Irish-headquartered drug company Perrigo has lost its High Court action aimed at overturning a €1.64 billion tax assessment.
The judgment of Mr Justice Denis McDonald is expected to be scrutinised by other large companies and tax consultants given its potential implications beyond Perrigo.
The 155-page judgment, delivered on Wednesday, dismissed all grounds of challenge by Perrigo, including its core claim it had a legitimate expectation Revenue would not raise such an assessment.
Perrigo had failed to establish any basis for the court to interfere with the 2018 amended assessment issued in respect of disposal of intellectual property (IP) in the drug Tysabri, the judge concluded.
The question of whether that disposal constituted a trading or capital transaction will have to be resolved in due course before a Tax Appeals Commissioner (TAC), he stressed.
The notice of amended assessment was raised in 2018 following an audit of Perrigo’s corporation tax returns for the periods ending December 2012 and December 2013.
Revenue argued a transaction involving disposal of IP rights in Tysabri, treated in the firm’s tax returns as part of the trade of Perrigo and subject to a 12.5 per cent tax rate, should properly have been treated as a capital transaction, taxable at 33 per cent.
Perrigo disputed the assessment in its judicial review proceedings and has separately appealed it to a TAC, which appeal has yet to be heard.
Elan deal
Perrigo bought Elan in 2013 by way of corporate inversion, involving foreign companies reversing themselves into Irish businesses to secure an Irish domicile and lower corporate tax rate.
Eight months earlier, Elan sold Tysabri to Biogen, its partner in the drug's development. Because Biogen paid for Tysabri with an up-front sum and the promise of future royalties depending on sales, Revenue said it should have been treated as a capital gain.
The judge noted the legitimate expectation claim was based, inter alia, on a Shannon Free Trade Area tax certificate issued to Elan in 2002, backdated to 1997. It expired in 2005 but Perrigo claimed it was represented to it that existing certified activities would continue to be treated as they were during the Shannon regime.
The judge said the certificate appeared to limit the IP rights management to the licensing, sub-licensing, distribution, research and development or similar arrangements or agreements and did not seem to extend to “outright” disposals of IP.
It was clear from a Revenue letter of September 2000 the issue of whether a particular transaction would constitute trading would be “a matter of fact to be determined after the activities have taken place”, he said.
He also disagreed a legitimate expectation could be derived from a 2004 tax briefing document issued by Revenue or from the course of dealings between Elan, its tax advisers and Revenue officials, including a manager within Revenue’s large cases division.
Perrigo, he noted, had not cross-examined several Revenue witnesses about their sworn evidence concerning Revenue’s approach to various tax returns by Elan, or about a 2005 compliance report concerning Elan provided by a manger in the large cases division. The manager’s evidence included he never considered or reviewed Elan’s tax treatment of IP, the judge noted.
Because Perrigo had not cross-examined this evidence, it could not call it into question, he held.
Cumulative effect
On the evidence, he held the cumulative effect of tax returns over the years, combined with assessments raised by Revenue on foot of those, did not mean Elan, now Perrigo, had a legitimate expectation that, having bought and sold IP for many years, Revenue would not raise an assessment treating the disposal of the remaining 50 per cent interest in the Tysabri IP as a capital gain.
Perrigo’s claim that this was the only time Revenue had treated a Shannon certificate or an IFSC certificate holder in this way was not relevant because Perrigo provided no detailed evidence to enable the court to compare and contrast the treatment of such certificate holders, he held.
On the evidence, he was unable to find Revenue must have known that IP disposals formed part of the trade of Elan or that IP was treated as a stock in trade.
Perrigo had not established anything in the dealings between Elan and Revenue over some two decades which could be said to give rise to any representation or legitimate expectation Revenue would not revisit the tax treatment of any individual IP disposal and, in particular, disposal of the Tysabri IP, he held.
Additional claims the Revenue’s audit findings letter amounted to an abuse of power were also dismissed. Taxpayers and the Revenue may examine a tax payer’s historical transactions in the context of determining whether a particular transaction constitutes part of a trade, he said.
Dismissing claims of unfairness and unjust attack on Perrigo’s property rights, he said there are clearly arguments available to Revenue as to why the disposal of the Tysabri IP should not be regarded as a trading transaction and that issue will have to be addressed in due course by the TAC.
