A €1.64 billion tax assessment raised on drug company Perrigo by the Revenue Commissioners involved a "very high level of unfairness" and came as a "surprise", not just to Perrigo but the "entire tax community in Ireland", the High Court has been told.

Irish-headquartered Perrigo is challenging that 2018 assessment in proceedings against the Revenue, which opened via video link on Thursday before Mr Justice Denis McDonald.

Revenue maintains Perrigo owes the €1.64 billion because of its purchase of Irish pharma group Elan in 2013 and the sale by Elan eight months previously of its multiple sclerosis drug Tysabri to Biogen, its partner in the drug's development.

Perrigo bought Elan in 2013 by way of corporate inversion, which involves foreign companies reversing themselves into Irish businesses to secure an Irish domicile and a lower corporate tax rate.

Because Biogen paid for Tysabri with an upfront sum and the promise of future royalties depending on sales, Revenue says it should have been treated as a capital gain, taxable at 33 per cent.

Tradable income

Perrigo treated it as tradable income in its Irish tax return, subject to a 12.5 per cent tax rate, and maintains this is consistent with how Elan reported the purchase and sale of intellectual property (IP) rights to medicines over two decades without challenge by Revenue.

The Revenue treatment of Elan’s returns over years meant Perrigo had a “legitimate expectation” as a taxpayer it should be able to account for the Tysabri sale as trading income, it claims.

Outlining Perrigo’s case, Paul Sreenan SC, for Perrigo, disputed suggestions its challenge to the assessment goes to the heart of the self-assessment system of taxation or could “open the floodgates” to claims against the Revenue.

Perrigo is not seeking favourable treatment, counsel said. Its claim is “wholly exceptional” and “unique” because it was the only case ever involving the Revenue going back on a Shannon free trade area tax certificate (STC) in refusing to accept the 2013 disposal of Tysabri did not qualify for trading treatment and should be treated as chargeable capital gains tax.

This was contrary to Perrigo’s legitimate expectation arising from an STC of 2002, backdated to 1995, and also from guidance, representations and the conduct of Revenue after the STC expired in 2005, including a 2005 finding of tax compliance, he said.

Preferential rate

Under the STC certificate, Elan availed of a preferential 10 per cent tax rate for sale of IP rights to medicines. After the STC expired in 2005, those sales were subject to a 12.5 per cent rate and Revenue gave assurances that existing certified trading activity would continue to be so certified, he said.

Elan had sold IP rights as tradable income for some 16 years before the remaining interest in Tysabri was sold in 2013, and Revenue was not entitled to come along years later and treat that disposal as a capital gain on the express basis the applicant’s trade never included disposal of IP from the very beginning, he said.

It was particularly unfair this “most successful” sale of the “blockbuster” drug Tysabri would be singled out for this treatment, he said.

Perrigo’s expectation was also informed by market practice and conduct, he said.

Revenue was attaching an “extreme” meaning to what it called a “proviso” in the STC and relevant Revenue guidance but, Perrigo maintained, if that applied, the STC and guidance would be deprived of all meaning.

Mr Sreenan said the Revenue Large Cases Division (LCD) was established around 2002 or 2003 to manage the national large taxpayer group who were regarded as “clients”.

Certainty

The LCD acknowledged the need for tax certainty and there was less willingness to countenance “surprise” investigations by Revenue or other inquiries, he said.

Elan was audited in relation to PAYE and income tax returns but there was no audit in relation to the disposal of IP until 2016.

Before that audit, Revenue said the LCD was engaged in “non-judgment processing” of returns and not in “detailed interrogation” of those, he said.

Even if that is true, how can a taxpayer be expected to consider that was the “level of indifference” being displayed by the LCD to one of the largest companies in the country, he asked.

The case continues on Friday and is listed to run for eight days.