public accounts committee dirt inquiry report

8/14/2019 Public Accounts Committee DIRT Inquiry Report

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PART I

THE INQUIRY AND ITS OVERALL APPROACH

CHAPTER 1

1. IntroductionThis is the Report of a Parliamentary Inquiry into tax evasion. The immediate focus of the Inquiry is theevasion of Deposit Interest Retention Tax (DIRT) from its very introduction in 1986 up to 1998 (therelevant period). The practice was large-scale systematic and carried out over many years.The basic facts are well known and established at this stage. Interest on non-resident deposits was andremains free of DIRT. From its inception in 1986, DIRT was evaded by depositors through the opening ofbogus non-resident accounts.Deposit-takers knowingly facilitated the practice. Discoveries were made of bank officials organising theopening and operation of bogus non-resident accounts for customers and indeed of establishing them fortheir own use.It is now also apparent that the evasion of DIRT was practiced in a wider culture of more generalised tax

evasion. Specifically in addition to the simple evasion of DIRT, bogus non-resident accounts wereemployed as a means of concealing otherwise taxable income from Revenue so as to ensure the evasionof other taxes due on those monies. This phenomenon of bogus non-resident accounts and theaccompanying technique of deposit splitting to evade tax dated in fact from the early 1960s. An alliedtechnique of back-to-back deposit and loan accounts was similarly employed as a means of reducing thefull liability to DIRT.2. The HearingsOn 31 August 1999 the Committee of Public Accounts (PAC) Sub-Committee on Certain RevenueMatters commenced its Public Hearings (the Hearings). These Hearings continued through the month ofSeptember and into early October. They concluded on 12 October last. The Sub-Committee in the courseof the Hearings examined the State and its Agencies, certain deposit-taking institutions, their External

Auditors and the industry representative bodies. One hundred and forty two witnesses gave evidencebefore the Sub-Committee at these Hearings and the Sub-Committee sat in public session for 26 days.3. New PowersThis was the first occasion on which an Oireachtas Committee carrying out an Inquiry used extensive newpowers. The principal Acts granting these powers are the Committees of the Houses of the Oireachtas(Compellability, Privileges and Immunities of Witnesses) Act, 1997 (The Compellability Act, 1997) and the


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Comptroller and Auditor General and Committees of the Houses of the Oireachtas (Special Provisions)Act, 1998(The Special Provisions Act, 1998).4. Historic Nature of InquiryThe Hearings were historic from another point of view. They were broadcast live on television by TG4. Inaddition, they were carried live every day on the world-wide web (1). The website also published the dailytranscripts of the proceedings.All of these developments the enhanced powers of the Committee of Public Accounts, examinationunder oath, live broadcasting and rapid publication of the proceedings represent a major advance andmodernisation of the parliamentary process and parliamentary scrutiny. The Hearings therefore representan historic moment in our parliamentary development.Since the conclusion of the Public Hearings the Sub-Committee has met regularly to consider andprepare this Report. A small working group comprising advisors, assistants and members of thesecretariat also worked to the Sub-Committee. This volume (Volume One) sets out the background to andthe findings, conclusions and recommendations of the Sub-Committee on the matters under examination,the operation of Deposit Interest Retention Tax (DIRT) during the years 1986 to 1998 and related matters.(1)www.irlgov.ie/oireachtasWhat is DIRT?Deposit interest is a form of income and is therefore liable to assessment to income tax. Deposit InterestRetention Tax (DIRT) is a specific tax on this interest income. DIRT is in fact a collection tax. In thisregard it is broadly similar to PAYE and VAT, in that it is calculated and collected at source by thedeposit-taker according to rules laid down in law, with any final settlement to be determined subsequentto collection. From a tax administration viewpoint, DIRT is a self-assessment tax. The relevant deposit-taking institution, that is the bank or building society, must therefore accurately assess the amount ofDIRT for which it is liable as a collector and return this amount to the Collector-General.In fulfilling its obligations as a collector on behalf of Revenue, every bank or building society must alsocomplete a retention tax return for each tax year. This DIRT return must be filed with the Collector-General within a specified time period. The return must show the amount of interest paid and theretention tax on that interest. The tax shown to be due on the return is self-assessed and must be paid byeach deposit-taker on or before the due date. Under the law there is no obligation for an Inspector ofTaxes to estimate and assess DIRT due, unless the tax has not been paid by the due date. Deposit-takers, in complying with the law, must also make an interim payment every year by 20 October.The interim payment is also self-assessed and must not be less than the retention tax accruing day-to-day for that interim period.From a compliance perspective, a bank or building society must deduct DIRT at the standard rate ofincome tax from all interest credited to ordinary deposit accounts. Tax must also be deducted at 20 percent from interest credited to special savings accounts (SSAs).The law furthermore requires that account holders must allow the tax to be deducted.Non-compliance with the law on DIRT by depositors or deposit-takers is a Revenue Offence.
http://www.irlgov.ie/oireachtashttp://www.irlgov.ie/oireachtashttp://www.irlgov.ie/oireachtashttp://www.irlgov.ie/oireachtas


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6. Immediate BackgroundThe immediate backdrop to this Report is the Meetings of the Committee of Public

Accounts in April and October 1998, the Public Hearings (31 August 1999 to 12 October 1999) and alsothe Report of the Comptroller and Auditor General (C&AG) into the matters under examination - Reportof Investigation into the Administration of Deposit Interest Retention Tax and Related Mattersduring the period 1 January 1986 to 1 December 1998. That Report was published in July of 1999 andwas itself the outcome of a seven-month investigation by the C&AG. The investigation by the C&AGcomprised two elements - an investigation by the Comptroller and an independent audit of accounts infinancial institutions by Ms Aileen Barry (the Appointed Auditor), partner in the UK firm of ArthurAndersen. All relevant State Agencies and financial institutions were written to by the Committeerequesting them to identify inaccuracies in the C&AGs Report. Other than some minor inconsequentialitems, all of them confirmed the factual accuracy of the Report.7. Report of Comptroller and Auditor GeneralIn 1998 there were reports in the printed media concerning the use by AIB of bogus non-residentaccounts as a means of evading DIRT. The Committee of Public Accounts immediately initiated enquiriesand both the Chairman of the Revenue Commissioners and the Group Chief Executive of AIB dulyappeared before the Committee in October 1998. Within days of this evidence the Committee of PublicAccounts submitted a Report to the Dil. A Resolution of the Dil followed which asked that theCommittee of Public Accounts examine and report inter aliaon any purported settlement betweenfinancial institutions and the Revenue Commissioners in respect of undeclared DIRT and informationknown to the financial institutions and regulatory authorities concerning the use of bogus non-residentaccounts. The C&AGs investigation was requested by Dil ireann to facilitate the work of theCommittee of Public Accounts.The investigation of the C&AG established that evasion of DIRT was pervasive throughout the Irishdeposit-taking system and was not confined to AIB. Furthermore, the C&AG established that the relevantauthorities were very well aware of the problem.8. The State AgenciesThe Parliamentary Inquiry has examined the Department of Finance, the Central Bank and the RevenueCommissioners under the following headings:

the extent of their knowledge of a problem in relation to bogus non-resident accounts and relatedmatters and the scale of such problem;their powers and obligations in relation to such problem;the actions (if any) taken by them to deal with the problem; andthe contacts and communications (if any) between them or between any one of them on the one

hand and financial institutions on the other.

9. Financial InstitutionsThe Inquiry set out to examine the role of deposit-takers with regard to:

the extent of knowledge of bogus non-resident accounts and related matters within the financialservices industry generally, or, where appropriate, within individual institutions;


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the extent and knowledge of all appropriate boards, senior management and external auditors ofsuch problems;the actions, if any, taken by persons or bodies referred to above to deal with such problems;where any such persons or bodies were unaware of the problem (or the scale thereof) thereasons for such lack of awareness; andthe extent, if any, to which bodies representative of the sector contributed to governance within

that sector.

