Irish Court of Appeal

UNAPPROVED

THE COURT OF APPEAL

Neutral Citation Number: [2025] IECA 75

Court of Appeal Record Number: 2024/130                 

Butler J.

O'Moore J.

Hyland J.

 

BETWEEN/

 

COVIDIEN LIMITED

Respondent/Respondent

 

- AND -

 

THE REVENUE COMMISSIONERS                                          

Appellant/ Appellant

 

JUDGMENT of Ms. Justice Hyland delivered on the 31 day of March 2025

Introduction

1. This appeal arises from a case stated of 28 July 2022 following a Determination of the Tax Appeal Commissioner ("TAC") made on 29 April 2022. In the introduction to the case stated, it is identified that the core issue in the appeal is whether the respondent to this appeal (hereafter "Covidien") was liable to VAT on foot of assessments of VAT made by the appellant (hereafter "Revenue") between 26 August 2015 and 16 March 2017 in respect of the periods from 1 July 2011 to 31 December 2014 inclusive. The total amount of VAT assessed by Revenue in respect of the said periods was €45,936,982.00. Covidien appealed against the said assessments by notices of appeal. The TAC upheld the appeal. At the request of Revenue, a case was stated to the High Court. The High Court (Nolan J.) upheld the conclusion of the TAC ([2024] IEHC 92).  Revenue have appealed against that decision to this court. It should be emphasised that Revenue has already permitted deductibility in respect of some input VAT. However, Covidien claims full deductibility i.e. that the entirety of the input VAT it incurred should be deductible. Revenue argues that partial deductibility is appropriate.

Case Stated

2. The case stated is in the following terms:

"The respondent having requested me to state and sign a case for the opinion of the High Court in accordance with s.949AQ of TCA 1997, in relation to my Determination dated 29 April 2022, the questions of law for the opinion of the High Court are:-

 

(i)                 Was I correct in law in my approach to issues of fact on the one hand and issues of law on the other, and, in particular, in my identification of material findings of fact in my Determination?

(ii)              Was I correct in law in identifying as the relevant issues for determination those contained in paragraph 287 of my Determination?

(iii)            Was I correct in law in the approach taken in paragraphs 289 to 333 inclusive of my Determination to addressing and answering the following questions of law:-

(a)   What is an economic activity for VAT purposes?

(b)   What is an economic activity giving rise to right to deduct for VAT purposes?

(c)   What are the appropriate legal considerations when determining whether (i) ongoing costs comprising input costs of supplied made to the Appellant by THGLP and other foreign and domestic service providers, (ii) costs incurred in relation to Project Jameson, and (iii) costs incurred in relation to the Medtronic Transaction had been used for the purposes of taxable output transactions?

(iv)             Was I correct in law concluding that the Appellant was at all material times wholly engaged in economic activity for VAT purposes?

(v)               Was I correct in law in considering that the receipt of a single composite service from THGLP and the supply of a single composite service by the Appellant was relevant for the purposes of ascertaining the level of input VAT deductible by the Appellant?

(vi)             Was I correct in law in concluding that there was a direct and immediate link between the entirety of the input costs suffered by the Appellant on the supply of services it received from the THGLP under the THGLP Agreement and the supply of taxable management services by the Appellant under the Service Agreement to the four Service Recipients and, through them, to the other 84 legal entities connected to the Service Recipients?

(vii)           Was I correct in law in concluding that the Appellant was entitled to deduct VAT inputs it incurred in respect of services it received in relation to Project Jameson?

(viii)         Was I correct in law in concluding that the Appellant was entitled to deduct VAT inputs it incurred in respect of services it received in relation to the Medtronic transaction?"

3. The Determination giving rise to the case stated followed a nine day hearing before the TAC, in the course of which he heard evidence from four witnesses on behalf of Covidien: Mr. Oldaker, of Medtronic PLC; Ms. Ciampi of Medtronic PLC; Mr. Brodie, a tax partner with PWC; and Mr. Ranalow, a partner with Arthor Cox Solicitors LLP. Following that oral evidence and on the basis of the documents before him, the TAC made certain material findings of fact set out later in this judgment. At para. 31 of his Determination, he identified that five issues were required to be determined in order to decide the appeal. He arrived at certain conclusions in respect of each of those issues. Again, these are set out below and discussed in their appropriate context.

Factual background

4. From June 2009 until January 2015 Covidien Ltd. (formerly Covidien PLC) was the Irish incorporated and resident holding company of the Covidien Group (the "Group"). The Covidien Group was at all material times a global healthcare products group and manufacturer of medical devices and supplies. During the periods under appeal, it operated in three market segments, namely medical devices, medical supplies and pharmaceuticals.

5. Covidien's shares were listed on the New York Stock Exchange and it was registered with the SEC. Covidien held 100% of the share capital of Covidien Group Holdings Ltd and 100% of the share capital of USSC Medical GMBH. From June 2013 until end March 2016, Covidien held 100% of the share capital of Covidien Belgium BVBA. From July 2012 until April 2014 Covidien had beneficial ownership of 100%held of the share capital of Covidien JJE Public Ltd. Covidien has no other direct subsidiaries. Covidien's offices were situated in Dublin in respect of the period July 2011 to December 2014.

6. The board of Covidien consisted of one executive director and various independent non-executive directors. Covidien had approximately 5 employees who supported the board of directors. The vast majority of the other services, which Covidien required to manage its shareholding in Covidien Group Holdings Ltd., and the group beneath it, were supplied by a related entity, Covidien LLP, formerly known as Tyco Healthcare Group LP (THGLP or Tyco, hereafter referred to as "Tyco"). Tyco is located in the U.S.A. and since 2007 has been responsible for Covidien's US operations and also functioned as a shared services centre for the Covidien Group.

7. There were two written agreements in place for the provision of services by Tyco to Covidien. The first agreement was between Tyco as supplier and Covidien as recipient pursuant to which Tyco agreed to provide certain services specified in that agreement to Covidien (the "Services agreement"). The second agreement was between Covidien, as supplier and four indirect subsidiaries (the "Management Services agreement"), being Nellcor Puritan Bennett Ireland, Mallinckrodt Medical Imaging Ireland, Mallinckrodt Medical BV and Covidien AG (the four service recipients or "FSR's"), which between them own all of the intellectual property rights for the non-US parts of the Covidien Group (Tyco owning the US rights)).

8. Pursuant to the Management Services agreement between Covidien and the four FSRs, Covidien supplied the FSRs with a composite supply of services set out in Article 3 of the agreement, including corporate executive, business development, human resources, internal audit, finance, tax, legal, treasury, operations and any other activities respecting any other matter relating to Covidien's business. Article 3 also provided that the services shall include only those activities that provide a benefit to the service recipient i.e. provide an increment of economic or commercial value that enhances the service recipient's commercial position or is reasonably anticipated to do so. The fee is set out at Article 4 and it states that the service recipients shall collectively pay to Covidien a service fee equal in amount to Covidien's total services costs incurred in connection with providing the services to the service recipients, defined as "total services costs", plus a markup of 10%. Under Article 4.1(c), total services costs shall be equal to the sum of direct costs and indirect costs.

9. It is further provided that costs incurred by Covidien in connection with activities that provide no benefit to service recipients shall not be considered in the calculation of total services costs for the purposes of computing the fee under the agreement. There is a distinction drawn between direct costs i.e. those identified directly with particular activities, and indirect costs, which include costs with respect to utilities, occupancy, supervisory and clerical and other overhead burdens of the departments, and other overhead costs.

10. It is recorded in the Determination that it was common ground between the parties that the consideration which Covidien received from the service recipients was less than the consideration which Covidien paid for the supply it received from Tyco (para. 142). Submissions were made at the hearing by counsel for Revenue that Revenue had allowed a 40% deductibility on the input tax imposed on Tyco's services but refused the 100% deductibility contended for by Covidien. No issue was taken with that summary of the facts by counsel for Covidien. It appears from supplemental submissions made by Revenue during the course of the hearing before the TAC that Covidien incurred input VAT on management services pursuant to the Services agreement. The VAT exclusive fee for the services was approximately $76 million.  Covidien provided management service to the FSRs pursuant to the Management Services agreement in respect of which a fee of approximately $29 million was charged. At paragraph 142 of the Determination the TAC recites the following submission from Covidien: "It is common ground between the parties that the consideration which the Appellant received from the Service Recipients was less than the consideration which the Appellant paid for the supply it received from Tyco. In fact, the assessments which the Respondents have raised relate exclusively to this difference".

11. As found by the TAC in his Determination, during the periods under appeal, Covidien carried out the following two main activities. First, as the parent to the Covidien group, it directly and indirectly held shares in all of the subsidiaries in the Covidien group, comprising approximately 300 subsidiaries, the majority of which were owned directly or indirectly by Covidien Group Holdings Limited. Second, Covidien provided management services under the services agreement referred to above.

