We needed vulture funds, but the legal exploitation of the system is leaving the country out of pocket on taxes
Investors played a part in our recovery from the financial crash, but loopholes that allow little to no tax to be paid need to be closed, writes Paul Wyse
VULTURE funds have played a vital part in Ireland’s recovery from the financial crisis. The initial entry into the market place of the vulture funds as buyers for under-performing loans has helped to develop a market for those loans and there is no doubt that the emergence of this market was key to the recovery in property prices and capital, in particular, by Nama.
The effect of this development in the market place has enabled loans to be moved on from banks to enable them to get back to their performing and profitable business.
This obviously helped to stabilise the financial position of the banks and Nama to generate returns for the Exchequer.
Given that Brexit has happened, the need for capital in the marketplace is vital to ensure progress continues to be made in this very uncertain environment.
Section 110 Companies used by some of the vulture funds that acquired distressed loans and/or assets have been the subject of a lot of recent media coverage because they have paid little Irish tax on income received and on gains made.
These funds are funded by foreign private equity which was made available to purchase loans and distressed assets in Ireland when there were no local or domestic funds/ banks able or capable to take on such nonperforming assets.
Such funds are migratory and transact or deal where the market has a need and suitable returns on equity/funds can be made.
No one envisaged the level of activity in the purchase of distressed loans/assets as we have seen in recent years.
Section 110 was established to attract certain activity in Ireland. However, this structure is now being exploited (in a legal manner).
There were 124 Section 110 companies established in Ireland in 2010 and this increased to 404 last year.
Nobody expects these funds to provide capital with no return. Unless returns are made to investors in these funds they will not survive in business. A key question is what taxes should be paid on profits made in Ireland and where such tax should be paid.
It has been suggested that such transactions are not in scope of the legislation. If this is so then they can be challenged. It was reported in the Sunday Independent on July 24 that the Revenue Commissioners were investigating at least 40 Section 110 Special Purpose Vehicles (SPVs).
Section 110s that have been used by some of these funds have paid little Irish tax on the profits made by them.
A knee-jerk reaction would be to scrap the current tax regime for them. However, Section 110s have served a good purpose for international trade and ownership and make capital and funding available in Ireland.
The response should be proportionate and focused on the transparency and payment of taxes being emphasised by the EU and OECD.
A Section 110 company is an Irish Resident SPV which holds and/or manages qualifying assets. Introduced to allow the IFSC win global securitisation deals, they are regarded as the cornerstone of Ireland’s debt securitisation regime, allowing investors to acquire, manage and trade in a vast range of assets including securities, aircraft and financial assets in a tax neutral manner.
The section allows corporation tax neutral treatment under certain conditions. A Section 110 also qualifies for the benefits of Ireland’s double-tax treaty network, which in most cases reduces or eliminates withholding taxes on income flows and capital gains in treaty jurisdictions.
These structured/complex finance transactions envisage minimal tax leakage to ensure maximum return to investors and enables a qualifying company to calculate its
taxable profits as if it were a trading company.
We already attract controversy in Europe and the US over certain large multinationals paying very low amounts of tax on their earnings: in a recent RTE programme economist David McWilliams highlighted that many multinational companies in Ireland were paying less taxes than anticipated.
It is very frustrating for taxpayers and companies that pay large tax bills that some multinationals have been able to avoid doing that and now it has come to light that little, if any, tax is being paid here on profits made by vulture funds using Section 110 company structures.
Post-austerity, there has been a significant increase in income taxes and indirect taxes in Ireland.
There is a significant expectation by taxpayers for fairness in our tax system.
There is a clear public expectation that profits made in a country should be taxed in that country and not transferred out to another jurisdiction without commercial justification to avoid taxes payable.
And there is mounting pressure to ensure transparency in the tax arrangements of corporates and also on Revenue to clamp down on global tax avoidance, especially the very complex financial structures to avoid paying tax.
The EU has also sought actions deterring the shifting of profits by corporate groups in low or no tax countries.
If we do not take action to curb these practices, our international reputation is tarnished and more encouragement is given to the EU, OECD and US to question our tax regime and put pressure on us to make it less attractive.
The Minister for Finance is well aware of this risk and has stated recently that: “Should Revenue’s investigations uncover tax avoidance schemes or abuse which erodes the tax base and causes reputational issues for the State, then appropriate action will be taken and any necessary legislative changes that may be required will be put forward for consideration”.
The Revenue and Department of Finance need to address this and amend the Tax Acts to close off any loopholes being exploited which are not contemplated by Section 110.
Loopholes that allow companies to use above-market interest rates or artificial non- commercially justifiable transfer of profit mechanisms to avoid tax ought to be closed.
No one objects to profits/gains being made or income being earned. There is, however, a clear expectation that profits made or net income earned should be taxable prior to a return to shareholders of those profits.
Ireland has low corporate tax rates to encourage businesses to set up, create employment and invest in their growth.
But it is no longer acceptable for profits or income to be structured in such a way that no tax is paid anywhere.
Irish taxpayers have borne the brunt of the losses incurred by Irish banks and the cost of the necessary recapitalisation and write-offs for unrecoverable debts or on the sale of loan portfolios to Nama and others.
Any profits made by vulture funds from the write downs of these Irish assets should be taxed — in the same way that the profits of bailed-out Irish banks should be, once the value of their distressed assets and loan books recover.
Remember, the Irish banks would have been taxable on their profits if they had been in a position to keep the loans on their books, which they were not.
Hence the need for the vulture funds and foreign equity financing them to help to restart the recovery of asset values in Ireland.
Unlike domestic banks, vulture funds have a short-term perspective on the country as a whole.
They are not long-term players here to ensure the economic recovery of Ireland.
Their main priority is profit and return on capital.
A position that could be adapted to corporate taxes by Revenue is to take a similar stance to the payment of a minimum rate of income tax by Irish taxpayers (circa 30pc) on their income to ensure a certain level of tax is received, even though the individual might have additional reliefs available to him/her that would reduce the tax rate significantly. Tax is a cost of doing business by any entity. And it’s arguable that if these tax structures were not available this may have resulted in even higher returns being sought by the vulture funds.
Maybe this is a circle that cannot be squared.
But if abuses are taking place, we need to square the circle to gain a better outcome for Irish taxpayers.