In carrying out this Parliamentary Inquiry the Sub-Committee has sought to come to an understanding ofthe forces and factors that gave rise to the large scale tax evasion discovered by the investigation of theC&AG. Such an understanding is critically important in framing appropriate recommendations. 10. Two TheoriesTwo possible theories emerge in seeking to understand the events and phenomena inquired into by theSub-Committee. The basic approach taken by the Sub-Committee in preparing this Report was toexamine the oral evidence given at the Hearings, the documents discovered to the Sub-Committee, andraised in the evidence, the Report of the Comptroller and Auditor General and evidence given at earliermeetings of the Public Accounts Committee with a view to determining to its satisfaction which of these

alternatives is the more plausible11. The First TheoryThe first theory is discernible in the response of Mr John Keogh, Group Financial Director of AIB, toallegations made in 1991 by Mr Tony Spollen, Group Internal Auditor at AIB.On 10 March 1991 Mr. Spollen alleged, inter alia, in a memorandum to the Audit Committee of the boardof directors of AIB Group concerning the independence of his position, that AIB faced a potential liabilityof 100 million in DIRT arrears as a result of the operation of bogus non-resident accounts at the bank.These contentions of Mr. Spollen became the subject of an internal examination by a Sub-Committee ofthe Audit Committee. There followed the preparation and submission by Mr. John Keogh of a rebuttal ofthe allegations.The thesis on the problem of bogus non-resident accounts underlying his rebuttal is that the problem wasa recognised and endemic issue. It dated from the 1960s. "The introduction of DIRT brought new complexitieswhich in the case of AIB is being worked out slowlybut progressively in intermittent dialogue with the Revenue Commissioners. Our customers are, ofcourse, an important constituent in this matter, as is the pace of implementation of Revenue requirementsby our competitors and, indeed, the concern of Government overall lest over enthusiastic action byanyone should lead to a flight of funds as Exchange Controls diminish."

This is a coherent proposition, even if it sits somewhat uncomfortably alongside the law as enacted. Whatthis theory amounts to is a statement that the phenomenon being investigated represented a recognised

problem and was being dealt with over time in a planned and co-ordinated fashion. If such a proposition isto hold, one must be able to demonstrate that the financial institutions understood themselves to beworking to such a plan or programme and acted accordingly. One should also find that the State and itsAgencies clearly understood themselves to be a party to such a pragmatic workout. And the theory mustshow that concern about capital flight made sense in the economic circumstances of the period so thatthere was justifiable cause to act in this phased fashion over time.


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12. The Second TheoryThere is an alternative theory. This set of propositions posits that in dealing with the issue

there was no coherent plan or understanding on the part of deposit-takers or the State and itsAgencies, whether formal or informal;

there was on the part of deposit-takers and the State and its Agencies incoherent, spasmodic andad hocengagement with the problem;on the part of the State, these spurts of activity were sometimes administrative and sometimespolitical in origin but they contained no strategic vision or overview;occasionally, the control systems of deposit-takers triggered corrective action; andcompetition in the market for deposits continued throughout partly on the basis of connivance withillegality, that is the facilitation of false declarations and the operation of bogus non-residentaccounts by resident depositors.

These alternative theories carry quite different implications. If the first theory were to hold against theobserved facts, one would be inquiring into the rational, strategic management of a problem with itsobjective, the restoration of compliance and legality in the market for deposits. Whether such an approachwas entirely appropriate is open to question.

However if the matter had been successfully dealt with in this manner one would now be dealingessentially with history. If the alternative theory is more applicable to the observed facts, then very seriousimplications arise for the system of public administration and the supervision and the conduct of bankingin Ireland.The Sub-Committee finds:

There was no coherent or planned approach to the DIRT issue.There was an incoherent, spasmodic and ad hocengagement on the part of the deposit-takersand the State and its Agencies with the issue of bogus non-resident accounts.Implausible the supposed pragmatic resolution of this problem using the capital flight argument to

support the cautious phased implementation of the law.


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PART II

CHAPTER 2

THE STATE AND ITS AGENCIES - AN OVERVIEW

Mr. Pairceir:Well, I think that the core of the problem was, and we were aware of it for a long time, that itwas, that the multi-account business which preceded the DIRT, and the DIRT afterwards, that it was afactor of competition between the banks and there was a demand for it from the customers because if thedemand werent there from the customers, the banks wouldnt be providing the service.

Chairman:The demand for what exactly?

Mr. Pairceir:For not paying taxes, which is not an unusual demand.

Evidence of Mr. Seamus Pairceir, Chairman,Revenue Commissioners 1984 September 1987

Hearings28 September 1999, Afternoon Session

In explanation of its finding in favour of the second theory the Sub-Committee turns now to itsconsideration of the actions of the State and its Agencies. What is the evidence gleaned by thisParliamentary Inquiry on the behaviour of the State and its Agencies that convinced the Sub-Committeeto adopt the second explanation as the more plausible explanation of events?

1. Inseverability

The Sub-Committee finds that the events of the relevant period (1986 1998) cannot be severed orseparated or understood without reference to earlier events. Many witnesses who gave evidence duringthe Hearings made this point. The essential urge that gripped depositors engaged in evasion was a flightfrom disclosure to Revenue. To again quote from the evidence of Mr. Pairceir:

The concealment of capital in deposits was a huge problem and had been a huge problem for a longtime, but we didnt have any solution.


2. The Examination of the State


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For the purposes of this Parliamentary Inquiry, the State and its Agencies comprise the Department ofFinance, the Revenue Commissioners and the Central Bank of Ireland. The Sub-Committee alsoexamined the five Ministers for Finance who held office during the relevant period. The present Ministerwas not examined as he had been in office just a few months when the DIRT issue first came into thepublic domain.

In arriving at its conclusion on the probable explanation of the observed phenomenon of the persistentpresence on a very large scale of bogus non-resident accounts, the Sub-Committee was especiallyinfluenced by a number of particular episodes.

There are events generally through the years prior to 1986 that are inseverable from the decision tointroduce DIRT and from what later happened between 1986 and 1998.

There is in the prior period, the episode of the Affidavit Initiative the abortive proposal in the 1983Finance Bill to require as part of the documentary requirement for opening a non-resident account anaffidavit from the applicant.

There is the initiative of the Bank of Ireland, begun in 1983 and persisted with until 1987, to influence theRevenue Commissioners to introduce a Code of Practice for deposit takers (banks and building

societies).

There is the episode in 1986 of the non-implementation of machine readable forms the

failure to implement the proposal to require banks to make returns to Revenue in the form of computertapes that could be read by Revenue computers.

There is the preoccupation with and handling of the economic theory of capital flight as relevant to theproblem of bogus non-resident accounts. All of the relevant agencies of State bought into this theory asbeing relevant. It became the Official View.

There is the episode of SIM 263, the Superintending Inspectors Memorandum governing the

administration by Revenue of DIRT. The instruction suspended inspectability by Revenue ofdocumentation held by the banks supporting non-resident accounts.

There is the state of affairs generally at Revenue, in particular in the Office of the RevenueCommissioners itself and in its relationship with the Revenue service.

There is the functioning of the inspectorate in particular Investigation Branch (IB) and Special InquiryBranch (SIB) during the period under examination.

Finally, there is the approach taken by the Central Bank to the problem, in particular its approach to theoperation of Exchange Control and to prudential supervision generally.

We treat each of these episodes in turn in setting out why and how we came to the conclusion that the

second of our two competing theories is the most plausible in understanding the persistence of a largescale evasion of tax through the abuse of the banking system.

However before engaging with the analysis of the Sub-Committee it is appropriate first to provide briefdescriptions of the principal actors.

3. The Department of Finance


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A Department of Finance and a Minister for Finance are provided for statutorily in the Ministers andSecretaries Act, 1924. Article 28 of the Constitution also refers to the Department.

The Ministers and Secretaries Act, 1924 states that the Department is responsible for

" the administration and business generally of the public finance of Ireland and all powers, duties and

functions connected with the same, including in particular the collection and expenditure of the revenuesof Ireland from whatever source arising"

Over time the Department has been assigned additional duties and responsibilities. It oversees economicplanning and the public service as well as dealing with monetary policy and banking. At present theDepartment enjoys principal responsibility for the implementation of a significant reform of the Irish PublicService the Strategic Management Initiative (SMI) launched in February 1994 and a new budgetarysystem, multiannual budgeting (MAB).

The Department is organised into six Divisions. Three of these Divisions, Budget and Economic Division,Public Expenditure Division and Finance Division, are relevant to the work of the Sub-Committee.

The Budget and Economic Division in the exercise of its budgetary function "formulates the overallbudgetary parameters within which the annual budget and medium-term budgetary policy is framed. TheDivision prepares the annual Financial Statement of the Minister for Finance, as well as the Finance Billand legislation on taxation matters in general."The Division is also responsible for forecasting andmonitoring tax revenues, and for advice on all questions of taxation policy.

Public Expenditure Division has responsibility for the monitoring, evaluation and advice on semi-statecompanies and agencies. In addition to this general responsibility it had, during some of the period inquestion a specific duty to "advise the Minister for Finance on policy issues relating to the ACC and theICC."During the remainder of the period this responsibility was transferred to Finance Division.

Finance Division has responsibility for monetary and banking policy generally. This includes relations withthe Central Bank and ACCBank.

4. The Office of the Revenue Commissioners

Tax collection was assigned under legislation in 1924 to a newly formed entity, the Office of the RevenueCommissioners. The Commissioners were established as a unified tax collection and administrationservice, replacing in a single body the Inland Revenue and the Customs and Excise Service of the Britishadministration.

