One of the country’s best-known business leaders Gary McGann has lost an appeal against the tax treatment of two payments totalling €2.3m which he claimed were a gift from Smurfit Kappa’s shareholders during his time as the group’s chief executive.
The Tax Appeals Commission (TAC) ruled that Mr McGann, the current chairman of Flutter Entertainment - the holding company of betting firms Paddy Power and Betfair - and Swiss-Irish food group Aryzta, was paid the money in 2011 as a result of his employment with Smurfit Kappa.
The TAC said Mr McGann had failed to discharge the burden of proof that Revenue had wrongly assessed the payments as liable for income tax by showing they had arisen from a source other than his role as the group’s chief executive.
TAC commissioner Lorna Gallagher said she was satisfied the payments were for Mr McGann’s "exceptional services" which had added $350m in value for the paper and packaging group’s shareholders.
"It is not possible to separate [Mr McGann’s] individual excellence from his role as CEO in circumstances where the means of demonstrating his excellence was by being CEO, by acting as CEO and by delivering exemplary results as CEO," said Ms Gallagher.
She said it was "fundamentally incorrect" for Mr McGann to argue that Section 112 of the Tax Consolidation Act, which taxes emoluments arising from employment, did not apply to the payment.
"One simply cannot separate the success from the employment and characterise it as a personal quality separate to the employment," Ms Gallagher said.
She added: "Irish jurisprudence, which has tested and measured the scope of Section 112 and its equivalents over the past 100 years, supports no such proposition."
The TAC heard that Mr McGann had paid a sum of €596,350 in September 2011 in capital acquisitions tax but that Revenue subsequently assessed the payments as liable for income tax.
Mr McGann, an accountant by profession, claimed the payment was not subject to income tax as it was made in respect of his personal qualities and was for "gratitude, appreciation, admiration and friendship."
However, Revenue claimed the money was paid in recognition of Mr McGann’s significant contribution to the successful re-flotation of Smurfit Kappa.
In evidence, Mr McGann said he was informed after the group had re-listed on the Dublin and London stock exchanges in 2007 that he would be given two payments totalling €2.3m as a gift which would be paid after the shareholders’ interest in the group was sold.
The payment was calculated at twice Mr McGann’s salary, the TAC heard. Evidence was given that Mr McGann earned an annual average of €4m in salary and other remuneration during the period Smurfit Kappa was a private company. Mr McGann acknowledged that he always felt he was "extremely well paid and well rewarded".
The businessman admitted he was "amazed" that the €2.3m payment was recorded as "compensation of key management personnel" in Smurfit Kappa’s 2007 annual report when he understood it was a gift.
The TAC ruled that the €2.3m was not paid to Mr McGann on grounds of compassion, altruism, ill-health, indigence or other similar reasons. Ms Gallagher noted the payment was not a singular award to Mr McGann, but one of four payments totalling €5.8m made to the entire senior management team at Smurfit Kappa.
"This undermines, considerably, the submission that the payments were made for reasons personal to the appellant," she remarked.
Ms Gallagher said the payment was made in respect of the "very extensive amount of work" undertaken by Mr McGann in the five-year period prior to the listing of Smurfit Kappa on the Dublin and London stock exchanges in 2007.
The TAC heard that he had set up an office during a family holiday to Hawaii in 2005 so he could work on a planned merger.
Mr McGann told the TAC that he had missed many family events due to work including the birth of his first grandchild.
Ms Gallagher said the €2.3m award reflected not just the successful completion of the IPO but also the significant growth of the company between 2002 and 2005 at a time of difficult market conditions.
She said the payment related to Mr McGann’s "extraordinary dedication and effort as opposed to being for that fact that he merely held a position in the company."
Mr McGann was chief executive of Smurfit Kappa from November 2002 to August 2015.
His first senior role was as chief executive of drinks firm Gilbeys, which he took up in 1991 before moving to the same role with Aer Lingus in 1994 and subsequently joining the Smurfit group as chief financial officer in 1998.
He was also a director of Anglo Irish Bank from 2004 until its nationalisation in 2009.
The TAC noted that Anglo provided Mr McGann with a loan facility of €1.38m in June 2008 to purchase €1.2m worth of shares in Smurfit Kappa.