12. Covidien's corporate group was restructured by way of a spinoff of the Group's nuclear medicine business and pharmaceutical business globally into a separate part of the corporate group. The separate corporate group created by the restructuring was a newly formed PLC named Mallinckrodt PLC established for that purpose. The reconstruction and subsequent demerger was referred to as Project Jameson. In its submissions to the TAC, recorded in the Determination, Covidien identified that it received services from Tyco in relation to Project Jameson relating to preparation and implementation of the step plan, preparation for IRS rulings, the provision of accounting, tax and legal advice, corporate portfolio restructuring, human resources and business strategy (see paragraph 151 of the Determination). Covidien's primary position was that it was not required to self-account for VAT on the services it received from Tyco because these transactions did not involve Covidien in economic activity or the supply of services for consideration (see paragraph 160-168 of the Determination). If, however, it was required to self-account, it argued that the VAT so incurred was deductible as a general overhead.

13. On 26 January 2015 Covidien was acquired by Medtronic PLC, the said acquisition being effected by means of a cancellation scheme of arrangement under Irish law. Again, Covidien argued as its primary position that it was not obliged to self-account for VAT on the services received from Tyco in this respect but if it was wrong, then recoverability (or deduction) of these costs were to be determined by reference to Covidien's overhead deduction entitlement (paragraph 181 of the Determination).

Legislative Regime

14. The core question raised by this appeal is whether Covidien was entitled to deduct the entirety of the input VAT it had paid in the relevant period or just part of it, as contended by Revenue. To understand this issue, it is helpful to start with the provisions of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (hereafter the "Principal VAT Directive" or "PVD") on deductibility. Those rules have been implemented by the Value Added Tax Consolidation Act 2010 ("VATCA 2010") but since Ireland has faithfully reproduced the Directive, I do not need to refer separately to the Irish legislation and will refer exclusively to the Directive for the remainder of this judgment.

15. Article 168 of the PVD is (in relevant part) in the following terms: -

"In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:

(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;".

16. Almost every word of this definition is of significance. The goods and services referred to in the first line are the same goods and services as referred to in the second line of sub-para. (a) i.e. the services supplied to Covidien by Tyco. These will be referred to as input services and the VAT payable on those services as input VAT. Covidien, as a taxable person, is entitled to deduct from the output VAT it is liable to pay on the services it supplies i.e. to the four FSRs, that input VAT, provided that the input services are "used for" the purposes of the taxed transactions of a taxable person (emphasis added) i.e. the output services.

17. In Marle C-320/17, EU:C:2018:537, the CJEU observed that to have a right of deduction under Article 168(a), it is necessary inter alia that the goods or services relied upon to confer an entitlement to that right i.e. the input services, be used by the taxable person for the purposes of his own taxed output transactions. Transactions for which Covidien did not charge i.e. the provision of services to direct and indirect subsidiaries where no consideration was charged, and therefore no VAT imposed, are not taxed transactions within the meaning of Article 168.

18. The case law has considered in some detail the words "used for" in Article 168. The services must be used for the purpose of that taxed transaction and not for some other purpose, although that does not mean that the input tax and the output tax must be equal in value. Services may be considered to be "used for" the purpose of a transaction in two different ways. The goods/services upon which input costs are charged may have a "direct and immediate link to the taxed output transactions". This will be referred to as deduction on the first basis. A simple example of this would be where a car factory buys tyres and pays input VAT on the cost of same. The tyres are used on the cars that the factory makes. The factory is obliged to charge output VAT on the price of the cars it sells. It is entitled to deduct the input VAT it has paid against the output VAT it is required to pay on car sales.

19. Alternatively, where the costs of the goods/services are part of the taxable person's general overhead costs and as such are components of the price of the goods/ services that the taxable person supplies, the person is entitled to deduct its output VAT from the input VAT paid. Using the same example, the factory would be entitled to deduct the input VAT it has paid on the cost of heating the factory floor against its output VAT payable on car sales. This will be referred to as the second basis of VAT deduction.

20. Article 173 of the PVD addresses the situation where goods and services are used by a taxable person both for transactions where VAT is deductible and for those where it is not. It provides as follows:

"(1) In the case of goods or services used by a taxable person both for transactions in respect of which VAT is deductible pursuant to Articles 168, 169 and 170, and for transactions in respect of which VAT is not deductible, only such proportion of the VAT as is attributable to the former transactions shall be deductible."

21. Article 167 makes it clear that a right of deduction shall arise at the time the deductible tax becomes chargeable.

22. Article 2 and Article 9 are important in defining taxable persons and taxed transactions. Article 2 identifies what transactions shall be subject to VAT i.e. the transactions upon which a person is obliged to charge VAT. The relevant part of Article 2 is as follows: -

"1. The following transactions shall be subject to VAT:

(c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such."

23. The critical words here are "for consideration". In the instant case, it is agreed between the parties that Covidien supplied services to the FSR for consideration and also supplied services to companies in the Group without charging or receiving consideration for same. (It also appears to have received certain services from Tyco that it used directly itself). Under Article 2, the obligation to make a transaction subject to VAT is only imposed on a taxable person where services have been supplied for consideration. That means Covidien did not charge VAT where it provided Tyco's services to companies within the Group without consideration and therefore no output VAT was charged on those transactions. On the other hand, where it charged for the services under the Management Service agreement with the FSRs, it was obliged to charge output VAT on those services under Article 2.

24. Article 9 deals with the definition of a taxable person as follows: -

" 'Taxable person' shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.

Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as 'economic activity'. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity". 

25. The reference to "economic activity" is of considerable importance in the context of this appeal, given the emphasis placed upon it by Covidien. In summary, at various points in this Determination, the TAC has treated economic activity as a basis for deductibility. Covidien has argued, inter alia, that because it was economically active it is entitled to full deductibility. That argument fails to reflect the entirety of the deduction system. It is true that the CJEU has held that where the sole purpose of a holding company is to acquire holdings and undertakings, without involving itself directly or indirectly in the management of these undertakings, without prejudice to its rights as a shareholder, it does not have the status of a taxable person and has no right to deduct tax under the regime established by the Sixth Directive.

26. That is because, inter alia, the mere acquisition of financial holdings in other companies does not constitute an economic activity within the meaning of the Sixth Directive (para. 17). On the other hand, where the holding is accompanied by direct or indirect involvement in the management of the subsidiaries, that is regarded as an economic activity within the meaning of Article 4(2) of the Sixth Directive in so far as it entails carrying out transactions which are subject to VAT by virtue of Article 2 of that Directive. But merely being a company engaged in an economic activity does not mean there is a right to deductibility: the conditions of Article 168 must still be met. No economic activity means a company seeking to deduct input VAT falls at the first hurdle: but economic activity is only one step of a number that must be satisfied to be permitted to deduct.

Relevant case law of the CJEU

27. In the light of Revenue's argument that the TAC misapplied the law, and that the High Court repeated those errors, it is necessary to set out some relevant case law of the CJEU interpreting the provisions of the PVD before considering the terms of the Determination and High Court judgment.

Principle of VAT neutrality         

28. The philosophy behind the deduction system is set out at para. 27 of Cibo, C-16/00,  EU:C:2001:495 as follows: -

"The deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT consequently ensures complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT."

29. Covidien relies upon the principle of neutrality to support an entitlement to full deductibility. Yet the case of Związek, C-566/17, EU:C:2019:390 recognises that to permit deductibility where it is contrary to established principles in fact runs contrary to the principle of neutrality. Having referred to the principle of neutrality, it pointed out: "In other words the deduction of input taxes is linked to the collection of output taxes. Where goods or services acquired by a taxable person are used for the purposes of transactions that are exempt or do not fall within the scope of VAT, no output tax can be collected and no input tax deducted. However, where goods or services are used for the purposes of taxed output transactions, deduction of the input tax charged in respect of those goods or services is required in order to avoid double taxation". It adds that to permit a taxable person carrying out both economic and non-economic activities to deduct the input VAT paid in respect of mixed expenditure in full would give it an advantage contrary to the principle of fiscal neutrality, which was intended to reflect the general principle of equal treatment in matters relating to VAT (paragraph 36). To permit Covidien to impermissibly deduct input tax would undermine the principle of fiscal neutrality.

Article 2 - services for consideration

30. The decision of Wakefield College v Revenue and Customs Commissioners [2018] EWCA CIV 952 is of assistance in considering the meaning of a supply of services for consideration for the purposes of Article 2 of the PVD. David Richards L.J., giving the decision of the Court of Appeal, observed as follows: -

"52. Whether there is a supply of goods or services for consideration for the purposes of article 2 and whether that supply constitutes economic activity within article 9 are separate questions. A supply for consideration is a necessary but not sufficient condition for an economic activity. It is therefore logically the first question to address. It requires a legal relationship between the supplier and the recipient, pursuant to which there is reciprocal performance whereby the goods or services are supplied in return for the consideration provided by the recipient. ... There is no need for the consideration to be equal in value to the goods or services. It is simply the price at which the goods or services are supplied."

