I’m writing today about what the State needs to do to secure in the region of €10bn to €20bn in potentially lost taxes from the so-called vulture funds. However, I would first like to comment briefly on my decision to resign from the Social Democrats.
Having vested so much in the party, and worked with so many amazing people on the project, Monday’s decision was a difficult one, and was considered and discussed at length. Many have been supportive of the decision, though some naturally feel let down, which was the hardest part of making the decision. To them I would say that if I thought there was a different option, I would have taken it.
The hard reality is that the leadership team wasn’t working. This had been flagged at a senior level in the party for some time, and in spite of the efforts of many involved, I concluded that the team would never work well enough to establish the party as a growing, outward-looking, mainstream, progressive social democratic political force, something Ireland needs in the coming years.
This was in evidence at the Budget Oversight Committee last week, where we heard from a range of experts that the tax base should not be eroded. It is evident in recent drops in our college rankings, highlighting the need for funding and operational changes in third-level education. The Apple ruling could be the start of a prolonged attack on our corporation tax offer, with a renewed call from the European Commission last week for the introduction of the Common Consolidated Corporate Tax Base (CCCTB) – something with the potential to damage our economy. The new national fibre network is set to be privatised, with the potential for years of under-investment and monopoly pricing. Brexit is throwing challenges our way, Portugal is edging closer to a new bailout and Greece closer to another default. Global bond markets are doing worrying things; the world is over-leveraged, and global capital is running for the hills.
For all of these challenges, opportunities abound, too – in modern public service models, in advances in science and technology and in social policy. But to seize them, the country needs smart, long-term progressive thinking, a stable revenue base and serious investment in services and productive infrastructure. And one critical, shorter-term opportunity to help with this is to close down tax avoidance by the so-called vulture funds – something that has as much potential for the public purse as the Apple ruling.
As things stand, less than 20 so-called vulture funds could take offshore somewhere between €10bn and €20bn in potential taxes in the next decade. Last Wednesday, after months of political pressure and investigative journalism, Minister for Finance Michael Noonan agreed that vulture funds were using Section 110 vehicles to avoid taxes on Irish profits. He also agreed that the principle to apply is that profits generated by economic activity in Ireland should be taxed here. The proposed amendment is a welcome first step, but as it stands, has more holes in it than a Swiss cheese.
Less than 24 hours after his announcement, some of the big accounting firms were briefing their clients on the proposed amendment. The message was clear – it would involve a small tax leakage, at worst. It also seems clear they had had a significant role in designing the amendment. One source told me it was believed that between 90pc and 100pc of the taxes currently avoided would remain as such under the draft amendment. So what are the loopholes?
First, while not explicitly stated, the accounting firms confirmed the vulture funds would be allowed to mark their assets to current market prices at the 0pc Section 110 rate. This would allow them avoid capital gains taxes (CGT) on the increase in property prices in recent years – a massive and unnecessary concession. In contrast, when Government changes CGT rates, it doesn’t allow you mark your assets to market value at the old rate just before the change. You just have to suck it up. The loophole is easily closed by ignoring any mark-to-market and setting an earlier date for any actual asset realisations.
Second, the draft amendment also allows vulture funds preserve their ability to get tax relief on interest they pay on their loans. At face value, this should be fine – tax relief is available to all companies in Ireland on their bank loans. However, companies can’t avoid taxes by making loans to themselves at interest rates that reduce their taxable profits to near zero. Again on this, the accounting firms believe there are structures possible that would allow the vulture funds use “arm’s length interest rates” to relocate profits offshore. This loophole could be closed by explicitly only allowing genuine third-party bank-debt financing, and only up to a limit of a rate of say 5pc (most vulture bank debt is at less than 3.5pc).
Third, the amendment only applies to property assets. This would allow the many billions in Irish personal unsecured loan portfolios be exempt, as well as all general corporate and SME loans.
What is really dangerous about this is that it would effectively legitimise the use of Section 110 to avoid Irish domestic corporate taxes. So if you want to buy a business, don’t do it the ‘old way’. Instead, get the business to set up a loan and use a Section 110 company to buy this loan. This would be your route to tax-free Irish profits. Again, this can be solved by prohibiting Section 110 status not just for Irish property assets, but any assets who derive their value or income from the domestic Irish economy. Given the scale of the tax avoidance here, it would be possible to list the circa 100 portfolios sold by Nama, IBRC and other private banks to vulture funds, which are prohibited. Problem solved.
The Government accepts that what is happening with vulture funds needs to change. Noonan has signalled he’s open to debate on the draft proposal. Given the scale of the monies involved, this amendment provides a real test for whether we are serious about shutting down tax avoidance, or still feel we need it to attract foreign capital and investment.
At the Budget Oversight Committee last week, Professor Alan Ahearne explained that pressures on the public purse in coming years mean the tax take is going to have to rise. In light of this, he argued, it made no sense to erode the tax base in the coming budget. I agree – sociodemographic changes, coupled with much-needed investment in public services and infrastructure, are essential to securing future prosperity. In the same vein, it makes no sense to let billions of euro in legitimate taxes on vulture fund profits drift out of the country. Profits generated on economic activity in Ireland should be taxed in Ireland – and for this to happen, it’s imperative the proposed amendment to Section 110 companies is made fit for purpose.