility that the system may be eroded by a lack of confidence in it?
Mr. MacDomhaill: The Deputy is absolutely correct. We tell business people and taxpayers that anyone who does not pay his/her fair share increases the burden placed on everyone else. Services must be funded and the cost of running the State will not decrease because some people are evading the payment of tax. We will use every means at our disposal to combat that evasion.
We are receiving a great deal of information from concerned citizens. While we may not use it as evidence, it can provide us with something to work on and would be a factor in selecting a case for audit and in securing evidence as we would know where to look for it. When this issue is reviewed and comes before the Oireachtas, additional powers may be provided to the Revenue Commissioners. I assure the committee that those powers will be used in eliminating tax evasion. People who evade the payment of tax take a huge risk.
I did not think people would avail of the tax amnesty in a partial way. Astonishingly, cases regularly turn up where this is the case. One can only imagine the attitude of somebody who does not take full advantage of a 15 per cent amnesty. Some people go to great lengths to avoid a small amount of retention tax; the rate initially stood at 10 per cent but increased to 15 per cent it has gone up in the last Finance Act. Large scale evasion is not numerically a large part of the problem although there are large scale evaders involved and we must consider how they can be identified.
Chairman: Is the avoidance of tax payment at all costs not a cultural attitude?
Deputy Bell: The Chairman of the Revenue Commissioners has answered a wide variety of questions and I am very impressed by the manner in which he did so.
Under the CAB, powers were conferred on the Revenue Commissioners to deal with criminal activity. It has been established, in the course of this discussion, that all tax evasion is a criminal activity of one magnitude or another. Would Mr. MacDomhnaill agree that the powers of the CAB could be extended to other bodies to deal with high-powered tax evasion?
Mr. MacDomhnaill: The Deputy is quite right; the Garda now have greater powers in this regard. For example, the Bankers’ Books Evidence Act was extended to the Garda in pursuance of their criminal investigations whereas it originally applied only to people who were parties to litigation. That is another way of gaining access to bank information. There are six revenue officers in the CAB and liaison people are in constant contact with it. Any case associated with tax evasion which is regarded as suitable for referral to the CAB is referred to it as soon as possible. The CAB makes a huge contribution in cases involving tax evasion in its most egregious form.
Deputy Bell: Does Mr. MacDomhnaill agree therefore that the CAB’s powers could be extended?
Mr. MacDomhaill: Yes, but I do not think the same constraints exist in relation to organised criminal gangs who operate on an international level. There are no havens for such criminals whereas there are 40 well established tax havens for tax evaders.
Deputy Bell: In my previous employment, I constantly encountered huge tax avoidance in cases of liquidations and receiverships. Companies can go into liquidation virtually overnight and huge amounts of money can remain unpaid to the State under PAYE, PRSI and so on. One often finds that the shareholders of such companies form other companies, buy machinery and so on back from the liquidator or receiver and start all over again. Attempts were made in the most recent Companies Act to come to grips with this practice. Can Mr. MacDomhnaill give us any indication as to what level of tax avoidance exists in regard to company liquidation and receivership and what percentage this is of the total level of tax avoidance?
Mr. MacDomhnaill: It is quite substantial but it is transparent as moneys are quantified and submitted to the C&AG to be written off. Company law reform spent years going through the Dáil and we made very strong submissions about the abuse of limited liability. We attempted to have safeguards included which would make it more difficult for companies to be floated with virtually no capital input as that is not limited liability at all; it is zero liability in some cases. We have not been very successful in this area; the most recent company law reform study group dealt with liquidations but did not treat the problem of people walking away from companies without even bothering to liquidate them. We have decided not to waste any more time seeking that type of reform but to set up a special quick response unit. With the current level of computerisation, information can be conveyed to us in a manageable form through which we can quickly establish the identity of people involved in companies.
With that information we can mount a very fast action exercise so as not to allow the normal lapse in time before we get after those people in the new companies. We also use every means at our disposal to secure liquidations. Some judges have complained about Revenue coming before the courts so frequently looking for liquidations. We try to make sure that the trading while insolvent rules are used and have the limited liability protection withdrawn from the participators. Our current policy is to use all these measures and we have set up a special unit to deal with that issue. We have also developed computer software to facilitate our people which I believe will be very successful.