31. At para. 54, he observes as follows: -

"Having concluded that the supply is made for consideration within the meaning of article 2, the court must address whether the supply constitutes an economic activity for the purposes of the definition of "taxable person" in article 9. The issue is whether the supply is made for the purposes of obtaining income therefrom on a continuing basis. For convenience, the CJEU has used the shorthand of asking whether the supply is made 'for remuneration'. The important point is that 'remuneration' here is not the same as 'consideration' in the article 2 sense, and in my view it is helpful to keep the two terms separate, using 'consideration' in the context of article 2 and "remuneration" in the context of article 9."

32. He goes onto say that whether Article 9 is satisfied requires a wide-ranging, not a narrow enquiry and all the objective circumstances in which the goods or services are supplied must be examined.

33. In Tolsma, C-16/93, EU:C:1994:80 the CJEU considered Article 2 of the Directive on the harmonization of the laws of the Member States relating to turnover taxes (77/388/EEC) of 17 May 1977 (the "Sixth Directive") and in that context held that "taxable transactions" within the framework of the VAT system presupposed the existence of a transaction between the parties in which a price or consideration is stipulated. At para. 14 it concluded that a supply of services was effected "for consideration" within the meaning of Article 2(1) of the Sixth Directive and hence is taxable "only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient". The court sensibly concluded that those conditions were not fulfilled where a musician simply receives donations from passersby as these could not be regarded as the consideration for a service supplied to them.

34. In Gmina O., C-612/21, EU:C:2023:279, the court observed at para. 32 that the referring court is obliged to determine whether identified transactions are carried out in the course of an economic activity, and according to the case law an activity may be regarded as an "economic activity", within the meaning of Article 9(1) of that Directive  "only where that activity corresponds to one of the chargeable events defined in Article 2(1) of that directive", citing Administration de L'Enregistrement, C‑846/19, EU:C:2021:277. Again, one sees the CJEU drawing an explicit link between economic activity and Article 2(1).

 

"Used for"

35. There are a considerable number of cases where the phrase "used for the purposes of the taxed transactions of a taxable person" in Article 168 has been considered. In BLP, C-4/94, EU:C:1995:107, the CJEU commented on wording that now appears in Article 173 of the PVD, observing that "the use in that provision of the words 'for transactions' shows that to give the right to deduct under paragraph 2, the goods or services in question must have a direct and immediate link with the taxable transactions, and that the ultimate aim pursued by the taxable person is irrelevant in this respect."

36. In CCE v Southern Primary Housing Ltd [2003] EWCA CIV 1662 (Southern Primary), the question for the purposes of attribution was whether the land purchased by the taxpayer was used by it for the purposes of a taxable transaction (a housing development contract). Jacobs L.J. held that while the exempt transaction was necessary to make performance of the development contract commercially possible, the lower tribunal had failed properly to apply the attribution exercise required under the "used for" test in concluding that there was a direct and immediate link between the land purchase and both the land sale and development contract. This was because Jacobs L.J. held that the law does not work in such a generalised way, observing at para. 37 as follows:

"You have to look at transactions individually, component transaction by component transaction. They may be linked in the sense that one would not have happened without the other, but they remain distinct transactions nonetheless".

37. In the case of Finanzamt, C-98/21, EU:C:2022:645, the correct approach was identified succinctly as follows at para. 47: "In either case, it is necessary that the cost of the input goods or services be incorporated either in the cost of particular output transactions or in the cost of goods or services supplied by the taxable person as part of his or her economic activities". At para. 52, the court observed that, where the relevant input services regarding which VAT deductibility is claimed are not used to permit the offering of taxable output supplies, it follows that "the expenditure incurred ... to obtain those input services cannot be regarded as being part of components of the price of its taxed output services giving rise to a right to deduct".  

Activities of holding companies

38. The CJEU has been asked in a number of cases to consider whether holding shares in other companies, and associated activities, constitute economic activity. In Polysar, C-60/90, EU:C:1991:268, the CJEU established that where the sole purpose of the holding company is to acquire holdings and undertakings, without involving itself directly or indirectly in the management of these undertakings, without prejudice to its rights as a shareholder, it does not have the status of a taxable person and has no right to deduct tax under the regime established by the Sixth Directive. That conclusion is based, inter alia, on the fact that the mere acquisition of financial holdings in other companies does not constitute an economic activity within the meaning of the Sixth Directive (para. 17).

39. The CJEU reiterated that principle in Floridienne SA, C-142/99, EU:C:2000:623 but qualified it as follows:

"However, the Court has held that it is otherwise where the holding is accompanied by direct or indirect involvement in the management of the companies in which the holding has been acquired, without prejudice to the rights held by the holding company as shareholder" (para.18).  

40. At para. 19, the CJEU observed that involvement of that kind in the management of subsidiaries must be regarded as an economic activity within the meaning of Article 4(2) of the Sixth Directive in so far as it entails carrying out transactions which are subject to VAT by virtue of Article 2 of that Directive, such as the supply by Floridienne of administrative, accounting and information technology services to its subsidiaries. Thus, a holding company engaged in economic activities is in principle entitled to deduct VAT. However, it is only so entitled if it meets the conditions under Article 168. In Floridienne, the specific question was whether receipt of dividends paid by those subsidiaries to the holding company fell within the scope of VAT. The Court held that the receipt of dividends is not the consideration for any economic activity and thus does not fall within the scope of VAT.

41. In the case of Cibo, the CJEU was faced with a question whether and to what extent a holding company may deduct VAT charged on services purchased in the context of the acquisition of shareholdings in its subsidiaries. At para. 21 the court observed: -

"That direct or indirect involvement in the management of subsidiaries must be regarded as an economic activity with the meaning of Article 4(2) of the Sixth Directive where it entails carrying out transactions which are subject to VAT by virtue of Article 2 of that directive, such as the supply by a holding company such as Cibo of administrative, financial, commercial and technical services to its subsidiaries."

42. Importantly, one can see from para. 10 of the judgment that Cibo provided services to its subsidiaries, against payment, including staff, administrative, financial, commercial and technical management, and that the subsidiaries were invoiced for those services on a flat-rate basis of 0.5% of their turnover. Contrary to what is asserted by Covidien, this case is not authority for the proposition that all that is required to permit deductibility is a finding of economic activity: rather one can see from the analysis that the usual consideration of input costs against output costs was required.

43. In respect of the specific question as to whether a holding company may deduct VAT charged on expenditure incurred in respect of various services obtained in connection with the acquisition of a shareholding in a subsidiary, the CJEU noted that the expenditure in question did not form part of the costs of the output transactions which used the services as there was no direct and immediate link between the various services purchased by the holding company and the output transactions. On the other hand, it held that the costs of those services were part of the taxable person's general costs, and as such were cost components of an undertaking's products and that such services did have a direct and immediate link with a taxable person's business as a whole. Accordingly, it held that the expenditure incurred by a holding company in respect of services bought for the acquisition of a shareholding forms part of its general costs i.e. overhead costs, and therefore had a direct and immediate link with its business as a whole.

44. In Kretztechnik AG, C-465/03, EU:C:2005:320, a case relied upon by the TAC in relation to his findings on Medtronic, the CJEU emphasised at para. 33 that the right of deduction is an integral part of the VAT scheme. Where a share issue was carried out by a company in order to increase its capital for the benefit of its economic activity in general, the CJEU held that the costs of the supplies acquired by that company in connection with the operation formed part of its overheads and were therefore component parts of the price of its products. Accordingly, those supplies had a direct and immediate link with the whole economic activity of the taxable person, and therefore the company was intitled to deduct the VAT paid by it in obtaining those supplies.

45. Covidien relied on the decision in Sveda, C-126/14, EU:C:2015:712, where at para. 21 the court held as follows:

"Whether a taxable person acts as such for the purposes of an economic activity is a question of fact which must be assessed in the light of all the circumstances of the case, including the nature of the asset concerned and the period between the acquisition of the asset and its use for the purposes of the taxable person's economic activity... it is for the referring court to make that assessment."

46. At para. 27, the court refers to deductions on the first basis and at paragraph 28 to deductions on the second basis. The case does not support Covidien's argument that deduction only requires the question of economic activity to be considered. 

47. Covidien argued before the TAC that the entirety of the input costs incurred by it in paying Tyco were deductible on the second basis, i.e. they were overhead costs that were components of its taxable transactions i.e. the services supplied to the FSR companies. But as described below, the TAC permitted deductibility of the entire of the Tyco costs exclusively on the first basis.