The statutory base for the Office of the Revenue Commissioners is a Statutory Instrument, the RevenueCommissioners Order, 1923. The Office has something of the status of a non-Ministerial Department ofState on the one hand, yet it is a service scheduled to the Department of Finance, no different than theOffice of Public Works. The Commissioners act independently of Ministerial control in exercising their

statutory powers in regard to the liability to tax of the individual taxpayer.

Two Revenue sections were directly involved in the administration of DIRT the Office of the CollectorGeneral and Dublin Audit District 5. In addition, Investigation Branch could become involved if DIRTrelated matters came or were brought to its attention. Finally Special Inquiry Branch could directinformation to Investigation Branch for further processing.

In its administration of DIRT, Revenue had the following powers in law. All financial institutions wererequired to make Retention Tax returns twice yearly. Revenue also had power in law to inspect


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declarations of non-residency. Access to bank accounts was limited to certain circumstances, the bankaccounts of named resident individuals could be accessed with the permission of the High Court.

Certain powers normally available to Revenue to assist it in its investigative role are either not available orare abridged in the case of banking transactions.

5. The Central Bank

The Central Bank of Ireland was established in 1943 after the enactment by the Oireachtas of the CentralBank Act, 1942.

A central bank carries out four important functions. It is traditionally the Government's banker. It alsoprotects the integrity of the currency, reflected in its management of the interaction of the exchange rate,interest rates and inflation. It is the supervisor and regulator of deposit takers and it acts as the banker oflast resort.

It was not until the enactment of the Central Bank Act, 1971 that the Central Bank began to acquire thesubstance of a traditional central bank. The Act of 1971 gave to the Central Bank the power to licenseand supervise banks. In 1972 the Central Bank took over the Exchequer Account from Bank of Ireland.After Ireland became a founding member of the European Monetary System the Bank managed anindependent currency, the Irish pound. With the enactment of the Central Bank Act, 1989, the BuildingSocieties Act, 1989 and the Trustee Savings Bank Act, 1989 the supervisory and regulatory duties of theBank were further enhanced.

The enactment of the Central Bank Act, 1997 laid the framework for the introduction to the Irish monetarysystem of European Monetary Union. For the Central Bank the main implications are the removal ofmonetary sovereignty and the membership of the Bank in the European System of Central Banks underthe European Central Bank (ECB).

We turn now to those episodes the detailed consideration of which led us to the conclusion that thesecond of our two competing theories is the more plausible in understanding the persistence of a largescale evasion of tax through the use of bogus non-resident accounts.


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CHAPTER 3MINISTERS FOR FINANCE

1. Ministers for Finance

In the course of its Hearings, the Inquiry heard evidence from five former Ministers for Finance i.e. thoseMinisters who held office from the enactment of the Finance Act, 1986, through to 1997.The Sub-Committee also decided to ask its Legal Assessors to question the Ministers on its behalf. Thereasons for this decision were:1) the fact that the Public Accounts Committee under its Standing Orders is uniquely, and properly,excluded from questioning policy matters;2) that the Committee has a long tradition of avoiding party politics and acting in an all-party manner in

pursuing probity and efficiency in the public finances; and3) the Sub-Committee wanted to ensure that there could be no suggestion that Ministers were questionedeither too sympathetically or too harshly, by colleagues or opponents, but rather in an absolutely even-handed way.It should be pointed out that the Legal Assessors, in putting their questions to Ministers, were also boundby the provisions of Standing Orders ("The Committee shall refrain from enquiring into the merits of apolicy or policies of the Government or a member of the Government or the merits of the objectives ofsuch policies") (1).The Minister for Finance is politically accountable for his Department, the Central Bank and the RevenueCommissioners to the Oireachtas. His relationship with, and day-to-day control of, both the RevenueCommissioners and the Central Bank is restricted by law. He is not accountable for the day-to-day

management of these agencies. They have statutory independence. He is, however, responsible for their overall performance, resources and the legislative framework withinwhich they operate.The Sub-Committee has considered the Ministers role in relation to all three agencies. It has alsoconsidered allegations made by two former Secretaries of the Department of Finance, one of them also aformer Governor of the Central Bank, who cited a "failure of political will" as an explanation, at least inpart, of the DIRT scandal.Finally, the Sub-Committee has considered the Ministers role in relation to the ACCBank of which theywere the sole shareholder.2. Right of Initiative

The right of initiative in relation to public finance, including taxation, is vested in the Government. This isprovided for under Article 17 of the Constitution.


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Under Dil Standing Orders only a member of the Government can initiate a Bill that imposes or changestaxation. Therefore, taxation, in common with financial policy generally, is a Government decision subjectto the approval of the Oireachtas.Government decisions are taken by Ministers. In the making of decisions the rule of collective cabinetresponsibility applies. Civil Servants give advice which may or may not be accepted.3. Relationship between Ministers and Secretaries

The relationship between Ministers and their Departments and officials during the period in question wasgoverned by the Ministers and Secretaries Act, 1924.

Ministers and Secretaries Act, 1924 provides the respective roles:

Minister as corporate soleCivil Servants as advisors

The Constitution of Ireland:

the role of Government and the Department of Finance in taxation (Articles 17 and 28)Right of Initiative and Ministers and Secretaries Act, 1924 - interactionsThis, from the point of view of the relationship between the Government on the one hand and the publicadministrative system on the other, was commented upon by a former Secretary of the Department ofFinance, Mr. Maurice Doyle, referring to the Report of the Comptroller and Auditor General, in evidence tothe Sub-Committee:Mr. Doyle: I dont know the phrase the "permanent Government" ChairmanThe point I would like tomake here is that, to the extent that there is a decision to be made about this so-called balance, and I willreturn to this question of a balance later, the decision was not one for the Department of Finance much

less the Central Bank; it was a decision for Government and, moreover, one that the Government took. Itmay be necessary to point out that Departments of State do not formulate policy, they formulate policyproposals, which are put to their Minister. The Minister may accept or reject or amend these proposals. Ifhe rejects them, that is the end of the matter. If he accepts them or amends them, they become hisproposals. They are now the Minister's proposals, not the Department's. The Minister in turn then eithertakes a decision on the basis of what he has decided or puts the proposals in turn to the Government ifthey require a Government decision. At that point the Government may accept these proposals from theMinister, it may reject them or it may amend them. If it accepts or amends these proposals, then thesebecome Government decisions and Government policy.

Hearings31 August, 1999, Morning Session,

The Sub-Committee is perplexed as to how the Department of Finance which proposed the drastic courseof action of an Affidavit in 1983 without any apparent regard to the consequence for capital flight couldnow oppose the introduction of DIRT on precisely these grounds. Nor were any proposals to strengthenthe law ever made to the Minister.Mr. S. P. Cromien was Secretary of the Department of Finance from 1987 to 1994. He gave the followingevidence to the Sub-Committee:


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Chairman: The question which you didn't answer Mr. Cromien was - did you do anything, did you makeany recommendations? If so, will you tell us briefly what they were?Mr. Cromien: I realised that there was no point in recommending to Ministers that Revenue should begiven these powers and if I were to do it, I think I would be worried myself that they would cause theoutflows.Chairman: So you made no proposal?Mr. Cromien: I found it wasn't in the national interest to make proposals. Hearings31 August, 1999, Afternoon SessionThe Sub-Committee has established that, while there was internal debate on the subject in 1993, at notime did officials at the Department of Finance make any proposals to the Minister to amend or strengthenthe law in relation to the operation of DIRT during the period 1986 to 1998.The Sub-Committee has also established that none of the Ministers of Finance ever sought to influencethe Revenue Commissioners, or any of its officials, in relation to the content of any of its operatinginstructions or in any other way affecting the application of the law.Indeed, the Sub-Committee was struck by the fact that Ministers were unaware of the mechanisms withinthe Revenue Commissioners by which the law was applied and, specifically, had no knowledge of theexistence of SIMs.The Sub-Committee, while commending the Ministers for not interfering, directly or indirectly, withRevenue operations, finds it surprising that Ministers were so poorly informed of the RevenueCommissioners operating procedures. The Sub-Committee concludes that Ministers should have satisfiedthemselves that there were adequate procedures and resources in place within the Revenue

Commissioners to ensure the proper and fair application of the law as enacted by the Oireachtas. The Sub-Committee finds unconvincing the contention by the two Senior Officials that the dropping of therequirement for affidavits for non-resident accounts from the Finance Bill of 1983 by the then Minister wasthe reason why, after 1986, no subsequent proposals were brought forward to improve DIRT collection.This is especially in view of the fact that DIRT itself was a major new initiative that changed significantlythe regime in relation to interest on deposit accounts.The Sub-Committee finds implausible the argument that a more rigorous enforcement of the 1986 Actcould not be applied to DIRT because of fear of provoking a flight of capital while at the same timeasserting the merits of a more severe affidavit requirement.In the light of the above, the Sub-Committee concludes that claims of failure of political will are

groundless insofar as no proposals were made to Ministers by officials and, therefore, none were turneddown on political grounds.The Sub-Committee also considered how Ministers ran the Department of Finance, and how they relatedto the Secretary (Secretary-General) and other senior officials of the Department. The Sub-Committee finds that none of the Ministers had adequate information systems in place to ensurethat they were fully informed and kept up to date on all issues of significance in all sections of theDepartment or the other agencies for which they had responsibility. This is best illustrated by the fact that