Deputy Bell: You are one of our main generals in the field of battle against tax evasion. In that capacity, do you feel you have the necessary troops and weaponry to carry out an effective war against tax avoidance?
Mr. MacDomhnaill: Generally, Revenue can turn to good account any extra resources, whether staff, accommodation or computers. I guarantee Revenue will produce a net advantage to the Exchequer on any expenditure allotted to it in multiples of 30 to 100. Nevertheless, we must operate within the overall expenditure constraints. Our numbers are determined by Government order. If we get one post in addition to that, it must be justified on the basis of new and expanded work and on the basis that we cannot find an economy somewhere else in the organisation to do it. This raises the issue of prioritisation of work, customer as service against auditing, evasion, smuggling and so on. This is a huge task. We are reconciled to the fact that our numbers are now fixed at 6,044 - down from 7,500 in the early 1980s when I first became involved in the resources of the Revenue Commissioners. Business has expanded enormously in terms of numbers to be dealt with by Revenue and we have got huge productivity. We received a lot of money through the administrative budget process for computerisation and so on. However, we could collect extra money if we got extra resources.
Deputy Bell: Would it be a good investment?
Mr. MacDomhnaill: Yes.
Chairman: Has Revenue requested extra resources?
Mr. MacDomhnaill: I explained that to get even one head of staff I must show new or expanded work and that there is nowhere else in the organisation I can get that one from. This is a horrendous task and I try to live with the numbers we have. In general, if we got another 200, 300 or 500 people we would utilise them.
Deputy Doherty: Mr. MacDomhnaill what is the purpose of someone having a bogus account?
Mr. MacDomhnaill: We are mainly interested in those taking profits out of business, capital gains from disposal of property or items affected by the capital acquisitions tax legislation. We are mainly concerned with accounts whereby the actual capital represents untaxed profits, income or gains. There are others that may be big in numbers but small in amounts where people with lump sums, compensation from accidents or severance payments lodge money in the mistaken view that the gross interest would represent a huge difference. This is not so because the difference between gross and net interest is not great. We have seen such accounts whereby people retire and put their lump sums into bogus non-resident accounts. It is almost inexplicable but it does happen. In our special investigations of individual cases we do not concern ourselves to a the same extent with that type of account where retention tax is all that has been lost. If we can tax them on the full interest we do not bother about the retention tax. In order to get the bank to impose retention tax we must prove the bank was implicated.
Deputy Doherty: Is it correct to deduce from what Mr. MacDomhnaill said that bogus accounts in some instances are for the purposes of tax evasion?
Mr. MacDomhnaill: I think they are nearly all for tax evasion purposes but some of it is so minor it is almost of no consequence.
Deputy Doherty: To facilitate that tax evasion, if one acknowledges the claim made publicly by a particular bank that there were thousands of bogus accounts, would there not be complicity by the facilitator in setting up these bogus accounts?
Mr. MacDomhnaill: We are talking about a historical situation. In the beginning there was no challenge. All that was required under the original Section 17 of the 1963 Act, and remained in existence under the 1967 Act into the 1980s, was a declaration from the depositor that the interest officially belonged to a non-resident, and the bank was given no authority to challenge that. In 1983 the banks were given the right to look for an affidavit if they were dissatisfied with the bona fides, but the bank had to challenge the person as to his/her bona fides in order to get an affidavit. So you are asking bank staff to challenge a customer and say that they do not believe what the customer is saying. That is the situation as of now.
Deputy Doherty: I find it very hard to understand how a particular bank with 3 per cent of the nation’s business is in the mess it finds itself and that there is such a perfectionist condition attaching to the others. Have the Revenue examined the liability for tax on bank charges and are bank charges shown to you as described by me, the public and the banks?
Mr. MacDomhnaill: Bank interest and charges are deductible expenses for most businesses. They would be in the account as a normal business expense.