48. Both parties relied upon Joined Cases Minerva and Larentia, C-108/14 and C-109/14, EU:C:2015:496, which establish that for a holding company to be engaged in economic activity for VAT purposes, it must make taxable supplies for remuneration. In fact, as the analysis of Articles 2, 9 and 168 above shows, in order for any company to be engaged in economic activity for VAT purposes it must make taxable supplies for remuneration. The principle is not limited to a holding company. Nonetheless, it is of assistance to consider cases where the company at issue was a holding company, and therefore in certain respects similar to Covidien.

49.  At para. 28. the court held that the holding companies are subject to VAT in respect of the economic activity consisting of the supplies which they provide for remuneration to their subsidiaries. Therefore, the VAT paid on the costs of acquiring those services should be fully deducted unless the output economic transactions are exempt from VAT. At para. 29 the court observed: -

"It is therefore only in the event that the referring court finds that the shareholdings resulting from the capital transactions carried out by the holding companies at issue in the main proceedings were attributed in part to other subsidiaries in the management of which those holding companies were not involved that, as is envisaged in the referring court's first question, the VAT paid on the costs of those operations could be deducted only in part. In that case, the mere holding of their shares in those subsidiaries could not be considered to be an economic activity of those holding companies and it would be necessary therefore to apportion the input VAT between that which relates to economic activities and that which relates to the non-economic activities of those holding companies."  

50. The case of MVM, C-28/16, EU:C:2017:7, is arguably one of the most relevant cases to the instant situation. The taxpayer was a Hungarian state-owned energy company that leased power plants and fibre optic networks and was the holding company of a group of companies that generated and sold electricity during the relevant years. It was responsible for the strategic management of the group. It procured legal, business, management and public relation services for the benefit of itself and for the entire group and for each of the members of the group. MVM deducted the input VAT paid on these services against the output VAT it, MVM, charged in respect of services supplied by it. However, even when those services were in the interest of the entire group, or related directly to the taxed activities of the other members of the group, MVM did not (save for a few exceptions) charge its subsidiaries for those services. Nor did it impose a general charge on the group for its strategic management. MVM brought an action against a decision by the revenue authorities to refuse MVM the right to deduct VAT relating to certain services on the basis that where the services had been carried out in the interest of other members of the group or related to the acquisition of shareholdings, MVM was the ultimate beneficiary of those services. MVM claimed the fact that it did not charge its subsidiaries did not affect its right to deduct VAT.

51. At para. 33 the court referred to the Larentia/Minerva cases discussed above, noting that the involvement of a holding company in the management of companies in which it has acquired a shareholding constitutes an economic activity within the meaning of Article 9(1) of the PVD where it entails carrying out transactions which are subject to VAT by virtue of Article 2. However, it pointed out that the mere involvement of a holding company in the management of its subsidiaries, without carrying out transactions subject to VAT under Article 2 of the PVD, cannot be regarded as an economic activity within the meaning of Article 9(1) of the PVD. Therefore such management did not come within the scope of the PVD. It emphasised that it was apparent from the order for reference that during the period at issue in the main proceedings, MVM normally received no remuneration from its subsidiaries in exchange for its centralised management of the activities of the group and that therefore the involvement of MVM in the management of its subsidiaries could not be regarded as an "economic activity", within the meaning of Article 9(1), so as to come within the scope of the PVD, citing Securenta, C-437/06, EU:C:2008:166 in support of this principle.

52. It followed that MVM did not have the right to deduct the VAT paid for the services to the extent to which those services related to transactions falling outside the scope of the PVD. At para. 36, it observed that the court has previously held that, to the extent to which input VAT relating to expenditure incurred by a taxpayer is connected with activities which, in view of their non-economic nature, do not come within the scope of the PVD, it cannot give rise to a right to deduct.

53. At para. 40, the CJEU acknowledged that MVM is engaged in a taxable economic activity, namely the leasing of power plants and fibre optic networks but also noted that it was difficult to imagine that the services at issue, namely services procured in the interest of other members of the group and business-management services relating mainly to the acquisition of shareholdings, could have a direct and immediate link with that leasing activity, considered overall, although it noted that this was a matter for the referring court to determine. At para. 43, it noted that MVM claimed that the services at issue served the interests of the group and that, since its subsidiaries engaged in activities conferring a right to deduct, those services have a link to the economic activities of the entire group. This is very similar to the argument made by Covidien in the instant case.

54. The court observed that the VAT relating to the services at issue could not be deducted as a result of the choice made by MVM not to charge the members of the group for its management services, and observed that traders were free to choose the form of transactions which they consider to be most appropriate for their activities and that the principle of fiscal neutrality does not mean that a taxable person with a choice between two transactions may choose one of them and avail himself of the effects of the other, citing in this respect Cantor Fitzgerald International, C-108/99, EU:C:2001:526 (see paras. 44 - 45).

55. The role of remuneration is stressed in Marle. At para. 23, the court notes that within the framework of the VAT system, taxable transactions presuppose the existence of a transaction between the parties in which a price or consideration is stipulated and that a supply of services is effected "for consideration" within the meaning of Article 2 only if there is a direct link between the service provided and the consideration received. At para. 26, the court notes that Article 168(a) requires a number of conditions to be met in order to have a right of deduction, including that the goods or services relied on to confer entitlement to that right be used by the taxable person for the purposes of his own taxed output transactions.

56. In Finanzamt, following Marle, the CJEU held that for remunerated services subject to VAT, a mixed holding company is a taxable person, albeit entitled to only a pro rata deduction of input tax. Where the sole purpose of a company is to acquire shares in other companies, it is described as a holding company and does not have the status of a taxable person within the meaning of Article 9 nor the right to deduct VAT. However, in some holding companies, the company has direct or indirect involvement in the management of the companies in which the holding has been acquired. These are known as mixed holding companies. Such companies may have a right of deduction in respect of VAT paid in the context of direct or indirect involvement in the management of other companies, provided the other conditions of the PVD are observed. As noted above, Article 173 of the PVD permits partial deductibility in such a case.

57. Some emphasis was placed on the case of Volkswagen, Case C-153/17 by counsel for Covidien. However, that case is focused largely on the method adopted by the Member State in question (the United Kingdom) for deciding on the deductible proportion under Article 173(1) of the PVD. That is not an issue that arises in this appeal since no across the board method has been adopted in this respect by Ireland. To the extent that the judgment discusses the principles at issue in this case, it repeats the well-established case law on "used for" i.e. that there is right to deduct both for direct and immediate link deductibility and for overheads deductibility (see paragraph 42 of the judgment).

58. Shortly before the appeal hearing in December 2024, judgment was given in Linz, C-475/23, EU:C:2024:866, showing that the CJEU is maintaining its consistent approach to deductions identified in the case law described above. At para. 20, the CJEU recalls yet again that the right to deduct VAT on the acquisition of input goods or services presupposes that the expenditure incurred in acquiring them is a component of the price of the output transactions giving rise to the right to deduct. In relation to the overhead test, at para. 22, the court observes that tax authorities must take account only of the transactions that are objectively linked to the taxable person's taxable activity, with the link being assessed in the light of the objective content of the transaction in question.

59. That test is applied to the facts where, at para. 29, the CJEU observes that the right of deduction must be recognised only for the input VAT levied on the part of the costs incurred for the acquisition of the crane which was objectively necessary to allow Linz to carry out its taxed transactions or its economic activity. Read in isolation, that sentence might suggest there is no requirement to set input VAT against an output transaction. But when one reads the case as a whole, and considers it in the light of the case law of the CJEU, it cannot be interpreted as justifying a departure from the well-established principles of deductibility in accordance with Article 168.

Notice of Appeal                        

60. Ground one of Revenue's notice of appeal argued that the TAC was incorrect in his affirmative conclusions to each of the five questions asked of the High Court in the case stated. Ground two alleged that the trial judge failed to consider whether the facts as found were sufficient in law for the purposes of entitling Covidien to make the claimed deductions, and failed to correctly distinguish between issues of pure fact and mixed issues of fact and law. Ground three asserted that the trial judge erred in law in understanding and applying the definition of economic activity for VAT purposes. Ground four asserted that he erred in replicating the TAC's findings concerning the significance of input supplies from Tyco for the right of Covidien to deduct VAT on those input supplies. Ground five asserted that the trial judge erred in upholding the TAC's conclusion that Covidien used its input supplies entirely for the purposes of taxable output supplies giving rise to a right to deduct. Grounds six and seven challenged the trial judge's findings on Project Jameson and Medtronic.

Arguments of the parties

61. Because the issues raised by the decision of the TAC and that of the trial judge are essentially the same, the submissions made by the parties on both decisions will be summarised together.

