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Colby Cosh: The 17-year legal battle fought over … bread

Dennis McAteer
Dennis McAteer

The Subway sandwich-shop chain has come in for some taunting after the Supreme Court of Ireland ruled that the bread in its sandwiches isn’t bread. That’s probably as much as most people heard about the case, so let’s talk about the very important words that belong at the end of that sentence: “for tax purposes.”

Ireland has a “value-added” sales tax that, much like our GST/HST, is not applied to basic groceries but makes snacks, junk foods and candies taxable. Ireland’s revenuers had refused to refund the VAT on sandwich sales to an Irish Subway franchise owner, and that part of the case ended up hinging on the surprisingly high sugar content in Subway’s bread. The Supreme Court ruled, basically, that Subway sandwiches are too rich and libidinous to be considered a staple food. To the Irish taxman, and no doubt to a nutritionist, they are more like donuts or cake.

(Nerd footnote inserted to placate the tax lawyers in the audience: strictly speaking, basic groceries are subject to GST and Ireland’s VAT, but are “ zero-rated ” rather than “exempt.” This makes a difference further back in the supply chain, but it doesn’t affect the final transaction in a shop, nor does it matter to this story.)

Everybody seems to have thought this was an embarrassment for Subway, and I’m sure the company will go on insisting that its bread is bread, but there is an underappreciated angle to this bit of whimsy. To quote the Irish Independent’s story by Tim Healy : “The appeal by (the franchise owner) arose from a 2006 decision by the Revenue Commissioners refusing it a refund for VAT payments made between early 2004 and late 2005.”

In other words, we are not just talking about a legal battle over whether bread is bread. We are talking about a 17-year legal battle over whether bread is bread. And, at that, we also have the involvement of the Republic of Ireland’s highest court.

Having moral distinctions between foodstuffs in your tax regulations turns out to be an awfully expensive thing, and I think most economists would agree that it’s basically a dumb idea. If there were any doubt, a 17-year prosecution of a sandwich ought to settle the matter. The undoubted hundreds of thousands of Euros spent on bread lawyers in this case are virtually a pure loss to the Irish economy.

If the legislators who designed the Irish VAT had just applied the same rate to everything in the first place, the sub shops would have been on the hook, as they are now, without any litigation costs. For that matter, the whole thing could have been settled very cheaply half a generation ago with a coin flip if there weren’t a fake ethical principle involved. “Heads, it’s bread. Tails, it’s a pastry served with savoury accompaniments.”

Canada is in a position to snicker at Ireland in only one respect: tax rulings here are mostly fenced off from revision by the regular appellate courts. We do save a great deal of money and trouble by making the Tax Court of Canada (TCC) a virtually final authority, and that means that our own Supreme Court is rarely belaboured with arguments over meatball subs, except perhaps when it is ordering lunch during recess. Whether this is a good thing or a bad thing is your call.

But the Tax Court itself has been the scene of some pretty wild — and enduring, and expensive — scraps over groceries. In the important Aliments Koyo case , the TCC had to figure out whether a strawberry-flavoured soy beverage ought to be treated as “milk-based” (zero-rated), despite containing zero milk from any mammal, or whether Revenue Canada was right to consider it a “fruit-flavoured beverage” attracting full GST. The time between the tax assessment and the decision here was about five and a half years. (Tax was ultimately applied to the dubious liquid.)

Similar wars, unknown to the general public, have also been waged over bagged salads, crystallized ginger, granola, and paan (the leaf of the betel vine, which is chewed like gum throughout Asia and the subcontinent). No blood was ever spilled. Just plenty of treasure — and, in the end, for what?

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