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meetings between the Minister and the Departments Management Committee (MAC) only occurredintermittently and that the MAC had no written agenda or no minutes for most of the period under review.Nonetheless, the Sub-Committee concludes that successive Ministers were remiss in not having aproperly structured management system within the Department and this undoubtedly was a contributoryfactor to their lack of knowledge and, consequently, their lack of action in relation to the DIRT issue.The Minister is the sole shareholder in ACCBank and appoints its Chairperson and Board. The section ofthis Report that deals with ACCBank expands on this issue. Suffice to say that the Minister for Financecould reasonably be expected to set the standards for Ministers in other Departments concerning howState Companies are run and held to account. Given the scale of the rescue of ACCBank in 1988,successive Ministers should have been alerted to the problems in ACCBank. By their omissions, none ofthe Ministers appear to have discharged their responsibility for the ACC in an appropriate manner.


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CHAPTER 4

DEPARTMENT OF FINANCE AND THE REVENUE COMMISSIONERSEVENTS PRECEDING THE INTRODUCTION OF DIRT 1963 - 1986

1. Terms of Reference of Sub-CommitteeUnder the Terms of Reference of this Parliamentary Inquiry the Sub-Committee is confined to examiningevents in the period 1986 to 1998. However the Sub-Committee in coming to its understanding of theseevents concluded that they are inseverable from the earlier years, particularly the period 1963 to 1986.This also was the conclusion of the C&AG in conducting his investigation. The Report of the Comptrolleris valuable in the account that it gives of the inquiries of the C&AG and documents discovered to himduring that investigation. The Sub-Committee cannot examine this earlier period. However it has studiedaspects of the period and observes as follows.

2. Finance Act, 1963

Up to 1963 the payment of income tax on interest income was a voluntary affair. In other words it was upto the individual taxpayer to make a declaration of interest earned for the purposes of liability to incometax.In 1963 this changed. Under the provisions of section 17 of the Finance Act, 1963 banks were obliged tomake yearly returns to Revenue of all interest paid or credited by them on a gross basis to the accountsof depositors.

3. Disclosure LimitsThe regime as introduced in 1963 did provide a disclosure threshold - only information on accountsgenerating interest income, initially exceeding 15 a year, was required to be returned. In addition,returns were not required for accounts in the beneficial ownership of non-residents. In respect of thislatter category, the depositor was required to serve a notice on the bank, known as Form F, declaring

non-residency and requesting non-return of information on interest income to the Revenue. Theinformation supplied in the notice included the name and address and country of residence of thedepositor. Crucially, while deposit takers were required to retain these Forms F, they were not inspectableby Revenue.

4. Economic BackgroundIt should be recalled that until the 1960s, Ireland was an underdeveloped, poorly performing economy.Emigration, poverty and unemployment were pervasive. Put simply up until the 1960s economicconditions were such that there was little economic activity to tax and the tax system was correspondinglyrudimentary.The 1960s by contrast were years of exceptional industrial growth, economic development, socialtransformation and rising incomes and living standards in Ireland. During this decade, the taxation systemwas the subject of intensive examination and indeed was subject to radical change.

5. Commission on Income Taxation 1957 - 1962A Commission on Income Taxation, chaired by Mr. Justice Cearbhall O Dalaigh of the Supreme Court, satbetween the years 1957 and 1962. The Commission produced seven highly detailed Reports and mademany recommendations in respect of virtually all aspects of the tax system.


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The Commission, its work programme and its interaction with public policy appears to have followed awell-structured approach in the identification of problematic taxation issues, the arrival at conclusions andrecommendations and finally, the resulting policy and administrative action.

6. Seventh ReportIn its seventh and final Report published in 1962, the Commission, recommended the change introduced

by section 17 of the Finance Act, 1963, disclosure to Revenue of information on deposits. TheCommission had recommended disclosure of information on amounts on deposit, which is to say capitalamounts. The Government opted instead for disclosure of interest paid. The Commission itself did notrecommend inspectability by Revenue of detailed bank records.7. Debate on Income Tax Bill, 1966 and Income Tax Act, 1967The approach contained in section 17 of the Finance Act, 1963 was confirmed by the Income Tax Act,1967. The Act of 1967 was a consolidation measure and was at that point the single most complexlegislative measure brought before the Houses of the Oireachtas. The consolidating nature of the Actobviously required the inclusion of the 1963 measure. Section 17 was consolidated as section 175 of theIncome Tax Act, 1967.During the progress of the Bill through the Oireachtas a controversy arose as tothe constitutionality or otherwise of certain provisions (even though it was a Consolidation Bill). Theprovisions that were controversial related to Revenue powers of search. The eventual outcome was that

the Bill was passed into law through a complex procedure whereby it was simultaneously amended by anAmendment Bill with that Bill removing the sections of controversy. In the 1960s therefore, as the tax lawwas being modernised, the issue of Revenue powers was already controversial.

8. Capital Flight TheoryIt should also be noted that, as the C&AGs Report states, the recommendation of the DlaighCommission on Income Taxation favouring disclosure of deposit amounts was not unanimous. Twodissenting voices make mention, by way of argument against disclosure, of the possibility of capital flightin reaction to the imposition of a disclosure regime:"Two members of the Commission dissented from the recommendation, citing the danger of underminingconfidence in the banking system and encouraging capital outflows."[2]The two members dissenting were Mr. Owen Binchy and Professor James Meenan, Professor of PoliticalEconomy and the National Economics of Ireland (UCD). Professor Meenan was also at this time adirector of the Central Bank.

(2) Page 8 of C&AG Report9. Composite Rate Tax (CRT)In 1973 the issue of disclosure was complicated by the introduction of Composite Rate Tax (CRT) forbuilding societies. The tax was introduced under the Corporation Tax Act, 1976. Under the CRT regime,the building society paid a tax on the total gross interest it paid on personal deposits. The tax was set at apercentage of the standard rate of income tax. In particular, as it was not computed at the level of theindividual account, CRT did not discriminate between resident and non-resident accounts and thestandard rate was deemed to have been discharged on the individuals behalf. Individuals, meanwhile,

were required to declare interest income from building society accounts in order to pay tax on the incomeat the marginal tax rate subject to a tax credit for tax paid on the interest at the standard rate. In directcontrast however with the banks, building societies were not required to file returns on individual accountswith Revenue. This aspect was marketed by the building societies as "guaranteed confidentiality", whichcame to be a significant grievance within banking circles.

10. Seeds of the ProblemWe can now see that the seeds of what would become the DIRT problem were sown in the Finance Act,1963. Section 17 of the Finance Act, 1963 introduced Form F. There was in this measure as implemented


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the opportunity to make false declarations in establishing bogus non-resident accounts. Forms F were notinspectable. The measure also created the potential for deposit splitting, again practiced with a view toescaping disclosure to Revenue and, as with bogus Forms F, evading tax. The implementation of CRT for the building societies, in particular the "guaranteed confidentiality" aspectcompounded existing problems in the banking sector. The measure created an uneven playing field in the

deposit market. This development resulted in its own pressures on banking at a time when Irish bankingwas modernising, consolidating and having to finance its own rapid growth in the context of significantnational economic growth.

Revenue and the Department of Finance were aware of the impact of this inconsistent regime in thetaxation of interest income. They were aware of the spread and extent of illegality in the market fordeposits and the abuse of the banking system to conceal income and capital from tax. The investigationof the C&AG discovered a memorandum prepared in Revenue in 1976. The Report of the Comptrollercontains an extract

"The main area in which bank officials seem to facilitate, if not encourage tax evasion, is in relation toSection 175 of the Income Tax Act, 1967, that is, the section which provides for returns to the Revenue ofinterest amounting to more than 70 paid by financial concerns without deduction of tax. This was an anti-

evasion measure introduced by the Government in 1963, following a recommendation by the Commissionon Income Taxation and one would have expected that national institutions would have been concernedto see that Government objectives would have been carried out. In this particular area, however, itappears that bank officials are deliberately frustrating this objective. Evidence of this is available in aconsiderable number of instances sufficient to show how widespread the practice is."(3)

Revenue memo quoted in the Comptroller and Auditor GeneralReport of Investigationinto the

Administration of Deposit Interest Retention Taxand Related Matters during

the period 1 January 1986 to 1 December 1998.