62. Revenue asserted that the TAC's categorisation of Covidien's activities as wholly economic, and therefore taxable, was incorrect. Revenue argued that it was only supplies made for consideration and subject to VAT which constitute taxable supplies giving rise to a right to deduct for VAT in EU law under the PVD. As such, there was no legal basis for concluding that the entirety of Covidien's activities comprised supplies made for consideration, particularly given that while Covidien was the holding company of a large group of companies, themselves holding companies, dormant, or non-active companies, and given that Covidien administered, managed, or controlled these companies, as well as each of its subsidiaries in which it held shareholdings in the relevant period. Revenue pointed out that none of this was supplied in exchange for consideration. As a matter of EU law, Revenue argued, this activity was non-economic for VAT purposes under the PVD.

63. In their legal submissions, at para. 52, Revenue argued that one of the "core errors of law" made by the trial judge was that he failed to meaningfully engage with what comprised taxable economic activity for VAT purposes, and that he erred in identifying what were Covidien's taxed output transactions, given that Covidien's activities of holding shares in its subsidiaries and its strategic management of its group involved no taxable supplies. It asserted that the trial judge failed to appreciate the extent to which the purported findings of fact involved issues of law, and that he approached the questions raised in the case stated as being primarily concerned with findings of fact or inferences drawn therefrom, rather than with the application of legal principles to the primary findings of fact. Consequently, it is said, he failed to adequately address the issues of law arising.

64. Revenue argued that the trial judge failed to engage meaningfully with what comprised Covidien's taxed output transactions other than its supplies of taxable services to the FSRs, given its activities of holding shares in its two/ three/ four subsidiaries to which it made no taxable supplies, and its strategic management of the group. Revenue referred in this context to its planning and initiation and oversight/execution role regarding Project Jameson and the Medtronic transaction.

65. Further, Revenue argued that the trial judge failed to engage with the "used for" test under Article 168 of the PVD. Instead, he adopted the TAC's erroneous conclusion that Covidien's activity was wholly economic, and entitled to full VAT deductibility. It was argued that the TAC - and the trial judge - ignored the fact that there was no charge for the strategic management function activity performed by Covidien for the overall group. It was argued that the High Court erred in failing to appreciate that the TAC had failed to apply the correct legal test in concluding that Covidien was exclusively involved in economic activity for VAT purposes.

66. In respect of Project Jameson, it is argued that the trial judge failed to engage with the fact that it involved no taxable output supplies made by Covidien, being a business activity but a non-economic activity for VAT purposes. The discrete costs incurred by Covidien in respect of Project Jameson were used exclusively for that project. The trial judge, it is said, proceeded on the erroneous assumption (shared by the TAC) that all input costs from the services supplied by Tyco were used by Covidien exclusively for the purpose of its economic activity.

67. Separately, Revenue argues that the trial judge made an impermissible de novo finding at para. 99 where he held that the Project Jameson input costs formed part of Covidien's general costs and were, as such, components of the price of the goods or services which it supplied. Accordingly, Covidien's restructuring influenced "the price of the goods and services which [Covidien] supplied".

68. Revenue points out that no such finding was made by the TAC which did not consider the overheads deductibility test of the "used for" test under Article 168 of the PVD. Revenue added that Covidien did not in fact supply goods and the finding is additionally flawed in that respect.

69. In relation to Medtronic, it was argued that the trial judge erred in law in concluding that the TAC was correct in the finding that input supplies in relation to the Medtronic transaction had a direct and immediate link to taxable output supplies and that Covidien was fully entitled to deduct all input of VAT incurred in relation to that transaction.

70. Covidien placed emphasis on the finding by the TAC at para. 320 of the Determination that there was a direct and immediate link between the input costs suffered by Covidien on the single composite supply of management services that were received from Tyco and the supply of management services by Covidien to the four FSRs and their 84 subsidiaries. At para. 17 of its legal submissions, it observed that it was unsurprising that the TAC found a single composite supply of management services received by Covidien had a direct and immediate link to a fundamentally similarly composite management service supplied by Covidien. It was argued that there was no evidence that the TAC misunderstood the law. Covidien criticised the Revenue's submissions to the extent that they identified the difference between business activities and taxable economic activities for VAT purposes, pointing out that for the purposes of the VATCA, business and economic activity were synonymous and therefore it was meaningless to talk about the case turning on a distinction between the definitions above.

71. Covidien argued that the true distinction is between economic activities on the one hand and non-economic activities on the other. It referred to Article 9 in the case law on economic activity and the decision in Wakefield, where the court observed that a supply for consideration is a necessary but not sufficient condition for an economic activity. The case of Gmina O, referred to above, was relied upon, and focus placed upon the fact that the consideration for the supply of goods or services need not be obtained directly from the recipient since it may be obtained from a third party. Reference was made to that part of the judgment of the CJEU where the court identified that all the circumstances in which an activity is supplied will have to be examined in order to decide whether it is an economic activity.

72. At para. 168, Covidien submitted that the CJEU had found that VAT incurred for the purpose of share related transactions which fell outside the scope of VAT is part of the overhead costs of that business and deductible on that basis. Citing AB SKF, C-29/08, EU:C:2009:665, it noted that the CJEU had held that costs which had a direct and immediate link with an exempt share transaction were nonetheless part of the company's general overheads because the sale of shares had taken place for the purpose of benefiting the taxpayer's overall business.

73. Covidien referred to the TAC being obliged to have regard to the economic realities and to consider the contracts as performed, citing Revenue Commissioners v Novartis [2022] IEHC 642 and Viera Ltd v  O'Donagain [2021] IECA 334. Reference was made to the summary of EU case law by the TAC, including Polysar, Floridian and Cibo, with Covidien arguing that this summary showed the TAC was clear as to the distinction between economic activity and non-economic activity. It was argued that economic activity was separate to the supply of the goods or services themselves. It was observed that the CJEU had held that one particular type of economic activity in which parent companies may be involved is the exploitation of the shares they hold for reward. Covidien referred to the decision in Marle and noted that the caselaw identifies that the scope of the concept of economic activity was very wide. It drew attention to para. 290 of the Determination where, it was argued, the TAC correctly set out the issue as follows: -

"The appellant must be considered to have been carrying on an economic activity if it was exploiting its tangible property, namely its shareholding in direct and indirect subsidiaries, for the purposes of obtaining incomes therefore on a continuing basis."

74. In its written submissions it argues that whilst the taxable supplies which Covidien made, pursuant to the contracts with the FSRs, can be described as the supply of management services for consideration, the economic activity of which those supplies formed part was Covidien's exploitation of the shares it held in its subsidiaries and sub-subsidiaries for the purposes of earning income therefrom on a continuing basis. In relation to the finding that the evidence supports a conclusion that Covidien was not engaged in non-economic activity, Covidien noted that no challenges were made to any findings of fact in the s. 949AP notice and Revenue declared it was not challenging any findings of fact. Moreover, it said that even if this finding were to be challenged, only fragments of the evidence that the TAC considered were before the Court, and that it could not have been inferred from those fragments that the TAC could not have reached the decision he did other than by misunderstanding the law. The more obvious inference was that he fully understood the law but considered the evidence put before him was insufficient to establish the existence of non-economic activity.

75. In respect of the decision of the trial judge, Covidien argued that he correctly analysed the relevant principles governing the right to deduct VAT. It highlighted the analysis of the trial judge at paras. 69 and 79-80, in particular to the effect that there was no evidence that the taxpayer was engaged in partial economic activity and that the TAC found based on credible evidence that the services received by the taxpayer from Tyco were used in their entirety for the purposes of the taxpayer's economic activity, and therefore he did not have to consider whether the costs incurred were part of the general costs linked to the taxpayer's overall economic activity. It cited the well-known extract from Inspector of Taxes v Hummingbird [1983] ILRM 421 in respect of the approach a court should take when examining a decision of an Appeal Commissioner. Because of its particular relevance to this case, it bears being set out in full:

"A Case Stated consists in part of findings on questions of primary fact, e.g. with what intention did the taxpayers purchase the Baggot Street premises. These findings on primary facts should not be set aside by the Courts unless there was no evidence whatever to support them. The Commissioner then goes on in the Case Stated to give his conclusions or inferences from these primary facts. These are mixed questions of fact and law and the Court should approach these in a different way. If they are based on the interpretation of documents, the Court should reverse them if they are incorrect for it is in as good a position to determine the meaning of documents as is the Commissioner. If the conclusions from the primary facts are ones which no reasonable Commissioner could draw, the Court should set aside his findings on the ground that he must be assumed to have misdirected himself as to the law or made a mistake in reasoning. Finally, if his conclusions show that he has adopted a wrong view of the law, they should be set aside. If however they are not based on a mistaken view of the law or a wrong interpretation of documents, they should not be aside unless the inferences which he made from the primary facts were ones that no reasonable Commissioner could draw."