Deputy Doherty: How are bank charges in relation to transactions with which they are normally associated disclosed by the bank because there is a charge, a profit being made and a tax liability which is separate from anything else the bank has tax liability for? Have these recent innovations been examined by the Revenue Commissioners? The public are faced with four or five different charges in relation to extraordinary situations and it is the most vulnerable find themselves in this critical situation. It is almost as if they are lucky to be vulnerable and they do not question. Recently I encountered a horrendous situation in a bank by way of charges. It was an absolute act of gross immorality. Are bank charges specifically identified in the areas of their application by the Revenue Commissioners? Have you asked the particular banks to make returns specifically identifying the areas where they are imposed?
Mr. Mac Domhnaill: You are talking about the entire income of a bank. When a bank submits audited accounts the entire income, on the income side, is made up of interest and charges. That is reflected, in the hundreds of thousands of accounts of people who have the interest charged up, as an expense. Revenue are not in a position to validate the amount of interest, relative to the balances, because we see the balances on a balance sheet for one day in the year. The interest is calculated by reference to daily balances, fluctuating rates of interest and different terms. Not every borrower gets the same terms. You would really need a computer programme to track the charges. I understand there are experts who will do that.
Deputy Doherty: There are millions involved, are there not, made up a small amounts here and there? For example, a 45 acre farmer, already in debt, who goes to discuss his overdraft with his bank manager is charged £25 per hour. Do we know the cumulative amount of these charges in any particular bank?
Mr. Mac Domhnaill: All these charges and interest make up the banks’ income.
Deputy Doherty: I am distinguishing between charges and interest. These are new charges, introduced in recent years, imposed, in many instances, without the knowledge of the customer.
Mr. Mac Domhnaill: These charges make up the income on a bank’s account.
Deputy Doherty: They are additional to the interest.
Mr. Mac Domhnaill: The income of the bank account is made up of interest and charges. Those accounts are independently audited.
Deputy Doherty: The Director of Consumer Affairs is very concerned about bank charges. He has publicly stated his concern on more than one occasion. I simply thought the Revenue Commission might have a particular view on them.
The Central Bank has examined all the banks from time to time as is their responsibility. Has the Central Bank been forthcoming with you in relation to your investigations over the years?
Mr. Mac Domhnaill: I think, Chairman, we dealt with this the last day. The Central Bank has no authority to give us information.
Deputy Doherty: Would you consider it a necessity to ensure that the Revenue Commissioners can gain access to some of that information which is available to the Central Bank?
Mr. Mac Domhnaill: What was said to this Committee during the previous discussion on the Central Bank was that this was part of the Central Bank’s European arrangement. It is, in any event, a matter for the Central Bank. My understanding, from the statement given to me by the Central Bank and which I made available to the Committee, is that this is part of European as well as domestic law and that the degree to which the Central Bank can divulge this information is quite limited in the circumstances specifically laid down in the legislation. I see no need to go a circuitous route through the Central Bank if we can go directly to the banking institutions themselves. It would only be a waste of time.
Deputy Doherty: With no disrespect to the Central Bank, having regard to their performance in relation to the banks, I do not think there would be much useful information forthcoming. There was a serious deficit of information, at least in publicised accounts, over the years.
Lastly, to what extent do you use the offices of state solicitors? Do you have solicitors, other than state solicitors, who are on hefty fees?
Mr. Mac Domhnaill: Once our prosecution cases went to the Gardaí. The Gardaí then referred them for carriage through the Courts either to the Chief State Solicitor or to the state solicitors. That was where our main involvement would be with state solicitors. We have also used state solicitors, to a fair degree, for straightforward customs prosecutions. The other area where we use solicitors is for debt enforcement.
Deputy Doherty: Outside of state solicitors?
Mr. Mac Domhnaill: Yes, outside of state solicitors. Then we have the Revenue Solicitor’s Office.
Deputy Doherty: Do you have many of them?
Mr. Mac Domhnaill: There are two firms.
Deputy Doherty: What amounts of money were paid to these two firms over the past three or four years?