It is apparent therefore, that the seeds of the ensuing DIRT scandal were sown after 1963 by the manner

in which public law was implemented.

(3) Page 8 of C&AG Report11. The Affidavit Initiative (1983)In 1983 the issue of bogus non-resident accounts occupied the minds of two senior officials at theDepartment of Finance, Mr. Sen Cromien and Mr. Maurice O Connell. They launched a proposal for anaffidavit to be sworn by all bank customers proposing to open a non-resident account. The Ministeraccepted the idea and it was incorporated into the Finance Bill for 1983.

During the Dil debate on the Bill, there were serious reservations expressed about the proposal as itstood. At the same time, within the Department of Finance, Mr. O Connell met with the banks. They madea case for what was in effect the status quo - an affidavit would only be required if a bank official was not

satisfied with the genuineness of an application. In a memorandum to the Minister on the issue written byMr. O Connell, he expressed himself as being "impressed by the case" put by the bankers. As a result,the affidavit proposal was amended in such a way that it was substantially weakened.

While the incident of the affidavit pre-dates the period under examination it is relevant. It represented aserious attempt to deal with bogus non-resident accounts. It came three years before the retention taxinitiative. Withholding tax was under discussion within the Department. The affidavit initiative was alsoone that must have had implications for capital flight (if this theory was at all relevant to the bogus non-resident accounts issue) yet this did not seem to worry the Department at that point.


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The Sub-Committee finds that the affidavit initiative was a proposal developed by two senior Officials atthe Department of Finance. It appears to the Sub-Committee on the basis of the oral evidence that it wasvery much a personal initiative by Messrs. Cromien and OConnell. It did not represent an element in astrategically thought out plan or programme in tackling the issue. The Sub-Committee is struck by theabsence at the time of concerns on the danger of flight of capital, a consideration that in subsequentyears, dominated official thinking on DIRT related issues. Three years later when the Office of theTaoiseach proposed a withholding tax on deposit interest income this concern was to the foreground inDepartmental thinking in opposition to the Government decision to adopt the proposal.

12. The Bank of Ireland Initiative on draft Code of Practice 1983 1987"Yes but I dont see how Mr. Hely-Hutchinson comes into that. Mr. Hely-Hutchinson and I would not bediscussing tax evasion. That was my business. He was a banker."

Mr. S Pairceir, Chairman, Revenue Commissioners 1984 1987Hearings

28 September 1999, Afternoon SessionMr Cromien receives a letter

"Dear Cromien,At the request of Mr. Hely Hutchinson, Chief Executive of the Bank of Ireland, I haddiscussions with him recently on the question of the relationship which exists between the Revenue andthe Bank of Ireland. The discussions centred mainly on the less desirable practices engaged in by theBanks employees in recent years in advising customers of methods of evading tax by spreading depositsover different branches and accounts."You will see from the enclosed copy letter that the Chief Executiveis anxious to put an end to such practices and his forthright statement in this aspect is gratifying "(4)

Letter from P McMahonChairman, Revenue Commissioners

To Mr. SP Cromien,Second Secretary, Department of Finance.

25 October 1983

(4) DFIN.0003.222The conviction of Mr. Hely-Hutchinson, his desire to rid his own bank of the problem of deposit splittingmay have been gratifying to the then Chairman of the Revenue Commissioners. However Mr. Hely-Hutchinsons proposal for a code of practice that would be adopted by Revenue and applied throughoutthe deposit taking sector was never adopted and implemented. It was pursued with Revenue over thefollowing years by the bank. However by 1986 Mr. Pat Molloy of Bank of Ireland in a paper to his board ofdirectors concluded that:

"It is not at all certain that the Revenue Commissioners have the will or capacity to effectively police theDIRT regime or enforce a code of conduct"

Memorandum dated 11/12/86 to Board of Directors, Bank of Ireland extract.

In his evidence at the Hearings, Mr. Seamus Pairceir, Chairman of the Commissioners 1984 to 1987,Commissioner 1980 1984 and on his retirement, having served forty years in Revenue, gave his view ofMr. Hely-Hutchinsons overtures.

Deputy Rabbitte: Do you recall at all Mr. Pairceir if you look at the covering letter from Mark Hely-Hutchinson where he went to on talk to you about a code of practice for deposit takers.


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Mr. Pairceir: Yes.

Deputy Rabbitte: Apparently he had that going those discussions with you for a while I think.

Mr. Pairceir: And with my predecessor.

Deputy Rabbitte:And with our predecessor, thats right.

Mr. Pairceir:It didnt get anywhere.

Deputy Rabbitte:It didnt get anywhere. Why do you think it ran adrift, or ran aground rather?Mr. Pairceir: Well, it was an exercise to see whether between the banks and ourselves they couldcome to some kind of this was in the days of the multiple accounts Revenue had no function inarbitrating between the banks and so, I think, it would have required a great deal more of good will thanas we now know at present.

Hearings28 September 1999, Afternoon Session.The proposal of the Bank of Ireland was never adopted.

13. Disclosure and Machine Readability 1986 - Mr. Brutons PlanDisclosure of comprehensive information on bank accounts was a long-term ambition of Revenue. It hadlong pushed for significant disclosure, including information on capital amounts as well as interestincome. In 1986, very soon after the Budget that introduced DIRT, a change of Minister occurred with theappointment of Mr. John Bruton TD as Minister for Finance on 13 February 1986. Shortly after taking upoffice Mr. Bruton became personally involved in the detail of the Finance Bill proposals on DIRT anddisclosure. He quickly developed an initiative of his own, after discussions with the RevenueCommissioners.

The Minister put his thoughts on paper. In a Memorandum discovered to the Sub-Committee dated 21

February 1986 he wrote

"I have been giving some further thought to how to manage the problem created by the deposit interestretention tax and its applicability to non-liable persons. I feel that the burning sense of injustice that will becreated by this tax will create an insuperable objection to its long term continuance.I have discussed thematter with the Chairman of the Revenue Commissioners who feels that while an exemption for charitiesis possible this year that any other exemption would be both administratively impossible to administer,and lead to pressure for so many exemptions as to render the tax totally inoperable.It seems that the primary objective for the tax in the first place was to achieve a certain yield in 1986. Itwas not conceived of as a long term tax at all..." (5)(5) DFIN.004.178This Memorandum presents a detailed proposal that at heart envisages DIRT as a one year tax.Essentially, the memorandum regarded it as delivering an opportunity to fast track implementation of a fulldisclosure regime for the banks. It provides for very limited exemptions; and sees the 1987 Finance Billas the opportunity to pursue a final arrangement based on automatic and automated disclosure ratherthan taxation at source.

Deputy Bruton: I favoured the full disclosure of all accounts to the Revenue on a generalised basis,including savings certificates, that there should be in the world that I wished to see one where there would


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be complete and open disclosure of all such accounts, not just in regard to declarations but as to theaccounts themselves.

Hearings29 September 1999, Morning Session

Critical to this scenario was the need to introduce in the 1986 Finance Bill "detailed administrativearrangements to enable this to be done, including the provision of information by all financial institutionsin machine readable form"(6) What was envisaged was an automatic and automated or computerisedreturn of records by the financial institutions to the Revenue. This was not pursued in spite of the factthat there is evidence to suggest that if the Revenue authorities had any strategic objective at the time, itwas to get into the bank accounts, achieving disclosure of information by the banks on capital amountsand deposit makers to Revenue.(6) DFIN.004.178Revenue objected to the Ministers detailed proposal.

Mr. Bruton: This advice this advice is to me from Mr Seamus Pairceir of the Revenue

Commissioners, not from Mr. Maurice O Connell, Im sorry. But the advice was as follows: "The proposalto announce during the course of this years Finance Bill the reintroduction next year of the disclosurerequirement in relation to bank deposit interests which was abolished this year and to extend disclosureto building society interests is bound to give rise to adverse criticism. The effect of such announcementat this juncture on external deposits in the Irish banks and building societies would be likely to beextremely unfavourable It would create a climate of total uncertainty in an area where there should bereasonable stability. The conclusion is inescapable that the timing of such an announcement for thisyears Finance Bill would be unwise and most likely to be counterproductive." My recall would be that thatline of advice would have been also reinforced by the Department.

Hearings29 September 1999, Morning Session.

What were enacted were Revenue powers of inspectability, not automatic disclosure to Revenue. Theconfidentiality that had applied to the building societies under their CRT regime was conceded to thebanks. The banks, as the C&AG Report charts, and as was evident at the Hearings, continued lobbyingagainst the Act on grounds of complexity and administrative difficulty. However inspectability was also asignificant issue. The banks were opposed to anything that suggested of a right of access to accountinformation by Revenue, however limited.The detailed proposal for automated or computerised disclosure on a comprehensive basis by financialinstitutions as advocated by the Minister was not pursued. Such an approach would have solved theproblem of bogus non-resident accounts while the scale of disclosure envisaged by the Minister wouldhave yielded significant information on other forms of capital holding.14. Preoccupation with Capital Flight Theory

By 1987 there was a change in Government, there was a new Minister for Finance and there was thebeginnings of a change in attitude towards DIRT. It was yielding significantly more than had beenprojected and forecast. However disclosure, or rather inspectability, remained a pressing question for thefinancial institutions.