76. Covidien also emphasised the observations of Stack J. in Glynn v Revenue Commissioners [2021] IEHC 780, where she indicated that appeals brought by way of case stated under s. 949AP(2) required that the appellant must identify with sufficient precision the basis of the appeal, and indicate whether the error in assessing the evidence is an error of law and if so how, or whether it said to be an inference either based on a misinterpretation of documents, or one which no reasonable Commissioner could draw.

77. Covidien noted that there was no explicit appeal against either the findings of fact or the inferences drawn from those facts, and therefore Covidien did not have an opportunity to adduce additional evidence or documents as might have been necessary if there had been such an appeal. It argued that if this Court concludes that Revenue are indirectly seeking to challenge findings of fact or inferences, the appeal should be dismissed as no such challenge was identified in the notice as required in the case of Glynn. Accordingly, the Court cannot review findings of fact or inferences drawn, given that it does not have it available to it the totality of the evidence before the TAC.

Determination of the TAC - discussion and decision

78. Under the heading "Facts proved or admitted" in the case stated, the TAC indicated that, having considered the evidence from the four witnesses put forward by Covidien, and the documents before him, he was making certain "material" findings of fact. One of the overarching arguments by Covidien was that the trial judge could only disturb those findings in very limited circumstances and was correct not to do so. But that discloses a misunderstanding as to the nature of the TAC's conclusions: they are not primary findings of fact, as they represent a conclusion on a VAT liability and therefore of necessity involve the application of a legal test to a set of facts. Hummingbird makes it clear that a finding of this type is to be treated as a mixed question of fact and law. Applying Hummingbird, I must consider whether these conclusions are based on an incorrect interpretation of the documents, or whether they show that TAC has adopted an incorrect view of the law. In either case, the Court can set aside the conclusion of the TAC. Apart from those circumstances, the conclusions should not be set aside unless the inferences drawn from the primary facts are ones that no reasonable Commissioner could draw, on the basis that he must be assumed to have misdirected himself as to the law or made a mistake in reasoning.

Economic Activity

79. At paragraph 31 of the case stated, the TAC indicated that for the reasons given in paras. 289 to 306 of the Determination, Covidien was wholly engaged in economic activity at all times material to the appeal.

80. At para. 30(d), the TAC found that Covidien was at all material times actively engaged in the management of all aspects of the Covidien group and was an active holding company.

81. At para. 30(e) he found that Covidien was providing management services to the FSRs and to the 84 subsidiaries connected to the FSRs. That finding was presumably based, at least in part, on the content of the Management Services agreement.

82. At para. 30(f), he indicated that the evidence before him did not support a finding that Covidien was engaged in non-economic activity.

83. At para. 30(g) he found that Covidien was not just a passive holding company but was instead actively engaged and directly and indirectly involved in the management of its subsidiaries and sub-subsidiaries.

84. At para. 30(h), he found that Covidien's engagement and involvement in managing subsidiaries and sub-subsidiaries was for the purpose of the exploitation of its holdings in those companies for the purpose of obtaining income therefrom on a continuing basis. This is obviously referable to the last sentence of Article 9(1) which provides: "The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity". It is not clear whether he is referring to income under the Management Services Agreement, or other unspecified income.

85. It will be recalled that cases such as Minerva, discussed above, make it clear that where a holding company is involved in the management of its subsidiaries in which it has acquired a shareholding, this is an economic activity within the meaning of Article 9(1) of the PVD where it entails carrying out transactions subject to VAT by virtue of Article 2 i.e. transactions for which consideration is charged. The case law also makes it clear that the mere acquisition and holding of shares in a company do not amount to an economic activity, and thus any input tax paid on services purchased solely to facilitate the acquisition and holding of those shares cannot be deducted.

86. Given the terms of the Services agreement and the Management Services agreement, and the facts in this case, the conclusions of the TAC appear to be based on a misunderstanding of the law. The group of which Covidien was the ultimate holding company comprised many holding companies and dormant or non-active companies. Covidien administered, managed and controlled those companies. It also managed its subsidiaries (ranging from 2 to 4 over the relevant time period) in which it held shareholdings in the relevant period, but did not supply goods or services to them for consideration. This activity was therefore non-economic for VAT purposes under the PVD. The only taxable supplies made for consideration were to its indirect subsidiaries i.e. the FSR under the Management Services agreement.

87. On those facts, the conclusion that Covidien was engaged exclusively in economic activity can only mean either that the TAC misunderstood the law, or arrived at a conclusion that no reasonable commissioner could arrive at. For that reason, I consider the TAC erred in law in his conclusions at paragraph 30(d), (f), (g) and (h).

Composite supply of services

88. At para. 30(i) the TAC found that the Covidien received a single composite supply of services from Tyco. This manner in which services are supplied has no particular relevance insofar as deductibility and apportionment, are concerned, and the TAC's emphasis on same was misplaced.

"Used For" Test

89. At para. 30 (j) the TAC found there was a direct and immediate link between the input costs suffered by Covidien on the single composite supply of management services it received from Tyco and the supply of management services to the FSRs. He records his findings at paragraph 34 of the case stated as follows:

"For the reasons given in paragraphs 313 to 322 inclusive of the Determination, I found that the services received by the Appellant from THGLP were used in their entirety for the purposes of the Appellant's economic activity.

Having so found, I held it was not necessary for me to consider the Appellant's alternative argument that the costs it incurred on the supply of services by THGLP formed part of the Appellant's general overheads, nor was it necessary for me to consider the issues of apportionment of costs and the "as such" issue."

90. At paragraph 320 of the Determination, he observed that the fact that the 84 subsidiaries were not party to the Service Agreement and the fact that the cost of the management services supplied by Covidien were borne by the four FSRs did not require him to reach a conclusion other than that there was a direct and immediate link between the input costs suffered by Covidien on the single composite supply of management services it received from Tyco and the supply of management services to the FSRs. He accepted Covidien's submission that its operating structure and intercompany transfer pricing policy meant that there was a logic and benefit to the four FSRs in paying for the management services received by their 84 subsidiaries. He concluded that the allocation of costs discussed and analysed in the PWC report did not affect his finding in this regard and accepted the evidence of Covidien that that report was prepared for transfer pricing and corporate income tax purposes, and was not of direct relevance to the issues of VAT which arose in that appeal. He further concluded that services received by Covidien from Tyco were used in their entirety for the purposes of Covidien's economic activity.

91. There is an obvious difficulty with the TAC's findings insofar as the applicable legal test is concerned. His conclusion that the services received by the Appellant from Tyco were used in their entirety for the purposes of the Appellant's economic activity suggests that he understood that the test for deductibility was economic activity rather  than the "used for" test that requires an identification of input services, output services and a precise analysis as to whether, and how, the former were used for the latter. For that reason alone, his conclusion cannot stand.

92. Further, it is impossible to understand how his conclusion sits with the facts. As set out above in the section on economic activity, certain of the services provided by Tyco appear to have been used, not by the FSRs, but for the purpose of providing management services to other companies in the Covidien group, or for providing services to Covidien itself. The TAC does not explain how payment for services used by companies other than the FSRs were direct cost components of the service provided to the FSRs. Revenue had already allowed full deductibility for the value of the services purchased from Tyco that had, on the basis of the invoices raised by Covidien to the FSRs, been provided to the FSRs. It will be recalled that Article 4(1)(c) of the Management Services agreement provided that costs incurred by Covidien in connection with activities that provide no benefit to service recipients would not be considered in the calculation of total services costs for the purposes of computing the fee under this agreement.

93. Thus, prima facie, on the basis of the agreement before the TAC, all the Tyco costs that provided a benefit to the FSRs had been charged for, but no other costs. It is hard to reconcile that with the TAC's finding that there was a direct and immediate link between all of the Tyco services and the services that Covidien provided to the FSRs for consideration, and that the entirety of the Tyco costs were components of the price of the output transactions. Such a finding would require to be carefully explained by reference to the provisions of the Services Agreement and the Management Services agreement. However, no reference at all was made by the TAC to the Management Services agreement in this context.  

94. At para. 30 (k), he finds as follows "The services received by the appellant from [Tyco] were used in their entirety for the purposes of the appellant's economic activity". As set out above, this is not the correct legal test for deductibility. Economic activity is certainly relevant: under Article 2, where no consideration is charged, the activity cannot be categorised as an economic one. But the focus on economic activity by the TAC is misplaced: the real point of difference between the parties was not whether the services provided by Tyco were provided in the context of economic activity by Covidien and therefore subject to VAT; rather it was whether the conditions required to permit full deductibility had been met. That may be seen from the Minerva quote referred to by the TAC in his Determination at paragraph 318 in the following terms:

"In the circumstances, as the Advocate General stated in point 39 of his Opinion, the expenditure connected with the acquisition of shareholdings in subsidiaries incurred by a holding company which involves itself in their management and which, on that basis, carries out an economic activity, as was noted in paragraph 21 of the present judgement, must be regarded as attributed to that company's economic activity and the VAT paid on that expenditure gives rise to the right to full deduction, pursuant to article 17(2) of the Sixth Directive."