Mr. Mac Domhnaill: In 1996 the total gross amount paid out was £861,489. In 1997 the gross amount was £860,029. These amounts were paid to two firms of solicitors where a whole business operation is going on and hundreds of cases are being prosecuted.
Deputy Doherty: It would be for a number of cases and for staff and so on? Thank you Mr. Mac Domhnaill.
Chairman: As has been established by Deputy Rabbitte, there have been tremendous and evident improvements in the Revenue Commission over recent years. The activities uncovered by recent tribunals and revelations about banks have happened under the noses of the Revenue Commissioners and without sufficient action by them. This Committee can come to no other conclusion. The public feel that the Revenue Commissioners have been remiss and less than robust in exercising their duty of care to the taxpayers by failing to ensure that tax evasion does not occur. While I acknowledge that the rules of confidentiality in the banking system are there for a good purpose, they should not be used easily for the purpose of tax evasion which is a crime. Those who perpetrate tax evasion are criminals.
The Chairman of the Revenue Commissioners reported a case in a court in the west of Ireland where the judge found a respondent guilty but did not sentence him to prison because he was a professional man.
Mr. Mac Domhnaill: No, it was because his business would have been closed down.
Chairman: I think I am quoting your words correctly but that judge seems to me to summarise the attitude that jail is no place for gentlemen even if they are criminals. That attitude informs the approach of more than the Revenue Commissioners and it must change.
I am concerned about a number of things which are happening in our society which must be stamped out because they are dangerous. Allowing tax evasion, social welfare abuse and the compensation culture to continue will be corrosive and ruinous of our society and our economic success. The Committee must be concerned about that.
We cannot let you off today with a simple reprimand.
We must say we are concerned about the Revenue Commissioners. I suggest that we not conclude this hearing today. The Committee should consider some other aspects of this problem. For instance, we spoke today of the criminal pursuit of tax evaders. We have not yet spoken about the criminal pursuit of compliant bank executives. I am not sure if such a pursuit comes within the remit of the Revenue Commissioners. If senior bank executives are compliant in tax evasion, either by active facilitation or by turning blind eye they should not be let off the hook. If there is to be confidence in our banking system and in our economy it is important that the banks are seen to be above suspicion. For that reason I would like to consider if the Committee should use its powers under Standing Orders to summon bank officials to this Committee. I suggest that we adjourn consideration of this matter until next week.
I agree with Deputy Bell. You have an impressive mastery of the issue of taxation and of the organisation of which you are in charge. I commend you for that, chairman, and for the improvements which have taken place under your leadership in the Revenue Commission in this area the Committee is dissatisfied.
Mr. Mac Domhnaill: May I make a short response, Chairman. You mentioned various tribunals. Two of the tribunals have finished. In the beef tribunal, Revenue was cleared of all allegations and our two officers who negotiated the settlement were commended by the tribunal.
Nothing in the findings of the McCracken tribunal points a finger at Revenue.
In those circumstances it is hard to see why Revenue is specifically mentioned in the Moriarty tribunal. I am confident Revenue will get a reasonable hearing at the tribunal but the hearings have not started so I do not see, Chairman, where you get evidence drawn from tribunals to make that statement.
Deputy Rabbitte: I think he is getting it here, if one takes the example Mr. MacDomhnaill has made. It is true that any allegations - and there were no serious allegations against the Revenue Commissioners - were not established, but it was established that one of the largest enterprises in the country was engaged in the biggest orchestrated tax evasion scam in the history of Irish industrialisation. The point the Chairman was making was that this went on under the noses of the Revenue Commissioners, to use his phrase. That is not to imply it was the Commissioners’ fault or that they were complicit but it happened. It is difficult to understand how a huge enterprise can make Revenue returns akin to those of a corner shop without alarm bells going off somewhere - for instance, the company might claim to have 2,500 employees but the tax returns are for 150 employees. That is the point being made by the Chairman and the man on the street.
