The Revenue Commissioners look likely to miss out on hundreds of millions in VAT payments as a result of a ruling yesterday at the European Court of Justice (ECJ).
The court ruled that financial transactions charged between a company head office and its branches are not liable for VAT. This confirmed a preliminary ruling by the court's Advocate General last September.
While the case involved a London-based bank and a branch of the bank based in Italy, tax experts in Dublin said last night that the ruling would significantly affect Irish firms.
Niall Campbell, VAT partner at accountants KPMG, said the decision was likely to cost the Revenue hundreds of millions of euro in lost revenues.
Greg Lockhart, head of indirect taxes at Matheson Ormsby Prentice, said the ruling was "very welcome news for companies in the insurance and financial services sectors" in Ireland. "What this confirms and is now clear law is that between head offices and branches, there can be no VAT on the supply of services."
The Irish tax authorities have toughened their stance on VAT in recent years and have indicated to a number of companies in the insurance and financial services sector that they were planning to pursue them for VAT where those companies have several Irish branches that avail of VAT exemptions among themselves by way of a "VAT group".
While the ruling does not specifically mention VAT groups, advisers are confident that it will effectively cover them.
The Department of Finance, which has facilitated moves by foreign companies to locate head offices in Ireland under measures introduced by former finance minister Charlie McCreevy, is understood to have been instrumental in persuading Revenue to defer its pursuit of VAT groups pending the outcome of the Court of Justice proceedings.
Mr Campbell last night called on the Revenue to accept the court's decision and step back from efforts to tax companies over VAT groups. "Any such move would be very damaging to Ireland Inc, would cause companies already based here to consider relocating and would deter companies considering Ireland as a base," he said.
Mr Lockhart said that, in the light of yesterday's ruling, any attempt by the Revenue to proceed against firms would inevitably lead to a court challenge.