95. The CJEU confirmed in that case that the input costs could be deducted since the holding company was carrying out an economic activity; however, earlier paragraphs of the judgment make it clear that deduction is subject to the well-rehearsed conditions identified in Article 168 i.e. that the services purchased had been used for the output transaction. Unfortunately, the TAC appears to have treated his finding on economic activity as determinative of an entitlement to deduct, whereas it ought to have been treated as a necessary but not sufficient condition. A finding that the services purchased from Tyco were for the purpose of the economic activity of Covidien does not mean that the legal test in respect of deductibility may be omitted or avoided.

96. In summary, I consider that the conclusions at para. 30(j) and (k) demonstrate that the TAC incorrectly interpreted the Management Services agreement and adopted an incorrect view of the law for the following reasons:

-          He incorrectly focused upon economic activity as the determining factor for deductibility;

-          He failed to correctly apply the "used for" test, providing no explanation for his finding that the entirety of the Tyco costs were directly used for the purpose of the services provided to FSR, despite the surrounding factual context suggesting otherwise i.e. the Management Services agreement explicitly provided that it only charged the FSRs for services that were of benefit to them; the consideration that Covidien received from the service recipients was significantly less than the consideration which Covidien paid for the supply it received from Tyco; and where the services that he treated as a direct and immediate cost component of the management services provided to the FSRs were themselves management services being provided to other companies and therefore by their nature not obviously direct cost components.

-          The justification for his finding displayed a failure to understand the legal test he was applying. The fact that the FSRs provided services on to other subsidiaries was irrelevant. The FSRs only obtained such services by virtue of the Management Services agreement and therefore all transactions to subsidiaries had to be viewed through that prism.

-          His reference to the PWC report being irrelevant appears to be an attempt to sideline the pricing arrangements identified in the Management Services agreement, which may have been influenced by the PWC report. But the report and the agreement are two entirely different documents, with only the second being a legally binding agreement. There may be many reasons an agreement is entered into; but those reasons do not affect the validity and binding nature of the agreement. While focusing on the Services Agreement, he entirely ignores the impact of the highly relevant terms Management Services agreement.

-          If Covidien chooses to organise its affairs in a particular way, and reflects that approach in legally binding documents, irrespective of the reason for so doing, it is bound by the content of its agreements. Indeed, there was no evidence that the manner in which the agreements were carried out varied from the precise wording of the agreements. It was not contended by Covidien, for example, that the contracted services were not supplied to the FSRs or that Covidien was not paid by them.

-          In the circumstances, the treatment of the Services Agreement, the Management Services Agreement and the PWC report constituted a misinterpretation of those documents, since it is not possible to evaluate whether the Tyco services were entirely used for the output services without considering the terms of the agreement governing the provision of those output services by Covidien to the FSRs.

Project Jameson

97. The finding of the TAC is as follows on Project Jameson:

"For the reasons given in paragraphs 324 to 326 inclusive of the Determination, I found that the planning and execution of Project Jameson constituted economic activity on the part of the Appellant.

For the reasons given in paragraphs 327 and 328 of the Determination, I found that the services supplied to the Appellant in relation to Project Jameson related to the Appellant's economic activity and had a direct and immediate link to the Appellant's taxable output supplies to its direct and indirect subsidiaries.

I therefore found that that the Appellant was entitled to a deduction in respect of the VAT it incurred on the cost of the services it received in relation to Project Jameson."

98. Paragraphs 324 to 325 are descriptive of the Project Jameson transaction. Paragraphs 326 to 328 refers to the following facts: the decision to divest Covidien's pharmaceutical business was by way of sale or spin-off, the subsequent decision to proceed by way of spin off and the subsequent implementation of that decision were all an  integral part of the active management by Covidien's Board of the Covidien Group's business as a whole; and the planning and execution of Project Jameson constituted economic activity on the part of Covidien. He accepted the evidence that the divestiture of the pharmaceuticals business affected not only the FSRs but also their subsidiaries throughout the Group.

99. Here the input costs were incurred not just in respect of services provided by Tyco but also services provided by other professionals, in particular lawyers. If the input VAT is to be deductible either in whole or in part, the same rules as identified above apply. For the TAC to conclude that the entirety of the VAT charged on the input costs for those transactions was deductible, he would have to (a) identify the relevant output costs against which they were being deducted, and (b) explain why the entirety of the input costs are deductible, either on the first or second basis, with the precision identified by Jacobs L.J. in Southern Primary. In this context, it should be remembered that the only output service that Covidien supplied was to the FSRs.

100. Under the heading "Facts proved or admitted", the TAC refers to the nature of the Project Jameson transaction and concludes that the decisions in respect of spin off and the implementation of that decision were an integral part of the act of management by the Covidien Board of the Covidien group's businesses as a whole, noting that the structuring of the Covidien group into global business units meant that the divestiture of the pharmaceuticals business effected the FSRs and the subsidiaries i.e. the 84 subsidiaries. Following these three findings he concludes at paragraph 30 (o) as follows:

"The services supplied to the Appellant in relation to Project Jameson had a direct and immediate link to the Appellant's taxable output supplies to its direct and indirect subsidiaries."

101. It is not clear precisely what this means. This may be a reference to the supplies to the FSRs. However, none of the FSRs are Covidien's direct subsidiaries and no taxable output supplies were made to its direct subsidiaries. Nor were any made to its indirect subsidiaries except the FSRs. Insofar as it is intended to refer to any other services provided by Covidien to the companies in the group as a whole, there were no taxable output supplies since it did not charge for them.

102. There is no factual finding that would support a conclusion that the output costs charged to the FSRs included the expenditure in relation to Project Jameson as direct and immediate component of that price. As noted above, the Management Services agreement limits payment by the FSRs to services they receive. Article 3 of the Management Services agreement provided that the services shall include only those activities that provide a benefit to the service recipient i.e. provide an increment or economical commercial value that enhances the service recipient's commercial position or is reasonably anticipated to do so.

103. Given the terms of Article 3, the TAC would at a minimum be required to explain how the restructuring transaction was a service included under the Management Services agreement and had a direct and immediate link with the services provided to the FSRs. The re-structuring of the Covidien group may well have affected the FSRs; but as identified by Jacobs J. in CCE v Southern Primary Housing Ltd, there must be precision in relation to the question of deductibility. A general effect cannot be considered sufficient for a finding of a direct and immediate link between a particular input transaction and particular output transactions. The vagueness of the reasoning at Para. 30(o) means it is not possible to understand the basis for the conclusion reached, given the fact that the services purchased were clearly for the benefit of Covidien itself.  As with the previous finding, there is an inappropriate focus on Covidien being economically active.

104. In the circumstances, the TAC's conclusion that those services had a direct and immediate link to Covidien's supplies to the FSR's discloses a fundamental misunderstanding of the applicable legal principles and/or is one that no reasonable commissioner could come to.

Medtronic                                  

105. In relation to the Medtronic transaction, there is a single finding at para. 30(p) as follows: -

"The Board's initiation, oversight and execution of the disposal to Medtronic was an integral part of the active management by the appellant's board of the Covidien Group business as a whole."

106. He concluded at para. 39 of the case stated as follows: -

"For the reasons given in paragraphs 330 to 333 inclusive of the Determination, I found that the Appellant was entitled to a full deduction in respect of the VAT it incurred on the cost of the services it received in relation to the Medtronic transaction."

107. His reasoning at paragraphs 330 to 333 was sparse: he quoted Kreztechnik, including the following paragraph:

"In this case, in view of the fact that, first, a share issue is an operation not falling within the scope of the Sixth Directive and, second, that operation was carried out by Kretztechnik in order to increase its capital for the benefit of its economic activity in general, it must be considered that the costs of the supplies acquired by that company in connection with the operation concerned form part of its overheads and are therefore, as such, component parts of the price of its products. Those supplies have a direct and immediate link with the whole economic activity of the taxable person (citing BLP, Midland Bank, Abbey National and Cibo)."

108. At paragraph 333 he concluded as follows: "As I have already found as a material fact that Appellant was fully engaged in economic activity at all times material to this appeal, it follows that the Appellant is entitled to a full deduction in respect of the VAT it incurred on the cost of the services it received in relation to the Medtronic transaction."