Mr. MacDomhnaill: It is a point of view but it is not quite accurate in relation to the tribunal. We had made a settlement and it was alleged that it was not a good one. We uncovered the evasion and made a settlement before the tribunal entered the arena. That was placed before the High Court as part of the financial settlement necessary to salvage that industry when the banks had to come to an arrangement. They would not sign off on the arrangement until Revenue had finalised its back duty investigation.
Deputy Rabbitte: We are pitting our wits and I would like to reserve my position on the uncovering claim but I remember for a fact that when it was uncovered the company concerned misled the Revenue Commissioners - the figure was wrong and turned out subsequently to be a great deal more.
Mr. MacDomhnaill: No, in the first settlement we were dealing with an avoidance scheme where companies were set up and dividends declared but these dividends were remuneration in disguise. The judge endorsed Revenue’s view that these were not dividends, which would be tax free, but remuneration. In the second settlement, before that arrangement came about there was straightforward evasion which was not dressed up as dividends.
Deputy Rabbitte: We have to struggle with 53,000 accounts and I do not know what factor one can multiply that by for the other associated banks. In this small population of taxpayers that is a huge proportion and that was going on. I do not understand what Mr. MacDomhnaill means by saying there were 10,000 accounts of less than £100 because why would anyone want to open a bogus non-resident account for so little? I am bemused by that but perhaps he is saying that when they were uncovered £100 was left in them. The suggestion that someone would have only £100 in a bogus non-resident account is the type of thing which makes the man in the street ask who they think they are fooling.
Chairman: They were grannies.
Deputy Rabbitte: Grannies do not do that.
Mr. MacDomhnaill: When you count numbers of accounts or deposits it includes all of those so one can get a huge number. They may be balances only but at any one point in time there are a number of deposit accounts and at that point, nearly 10,000 were-----
Deputy Rabbitte: But Mr. MacDomhnaill are you saying that a large share of the bogus accounts had only £100 in them. They may have had £100,000 in them but at that particular time only £100 was left, when whatever transaction-----
Mr. MacDomhnaill: I am not saying anything of the kind, I said there were some large accounts. I was responding to Deputy Ardagh’s question as to whether small people were involved. I was not trying to make any comment about the numbers being quoted.
Deputy Rabbitte: They might be small people, shorter than 5 feet 8 inches, but with a lot of money.
Mr. MacDomhnaill: I was responding to a different question.
Deputy Durkan: There is one other question which might come up again but it might be no harm to look at it further for the next day. It relates to intermediaries. If I decide to approach a financial institution to make an investment - I hope I would have more than £100 if I was going offshore - what liability rests with the institution in respect of accountability to the investor? We have discussed the accountability to the Revenue Commissioners.
Mr. MacDomhnaill: The Deputy has touched on a sensitive point. In order to get information from a financial institution we must be able to show chapter and verse because otherwise the institution will be open to litigation from the investor. It must fit in with the reporting arrangements covered by law.
Deputy Rabbitte: What is the answer to the Chairman’s question? Are the Revenue and this Committee as powerless as it would appear? If a senior executive of the Bank invites me with a nod and a wink to invest in this way, on the basis that I have more substance than the average depositor, is he complicit with the depositor in committing an offence?
Mr. MacDomhnaill: If we can prove it. This could happen - a number of people have written to us regarding recent events and named individuals who enticed them to enter into these transactions. If those people are prepared to give evidence we will be able to establish a case of aiding and abetting tax evasion, for which there are fairly substantial penalties, including custodial sentences.
Chairman: That was the question I wanted to ask the Department of Finance: has consideration been given to introducing amending legislation to give protection to people who give evidence of the kind mentioned by the Chairman of the Revenue Commissioners?
Mr. Ó Murchadha: Up to now this question has not been considered. It can be considered in the context of the review of Revenue powers and legislation which may be required in the near future.
Chairman: It is galling that it is left to Mr. Bird and Mr. Lee of RTE to get this information under cloak of secrecy without naming individuals. If those individuals had confidence that they could go to the Revenue with legal protection and that justice would be pursued, presumably they would have considered that route, but I imagine they went to RTE because they did not feel that route was open to them.