In the course of 1986 there were media reports in Northern Ireland to the effect that Revenue was aboutto institute large-scale inspection of deposit accounts in the Republic. These reports arose out of aspeech given by a tax accountant in Northern Ireland. The concern in Northern Ireland was thatinformation on Northern Ireland depositors would be exchanged between the Revenue and UK Inland


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Revenue. A statement was prepared for the Minister the purpose of which as to assure Northern Irelandnon-resident depositors that these reports were without foundation. The statement did not issue.

There was also around this time (late June 1986) some net outflow of currency and pressure on theexchange rate. There had earlier been a currency crisis resulting in an EMS realignment. A minute by Mr.P. Neavyn, Principal Officer, in the Department to Messrs Maurice OConnell and Sen Cromien (with the

Secretary also to see) states inter alia, that

"Finance Division has advised that on 24 June there was a significant net demand for foreign currencyreversing the trend of almost continuous net supply since the EMS realignment. It is not known whetherthe Northern Ireland situation has a significant bearing on this development. There was a further netdemand situation on 25 June"(7)(7) DFIN.004.369Concerns about flight of capital and disclosure on deposit accounts were again being linked andintertwined.

Serving officials and former officials of the Department repeatedly made this connection in evidence to

the Sub-Committee. However the intertwining of the two issues - tax evasion and monetary policyconcerns - was not occurring in vacuo. Repeated currency crises occurred from the late 1970s through tothe mid 1980s. In 1986 itself, there were two realignments. The most dramatic picture of the context isthat of Mr. Maurice Doyle, former Secretary at the Department of Finance and a former Governor of theCentral Bank:"The second question arising here is the so-called balance between the question of guarding against theflight of capital and creating an anti-evasion tax regime. I have to ask: balance, what balance? TheC&AGs report does not discuss the dangers of capital flight but it has to be seen against the context ofthe time.What is the context? Without being too precise about dates, between roughly 1979 and 1987 wehad balance of payments deficits of never less than 1 billion. They ranged up to 1.6 billion, which was14 per cent of GNP in 1981. The current budget...another way of putting that is that for every 6 that thecountry as a whole earned, it spent 7. The current budget deficit never fell below 1 billion and ranged

up to 1.4 billion, which was between 7 and 8 per cent of GNP in 1986. The Government was spending6...sorry, was spending 7, was earning, taking in, 6 in tax and borrowing 1, and not even repayingthe 1 at the end of the year but borrowing again to roll that over. The Exchequer borrowing requirementran between 12 and 16 per cent of GNP over those years. Government debt rose from 85 per cent ofGNP to 133 per cent of GNP. We had a higher foreign debt per head of population than Poland, we had ahigher national debt as a percentage of GNP than Brazil, both of which were widely regarded as basketcases at the time. ... That was the state of affairs at the time. Inflation was running between 7 and 21 percent. Unemployment rose from 8 to 17.5 per cent. Growth fell from 3.5 per cent a year to 0.2 per cent,which is well within the margin of error in the calculation. The reserves - our primary index of creditworthiness ... lay between 2.5 and 3.5 billion over that period ...The interventions by the Central Bankin order to support the currency over those years ran between 1 and 1.5 billion a year. These are thestatistics of a Third World country and against that background must be judged whether or not there wasa potential flight of capital out of the country. I have to say, Chairman, to my mind the miracle is that there

wasn't a flight of capital out of the country - it wasn't a potential danger. And against that one is expectedto balance the creation of an effective anti-evasion tax regime as far as DIRT was concerned."Hearings

31 August 1999, Morning SessionThe period selected and described here by Mr. Doyle virtually precedes the introduction of DIRT.

This is a passionate and dramatic expression of what might be termed the Official View.


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Witnesses at the Hearings repeatedly proposed it, though perhaps never again in so dramatic a fashion.However the question remains: was there in fact a connection?

This is a critically important question as the view expressed above predominates in the official mind in theevidence to the Sub-Committee and also in the documents discovered to the Sub-Committee - whetherthe source of those documents is the Department, Revenue or the Central Bank. One former officer at the

Department, Dr. Michael Somers, now head of the NTMA, differed in his analysis of the situation. Giventhat his analysis contrasts so sharply with that of for example, Mr. Doyle, it is also worth quoting at somelength. In discussing the issue of evasion and bogus declarations, he stated in his evidence that:

Dr. Somers: There is not an awful lot, at the end of the day, that authorities can do about this if peopleare prepared to make false declarations, and the experience here seems to be that people are preparedto make false declarations. It is an area that I would be doubtful that you will ever get full compliancebecause if people want to be dishonest in this area, it is probably one of the easiest areas to be dishoneston. If you buy a bottle of alcohol or cigarettes or whatever you have to pay the excise and the VAT onthem - there is really no escape - but if you have cash you can put it in other areas. I mean we did haveall this great discussion during the 1980's, which I don't think ultimately was resolved, about the famousblack hole - that there was money leaving this country and nobody seemed to be quite sure where exactlyit was going or who was taking it out or what, in fact, was the total quantum of it. But there was a certain

amount of

Chairman: What I want to find out from you as, I suppose the pre-eminent expert in this area in thecountry, was there any real danger of a flight of funds from the banks because of this policy or if thispolicy was enforced and applied could there have been a flight of funds?

Dr. Somers: I think there probably could have been some flight of funds. I think, in fact, given the overallmagnitudes that were involved, it was probably fairly small beer because we were dealing with billions ofpounds flowing in and out of the country at that stage. I think with a lot of small people, and I think a lot ofthese people who are making these false declarations were presumably small businessmen, or whatever,or people with relatively small amounts of cash, there would be a big inertia factor with them. I mean, weused to hear the stories about all the accounts that were held up in Newry, I think it was in the Square inNewry, and the banks would send out their calendars to their good clients up in the Square in Newry and

they would all be returned, person unknown or whatever. This was going on. Now it was much easier, ofcourse, if you just had to sign a declaration, you didn't even have to go to Newry then with your bagful ofcash. As I say there is an inertia factor in all these things. I do not think that we would have seen vastamounts of money move out.at the time we would all have been extremely concerned about any kindof flight of capital. Now I am saying that maybe a lot of these DIRT accounts were small beer and itwouldn't have made a major impact on what was happening. But we did have a situation where ournational debt was rising at an outrageous rate and something had to be done.

Hearings,31 August 1999, Afternoon Session

The Sub-Committee is struck by an absence in the discovered papers and in the oral evidence of rigorousdebate on and analysis of currency pressures and currency crises and the resulting policy options open to

the Department. The issue of a withholding tax simply appeared interminable, bogged down in theperceived threat of a flight of capital.15. Taxation and Fairness - SIM 263

" ... if you're trying to do your job fairly and a large section of tax evasion is cut off to you, who exactly areyou, in effect, picking on then?"


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PMP Donnelly, Inspector of TaxesHearings

8 September 1999, Morning SessionMr. Donnelly's is a very important question, central to the work of this Sub-Committee.

With the enactment of the Finance Act, 1986 responsibility for implementing and administering the taxnow clearly passed in the normal way to the Commissioners. In administering taxes the practice inRevenue is to provide Officials with instructions or orders through a system of Superintending Inspector'sMemoranda - SIMs. The title of the Superintending Inspector has been changed to Chief Inspector. EachSIM was numbered. On 24 July 1986 the Superintending Inspectors Office issued SIM 263 on theoperation of DIRT. The instruction is highly detailed and runs to several pages. Included in the instructionis:

"Further instructions on the examination of declaration forms will issue in due course and Inspectorsshould not call for declaration forms from relevant deposit takers pending receipt of those instructions"(8)(8) REV.027.2This instruction was never countermanded, but was effectively rescinded when in 1998 the DIRT issueand other banking controversies broke into the public domain. Despite intense examination of a numberof past and current senior Officials of Revenue including Commissioners and Chairmen, the Sub-Committee never received full clarification on this incident. The person who authored the instruction wasnot identified by Revenue officials to the Sub-Committee. No papers relating to the drafting of the SIMwere discovered to the Sub-Committee and no papers exist according to the current Revenue Chairman.