109. This conclusion is not based on any facts in relation to the Medtronic transaction that are relevant to the test that has to be applied as has been set out above. There is no identification of the relevant input or output services, and there is no identification of whether the deductibility was on the first or second basis. In any case, that only comes into play where the output VAT against which the deduction will be made have been identified. It is not clear whether the TAC is making a finding that the VAT on the costs of the Medtronic transaction was to be set off against the VAT charged on services supplied to the FSRs. The TAC's conclusion that because Covidien was fully engaged in economic activity at all material times, it follows (emphasis added) that the Appellant is entitled to a full deduction in respect of the VAT it incurred on the cost of the services, demonstrates that the TAC was applying the wrong legal test and therefore his conclusions on deductibility were erroneous in law.

Decision of the Trial Judge  – Discussion and Decision

110. I do not purpose to consider in any great detail the decision of the trial judge separately from the decision of the TAC, because it is clear from his judgment that he almost entirely followed the approach of the TAC. I have explained above why I conclude the TAC erred in law. That reasoning applies mutatis mutandis to the decision of the trial judge.

111. In short, the trial judge erred in treating the conclusions of the TAC as findings of fact, and as such, subject to being disturbed only if there was no evidence to support them. He did not take account of the fact  that the findings were underpinned by an erroneous interpretation of principles of EU VAT law on the part of the TAC, in particular the definition and relevance of economic activity, and a failure to understand the obligation to apply the "used for" test for VAT deductibility under Article 168 as interpreted by the CJEU on the facts before him. The trial judge failed to take account of the fact that conclusions as to the status of a supply for VAT purposes involve conclusions of law, and that conclusions as to the entitlement to deduct involve at a minimum conclusions of law based on the factual background. He therefore applied the wrong legal test to the findings of the TAC.

112. Separately, the trial judge failed to identify the errors of law made by the TAC as set out above, in respect of economic activity, the used for test, and the Project Jameson and Medtronic transactions, and accordingly himself erred in law by upholding the conclusions of the TAC. For the above reasons, the decision of the trial judge will be set aside and the appeal upheld.

Arguments raised by Covidien

113. I think it important to explain at this point why certain discrete arguments made by Covidien have not been accepted. The thrust of the oral arguments made at the appeal hearing focused overwhelmingly on persuading the Court that Covidien was engaged in an economic activity. But as identified above, that is only one of the relevant matters that require to be considered.  Covidien did not squarely address the failure by the TAC to carry out the exercise required by Article 168 where the right to deduct is claimed: i.e. that the taxed transaction must be identified, the relevant input and output costs must be identified and the "used for" test must be applied. Irrespective of whether the first or second basis for deduction is relied upon, the link between the services purchased and the services charged must be identified with precision.

114. At para. 101 of Covidien's legal submissions, a point was made to the effect that the case does not concern costs which relate directly and immediately to the disposal, acquisition or issuance of any shares but rather costs which relate directly and immediately to the provision of management services. It is argued that it is not necessary that there be a taxable supply of management services to every company in the group for Covidien to avoid being engaged in non-economic activity. That submission fails to explain how the entirety of Covidien's activities could be economic where, as in the MVM case, it provided services to some companies in the group free of charge.

115. At para. 120, Covidien argued that there is no basis in the case stated for arguing there was a direct and immediate link between the Tyco service and that non-economic activity (the existence of which Covidien denied) for which no remuneration was charged. However, that is not the legal test. Rather the test is the flipside of that: i.e. it is necessary for a person challenging an assessment in respect of deductibility to show that there was a direct and immediate link between the input costs and the output costs, or that the input costs were overhead costs that constituted a cost component of the output services.  

116. It is possible that the full input costs of services supplied by Tyco may have been "used for" the services provided to the FSPs. However, to decide that question, an analysis ought to have been undertaken by the TAC by reference to the facts, including the specific terms of the services agreement and the Management Services agreement, and a consideration of whether and how the entirety of the input costs were used for the provision of those services, whether directly or as overhead costs. Neither the necessity for such an exercise, nor the exercise itself, were identified by the TAC.  It is vital that a TAC makes clear factual findings: on a case stated, a High Court judge cannot make findings of fact, and therefore a deficiency in the decision of the TAC in this respect may undermine the validity of the decision in a way that cannot be cured on an appeal by way of case stated.

117. Finally, Covidien made submissions in relation to the overhead basis of deduction. It referred to such costs being stated by the CJEU to have a direct and immediate link with the taxable person's economic activity as a whole. Covidien argued that this was what the TAC did i.e. considered whether the costs of Projects Jameson and Medtronic were costs of the taxable economic activity in which Covidien was involved. Covidien submitted that the TAC found, on the basis of the evidence, that the costs of both projects were costs of Covidien's economic activity i.e. the costs of the exploitation of the shares in its subsidiaries and sub-subsidiaries for the purposes of earning income therefrom on a continuing basis. Covidien referred to the acquisition costs considered in Cibo, the cost of acquiring capital in Larentia and Minerva and the costs of issuing shares in Kretztechnik. It pointed out that in none of those cases did the expense in question constitute the making of a taxable supply, but were held in each case to be part of the economic activity of exploiting shares. But in none of those cases did the CJEU depart from the "used for" test: rather it analysed the expense to see whether it could be considered part of the overhead cost of providing a taxable supply. As discussed below, I have decided to remit the case back to a TAC to allow Covidien the opportunity to argue that the Tyco costs were overhead costs incurred in the context of the taxable supply to the FSRs.

118. Moreover, the TAC never explained how the costs incurred on the input supplies in respect of Project Jameson and Medtronic constituted the costs of the exploitation of the shares in its subsidiaries and sub-subsidiaries for the purposes of earning income therefrom. No evidence was presented by Covidien that the restructuring activities directly generated income from the subsidiaries or sub-subsidiaries on a continuing basis. In fact part of the submission made to the TAC initially on the two projects were that they were non-economic activities. The argument that they constituted economic activities appears to have been made on a fall back basis.

119. At para. 131 it is argued that the TAC concluded on the facts that the costs of these projects and transactions were costs of Covidien's economic activity as a whole. However, as already pointed out, this is not the only task that the TAC is required to engaged in.

120. Covidien highlight two findings of the TAC: (a) that there was a direct and immediate link between the input costs suffered by Covidien on the services received from Tyco and the supply of management services the four FSRs; and (b) that Covidien purchased a single indivisible service from Tyco and used it for the purpose of making a taxable supply of management services and as such is entitled to full deductibility. It argues that these are findings of fact in respect of which there has been no appeal. However, I have already explained why neither of these conclusions are simple findings of fact. Both must be characterised as mixed findings of fact and law as they contain within them an application of the applicable legal test to a set of facts. Following Hummingbird, this Court is entitled to set aside same where they are erroneous in law.

121. Counsel for Covidien sought in oral argument to justify the findings in relation to Project Jameson and Medtronic on the basis that the services purchased from Tyco and others, including Allen & Ovary, should be treated as overhead costs: but there was not even a finding by the TAC that they were overhead costs, let alone an explanation of why the services provided in the context of the two projects were part of the general costs of Covidien, and as such component parts of the services provided to the FSRs and deductible.

Conclusion

122. The conclusions of the trial judge, following as they did the approach of the TAC, were erroneous for the same reasons that the decision of the TAC was erroneous. Those findings are therefore set aside. For this reason, the appeal is upheld.

123. Given that Covidien argued that the input costs not directly consumed by the FSRs constitute overhead costs i.e. the second basis of deductibility, and because the TAC did not consider the question of whether deductibility was permissible on this basis, I have decided to remit the entire matter back to a TAC to allow Covidien to seek to persuade the TAC, if it so wishes, that input VAT on the services provided by Tyco is recoverable on the basis that the payment for those services constituted overhead costs that were components of the output services provided by Covidien to the FSRs and additionally, insofar as Project Jameson and Medtronic are concerned, that the expenditure on these projects were part of Covidien's economic activity in the exploitation of its shareholdings in downstream companies for the purpose of earning income therefrom. In accordance with general principles of VAT deduction, no input VAT can be set off against non-economic activities, i.e. the supply of services by Covidien where no consideration was charged.

124. The rehearing should take place on the basis of the existing material that was before the TAC.

125. Ground eight of the notice of appeal challenged the conclusion in the Determination that there was no requirement to remit the question of recovery of input VAT in respect of supplies by other foreign and domestic providers, which supplies were not addressed by the TAC in the Determination, having regard to the finding that Covidien was engaged exclusively in economic activity. However, because I have found that this conclusion was erroneous, it follows that the question of recovery of VAT on other providers remains live and requires to be determined on basis of the principles in Article 168 PVD. This issue will also be remitted to the TAC.

126. Revenue, having been successful on the appeal, are entitled to an Order for the costs of the appeal. If Covidien wish to contend for any other Order, I would allow a period of fourteen days within which it may file and serve a short written submission (not to exceed 1,500 words) in which event Revenue will have fourteen days to respond.

127. As this judgment is being delivered electronically, Butler and O'Moore JJ. have authorised me to say that they agree with it.

Result:     Appeal allowed.