Mr. MacDomhnaill: Arising out of the judge’s comments we have written to RTE for the information.
Chairman: For the future, do you see a need to provide legal protection, immunity or indemnity to employees of financial institutions who see wrongdoing and report it to Revenue? Is there need to change the law to provide such protection?
Mr. MacDomhnaill: That is a significant point because when we get information we often cannot use it as evidence because the job of the person concerned may be at stake - it is not even a question of being prosecuted. We have information in many cases where we make financial settlements but we cannot translate it into evidence because of the risks to the people concerned.
Chairman: They cannot give evidence?
Mr. MacDomhnaill: They are not prepared to.
Deputy Doherty: In circumstances where names, addresses and information on where money went have been given to you. The circumstances in which the information was provided to you would, by normal standards, amount to a breach of contract between the client and the institution. Does any law govern this?
Mr. MacDomhnaill: That is something we must be careful about. The institutions themselves will take legal advice. They will not give information to Revenue unless there is a statutory authority because that is their protection. If you want them to give the information they must be given the statutory authority. On the other hand, we get information from people. This was the main point in the RTE case before the Supreme Court. The complainant alleged that documents had been stolen and therefore should not be used. Those in a fiduciary position with regard to a company can take the view that the Supreme Court has endorsed the handing over of information they hold to a regulatory authority. That is the first time we have had a strong statement to the effect that something obtained, even in doubtful circumstances, can now be given to a regulatory authority to secure conviction or whatever.
Chairman: In cases where there is evidence of crime. Is that the position?
Deputy Doherty: It is worse than that. In this instance an investigation is basing itself on a criminal activity that occurred in the first instance, where documents were obtained by illicit or illegal means. One cannot commit a crime in pursuance of the investigation or detection of one. In this situation I imagine the financial institutions are open to a large number of civil actions in circumstances where there is a revelation of accounts, names and addresses and where money went.
Have accountants been questioned or pursued? Many of these people, such as Deputy Rabbitte, have spoken about people with substantial sums of money who have accountants who are central to the fiscal activities. What role have they played and what are their obligations regarding this matter?
Has the matter been taken up with the various institutes of accountancy? They can no longer disclaim in these matters. Recent legislation has made it obligatory in certain circumstances for people to make disclosures. Surely they must be central to this whole area of investigation?
Mr. MacDomhnaill: A key recommendation of the beef tribunal was that auditors be obliged to notify the Revenue Commissioners if they came across evasion. That was one of the most controversial measures to come before the Dáil and it has been considerably watered down. Now they are merely asked to resign from the case if the client refuses a request to disclose matters to the Revenue Commissioners. There is no question of them having to tell us of evasion.
Deputy Doherty: You had better keep you eye out for resignations.
Mr. MacDomhnaill: The question regarding a crime being committed would have been a matter of great hesitation for many until the recent Supreme Court decision. The court has now said that, notwithstanding the theft of documents, they can still be handed over to a regulatory authority. If tax evasion is involved the Revenue Commissioners would be the regulatory authorities. We have requested these documents and are confident we will get them.
Chairman: We will adjourn at this stage but return to the subject because we need to discuss the state of the law on this. Revenue and other people are operating under laws which are unbalanced or unnecessarily restrictive. We may also wish to discuss other matters, including possibly calling senior personnel from the different banks to appear before the Committee.
We will resume on Thursday at 9.30 a.m. when we will consider Vote 3 - Department of the Taoiseach, Vote 42 - An Roinn Ealaíon, Oidhreachta, Gaelteachta agues Oileán and Vote 44 - An Comhairle Ealaíon. We will also resume on the report on the Value for Money Examination - the Irish Genealogical Project, with Deputy Conor Lenihan and Deputy Durkan leading.
On Thursday, 7 May 1998 at 11 a.m. we will consider the 1996 annual report of the C&AG, the Appropriation Account and Vote 24 - Department of the Environment and Local Government (resumed). Is that agreed? Agreed.
The witness withdrew.
The Committee adjourned at 5.05 p.m.