Obviously the ideas of fairness and legality (compliance with the law) are essential to the operation of anytax system and any specific tax. Inspectors must act fairly and therefore, in assuming office, they make astatutory declaration to apply the law fairly.A central question for the Sub-Committee is whether in fact the law on DIRT and indeed the taxation

system generally was applied in a fair manner in the years under examination (1986 - 1998) particularlyhaving regard to the existence of SIM 263. This matter was explored at the Hearings with Mr. PMPDonnelly, Inspector of Taxes, who drew the attention of the Sub-Committee to the existence of thestatutory declaration. Mr. PMP Donnelly, in his evidence talked of how he had been troubled by what hesaw as a clash between his declaration and SIM 263.

Chairman: Mr. Donnelly, in your brief opening statement you mentioned that inspectors of taxes uponappointment make a statutory declaration to apply the law fairly. Isnt here a classical case where theRevenue were not applying the law fairly, where compliant taxpayers were let down badly by the failure toapply the law fairly?

Mr. Donnelly: I have to agree with you Chairman.

Chairman: But was this something that was ever discussed among inspectors of taxes that you werent infact living up to your declaration?

Mr. Donnelly: We were living up to our declaration. It is a way of binding the inspectors of taxes to applythe law fairly, subject to directions.

Chairman: But do you think a direction should have been challenged that wasnt fair, or had the effect ofnot applying the law fairly?


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Mr. Donnelly: It would be difficult to challenge it, given the weight of the establishment above you. Imsorry we never did it and I do regret it, but perhaps the atmosphere will change now as a result of yourSub-Committees work.

Chairman: But, is this something that was raised in discussion between inspectors from time to time?

Mr. Donnelly: I think we were fairly disgusted with it, but we did nothing concrete. Im sorry.


Mr. D. Quigley, present Chairman of the Revenue Commissioners admitted unequal treatment oftaxpayers when applying the law:

Deputy Rabbitte:but I think I have to put to you the question that the inaction on DIRT over the yearseffectively created two classes of taxpayers. I know that that very concept is anathema to yourself but theobjective fact is that that is what happened.

Mr. Quigley: Well, I think it is correct to say, Deputy Rabbitte, as has already been pointed out in thehearings to date, that there was certainly separate treatment, different treatment, as regards the financialinstitutions and other taxpayers


The Sub-Committee finds that tax administration in Ireland during the latter half of the 1980s and throughcertainly to the early 1990s was not implemented fairly under the law. Revenue was not applying the lawfairly. SIM 263 was critical in this regard. In the Inspectorate particularly, this was clearly understood byofficials. However, this hugely important issue could not be pursued within the then Revenueorganisational structures. There was no proper management structure, no institutionalised proceduresand there was no effective management from the top of the organisation. The conclusion of the Sub-

Committee, on the basis of the evidence of a number of Tax Inspectors at the Hearings, is that theexistence of SIM 263 and the failure to countermand it adversely affected morale within the Inspectorate.Furthermore, the situation, leading as it did to a scenario of taxes going uncollected, contributed toproblems for Governments as they grappled with a fiscal crisis and the restoration of order in the publicfinances.In evidence at the Hearings the former Taoiseach and Minister for Finance Albert Reynolds TDremarked:

"DIRT, I dont recall anybody saying that DIRT was a problem or that DIRT was a gold mine or that therewas a pot of gold there in DIRT because I can tell you, if whats been said around this chamber recentlywas available then of course wed all run after it. Of course wed try and get more revenue in, as much aswe could."


16. The State of Affairs at the Revenue CommissionersOne of the first actions of the new Irish State on establishment was the creation of an Office of theRevenue Commissioners. This new organisation was intended as a unified tax collection entity, merginginto a single entity the Inland Revenue and Customs and Excise. Until very recently it would howeverappear that the merger of the two services and their organisation as a unified body was never in reality


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implemented. Furthermore, the three Commissioners functioned as equals and even independently ofeach other. The general approach was described by a former Commissioner and Chairman, Mr. P.Curran, and is quoted at length as it is a remarkable portrait of an essential organisation:

Mr. Curran: The work of the office is divided between three Commissioners. I was Commissioner,Revenue Commissioner, from '83 to '87, September '87. During that time I was responsible for the

Customs and Excise part of the office which up to that time operated virtually as an independent separatedepartment. I was not involved in any of the discussions or correspondence leading to the DIRT tax. I wasunaware of any of the factors involved leading up to the provisions in the Finance Act and, when Ibecame chairman, I continued to deal with the customs and excise part of the organisation in addition toassuming the particular additional functions of the chairman arising from his position as AccountingOfficer with responsibility for the Vote and so on, general matters of organisation. The other part of thetaxes organisation reported to the two other Commissioners. Specifically the chief inspector's office didnot report to me.I have to say when I was appointed chairman the DIRT tax had been in operation for ayear or more. Whatever instructions needed to be issued had been issued. As far as I was concerned, thetax was launched and running. It took its place with all the other taxes which were at that time operating. Ididn't...I was not aware that there was any particular major problem that required my intervention inrelation to the DIRT tax. This is...nothing emerged within the office to suggest that to me.Now, of course, the chairman also has to be receptive to influences from outside the office and thereagain there was nothing came to my attention which suggested that there was a very major widespreadproblem which would require my attention.Deputy Foley: Could you explain the high level policy decision-making process within the RevenueCommissioners?

Mr. Curran: If you mean did we have regular board meetings at which we decided things-----

Deputy Foley: I'm coming to that.

Mr. Curran: -----the answer is no. I continued the practice which had been there for years previouslywhich was that the Commissioners ran various sections of the office and there were lots of informal

contacts, of course. But, in relation to the statutory responsibilities of running the various taxes, acommissioner had full authority to act himself in relation to any of these and normally he wouldn't haverequired to get a consensus with his colleagues. We didn't have any - well I'm not saying we didn't haveany, there were occasions when we had meetings. They would largely have had to do with staffingmatters, organisation matters, resources and so forth.

Deputy Foley: During your time as chairman, how often did the board members meet or the RevenueCommissioners?

Mr. Curran: Well, as I said, we seldom had formal board meetings. Once a month, perhaps.

Deputy Foley: Yes.

Mr. Curran: I'm only guessing now.

Deputy Foley: Would you have had a set agenda for these meetings?

Mr. Curran: Not really; it wasn't a formalised procedure. If I found it necessary to convene a meeting, Iwould certainly have told my colleagues that we want to discuss such and such and we'll meet at 11o'clock, whatever. But there wouldn't have been a formal written agenda.


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Deputy Foley: Are minutes taken of such meetings?

Mr. Curran: No.

Deputy Foley: How would you follow up on something you discussed at a meeting at the followingmeeting?

Mr. Curran: If it was something I had to do - oh, at the following meeting. Well, if it was something I hadto do I would take a note of it and make sure to remind myself to do it. If it was something that one of theother Commissioners was involved in, my own notes would lead me to ask, maybe a few weeks later: oh,by the way, what happened about such and such. That's the way it worked.

Deputy Foley: Was there any reason for not taking minutes or keeping minutes, as a matter of interest?

Mr. Curran: No particular reason, we just didn't do it.

Deputy Foley: During your time as chairman, Mr. Curran, what level of knowledge did the RevenueCommissioners have of the situation regarding abuse of non-resident accounts and when did thissituation come to your attention?

Mr. Curran: I'm not sure if I fully understand the question but I think the point is this, that we all knew; youdidn't have to be Revenue Commissioners to know that the whole system as brought in was subject andliable to abuse. That was common knowledge. I think it was even knowledge the Government knew andthe Dil knew; they were doing the best they could in the circumstances. What we didn't know was thatthere was a very large widespread problem. We weren't aware of the scale of it.


The picture painted by Mr. Curran is of more than historical interest. It is relevant to this Inquiry to theextent that it provides a portrait of the organisation responsible for implementing DIRT. This was the

Revenue Commissioners of the mid-eighties and at least up to the early 1990s. Since then some changes have been made. The Sub-Committee has heard that there is now afunctioning Board, in the sense as normally understood. The taking of minutes was introduced in 1993.The Sub-Committee was told that a Management Committee (MAC) is being put in place. The presentChairman understands his position to have primacy. He indicated in oral evidence that this is now clearlythe position under the terms of the Public Services Management Act, 1997.

However during a most critical period in the fight against tax evasion and in the fiscal and economichistory of contemporary Ireland the Office of the Revenue Commissioners on the description of Mr.Curran cannot be said to have been functioning coherently in any real sense. In 1985 the Commission onTaxation 1980 - 1985 in its final Report (October 1985) stated that:

"The administration of taxation in Ireland has virtually broken down. Non-compliance is a major problem.The situation will get worse unless the evident problems are tackled quickly and with determination.Radical measures are needed."

The Sub-Committee finds this statement to be no exaggeration. And from it, is derived a critical point forthis Inquiry. The Revenue should be central to any strategic plan by the State and its Agencies, includingthe capacity to approach the Financial Industry, or any individual Bank, to deal with matters that arisefrom time to time. The Revenue should be capable of taking an active leadership approach in such


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circumstances. On the evidence the Revenue was not capable of leading any such initiative. Despite thechanges in the organisation of the Revenue Commissioners the problem persisted up to 1998.

17. Mr. Moriartys Paper

Mr. Gleeson: And tell me this, what happened to the file?

Mr. MacCarthaigh:The file lay in my room

Mr. Gleeson: But I mean, when you move on to some other appointment, do your files get taken up bysomebody else and do you usually do a note on the file telling the person where the story has got to.What is the custom?

Mr. MacCarthaigh: Not really, not really.

Cross examination by Mr. D Gleeson SC representing AIBof Mr. MacCarthaigh, Senior Inspector of Taxes,

Revenue CommissionersHearings

11 October, Afternoon SessionMr. Moriarty comes to DublinIn 1989 Mr. Sean Moriarty, Inspector of Taxes, working many years in provincial Ireland, was transferredon promotion to Dublin. Mr. Moriarty was destined to move rapidly through the management ranks,eventually to become an Assistant Secretary and Head of Human Resources Division in Revenue. Hisinitial posting in Dublin was to Tax Arrears Project Management and the National Audit Programme. Thisgave him responsibility for Investigation Branch (IB) and Special Inquiry Branch (SIB). His experience inthe provinces left him well qualified for his new posting.

Mr. Moriarty: I worked for fourteen years in provincial Ireland and I had a reasonable opportunity toobserve, at close quarters and, indeed across all my career, a contact base that you tap into to know

what happens in the real world, but I have to say that for all that I had very little hard evidence at the endof it other than the cases which my colleagues have detailed


In the line of command, Mr. Moriarty reported to Mr. C Clayton, Chief Inspector of Taxes, who reporteddirectly to the Commissioners.With the information coming from his colleagues in IB and SIB and with his experience of close quartercontact with the real world of provincial Ireland, Mr. Moriarty began to think, analyse and research and, in1991, to write a paper. He was encouraged in his endeavours by the Chief Inspector. His paper wouldeventually acquire a title Tax Evasion, The Role of Concealed Deposit Accounts and Other Forms of

Investment.

The paper evolved into a detailed examination of the routes to tax evasion evasion of Exchange Controlto transfer wealth out of Ireland and the use in Ireland of bogus non-resident accounts, Single PremiumLife Insurance Policies and investments in Unit Trusts to hide wealth from Revenue and thus evade tax.

Mr. Moriarty also sketched out possible courses of action by Revenue. Unfortunately, for the prospects ofthe Paper, he appended a final section, The proposed Amnesty for funds illegally held abroad.


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Mr. Moriarty:What I did was I tried to carve out a range of measures, which might fly in anenvironment where I took certain things as given. The certain things I took as given were that we wereunlikely to get new powers because that was the environment.


By February 1992 Mr. Moriarty had finalised his paper. He gave his superior, who had encouraged him inhis endeavours, an advance copy.

The Chief Inspector did not like what he read.

Mr. Clayton: It was not a paper that I myself would have written in that particular way.

Hearings11 October 1999, Morning Session

The Chief Inspector did not respond to Mr. Moriarty.Mr. Gleeson:It takes about 20 to 25 minutes to read Mr. Moriartys paper, I think.

Mr. Clayton: It might take 20 to 25 minutes to read it but it would take a great deal longer to study it andto analyse it.

Mr. Gleeson: Absolutely. It would require a lot of brooding and reflection. It was a very substantial andserious piece of work.

Mr. Clayton: Indeed.

Hearings11 October 1999, Morning Session

Mr. Clayton did contact Commissioner Quigley. For the next four months nothing happened. In May 1992the Chairman of the Commissioners, Mr. MacDomhnaill, got to hear about the existence of the Moriartypaper and asked to see it. On 15 May Mr. Moriarty forwarded the paper to the Chairman through Mr.Claytons office. On 25 May 1992 Mr. MacDomhnaill met with Mr. Moriarty in the office of Mr. Clayton, theChief Inspector also attended. Mr. MacDomhnaill rejected the paper.Mr. Moriarty: He was unhappy withthe paper, I have to say. He said there was very little evidence for the conclusions I was drawing andin the light of where we were coming from, I think it is a valid criticism. We were plucking at scraps ofinformation from because of the fact that we couldnt access the banking records. We couldnt do anykind of sample surveys so we were trying what I was trying to build was a framework of perceptions of experienced investigators that wasleading us in a certain direction.


The direction in which Mr. Moriarty was moving was towards considering the usefulness of an amnesty.This was not on the Chairmans menu and it did not receive the imprimatur of the Chief Inspector either.


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Mr. Moriarty: I understand to some extent why the chairman would feel so strongly about any attempt,even marginally to come down in favour of it, but I have to say, the backdrop against which I was workingin terms of what I suspect to be the entire amount of funds, of all kinds of investment products, which wasand was likely to continue to be off limits to Revenue, that it seemed to offer some possibil ity that if wecould go some way towards starting again, it offered some possibility so to that extent I attempted totease out a little bit, both sides of the argument ----


Part of the backdrop was a political climate and part of it was the continuance of SIM 263. Both werelinked.

Mr. Clayton: Now at the time I didnt expect that the proposals would be actually approved because ofthe references in the paper to the possibility of an amnesty and there had been ongoing correspondencewith the Department of Finance which indicated that the Minister didnt want any changes in the positionabout access to non-resident accounts. There had also been the Ministers Budget Statement in lateJanuary where he clearly stated that he proposed to extend the Revenue power to seek informationfrom taxpayers, their agents and third parties, excluding financial institutions. So, the prospects didnt look

good for the basic approach as regards powers.


While Mr. Moriarty was grappling with the intricacies of patterns of wealth accumulation in Ireland, he alsohad an administrative headache. Revenue was undergoing structural change and associated with thiswere industrial relations problems.

Mr. Moriarty: This paper I had been working on, I have to say, right during 1991, and I was interruptedseveral times because of the pressures of re-organising the industrial relations issues aroundorganising the chief inspectors office. It should really have been ready summer to autumn it driftedbecause of a very difficult industrial relations situation at the time.


Apart from the upheavals of reorganisation and associated confusion, morale was also at a low ebb in theinspectorate. The scale of suspected evasion and the apparent inability of the Commissioners and theGovernment to tackle it was damaging to morale. The inspectorate was reduced to trying to get throughto Government via their trade unions and using the ICTU in its negotiations with Government on a newwage deal. In particular, junior Inspectors were outraged by bogus non-resident accounts.

Deputy Rabbitte: to quote the phrase in the representations from Congress (ICTU) "Mr. Maxwell saidthat two of the Revenue Unions were claiming that the non-resident procedure was a joke That would

imply that the more junior ranks of the Revenue had a pretty good feel for it and were prettydisgusted about apparently nothing happening?Mr. Moriarty:Thats fair comment Deputy, I think, but our own ---- The feed through from the more juniorpeople and the people in the field would have been coming through to Investigation Branch. But yes,its fair to say that a lot of junior people had a very good feel for what was happening.



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It was against this backdrop of the fixed views of the Commissioners, internal re-organisation, industrialunrest and low morale that the 1991 negotiations of Mr. MacCarthaigh and AIB took place and the filewas subsequently consigned to the corner of Mr. MacCarthaighs office.

Deputy Doherty: And there was no follow up as we now know in relation to many things that we thoughthad been entered into and agreed with AIB.

Mr. Moriarty: That seems to be correct.

Deputy Doherty: And the certification that was promised by AIB wasnt submitted either and wasntasked for after 1991.

Mr. Moriarty: That appears to be the case.

Deputy Doherty: Would there not be a series of events and a pattern of behaviour and a use of wordsthat, while no deal, no amnesty everybody seemed to be looking the other way Wouldnt that not bea reasonable assumption?

Mr. Moriarty:No, I dont think it would, Deputy. First of all the most important point is, as we keep saying,we had no idea that there was a huge hidden undercurrent of a very significant amount of tax. We wereshooting in the dark.


Dr. Donal de Buitlir, former Assistant Secretary of the Revenue Commissioners and now in the Office ofthe Chief Executive of AIB Group summed up the position in his view.

Dr. de Buitlir: I think that if you look at the behaviours of the parties involved, you look from Mr. MacCarthaigh's proposal to Mr. Moriarty, which we only saw when these proceedings started, that thisrampant problem be tackled without pursuing arrears, the very significant effort communicated to the

Revenue, the substantial increase in our DIRT payment and the fact that the Revenue didn't do anythingabout it, speaks volumes Actions speak much louder than words in this area and I think what theRevenue have to choose between is absolute, utter incompetence and negligence or there was anagreement, de facto that there was an agreement. That's my view.

Hearings12 October 1999,

public accounts committee dirt inquiry report

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