Noonan to amend emergency ‘vulture’ law
Michael Noonan unveils his sixth budget, 30 days from now. In the wake of Brexit, the minister is facing widespread calls to use it to stimulate the economy, writes Dan White
EMERGENCY legislation drafted to close off a loophole that allowed so-called ‘vulture funds’ to pay little or no tax on income derived from their Irish profits may have to be amended, the Department of Finance has conceded.
Last week, Finance Minister Michael Noonan announced plans to amend S110 of the Taxes Consolidation Act 1997 in the wake of a public outcry over its use by funds who lawfully avoided paying tax on their Irish profits, including profits deriving from the acquisition of distressed mortgages.
The proposed law, effective from last Tuesday, when the draft amendment was published, restricts tax deductions to property funds that are not paying tax in Ireland — or are not in an EU double-tax treaty country — on the profits derived on their Irish loan books.
However, it has also captured funds directly lending into the Irish real estate market, including US funds supported by State agencies, such as the Irish Strategic Investment Fund (Isif ).
It is also feared that the law will affect the activities of funds using S110 special purpose vehicles (SPVs) to carry out Collateralised Loan Obligation activities.
NORMALLY this time of the year, just 30 days out from the Budget, the air is thick with kites being flown and wellsourced leaks as the Departments of Finance and Public Expenditure jostle with the spending departments over the shape of the following year’s budget.
Not this year. It’s as if Brexit, the Apple tax ruling and John Halligan have combined to suck all of the oxygen of media publicity from a sealed chamber, leaving nothing for the usual pre-budget speculation.
On Thursday, the Fiscal Advisory Council (FAC), the budget watchdog established at the behest of the Troika in 2011, published its prebudget statement. The message from the FAC to the Government was clear: keep your hands out of the cookie jar.
Warning that the activities of a couple of multinationals mean that GDP and GNP, the usual barometers of economic performance, “are detached from underlying developments”, the FAC warns that: “The headline debt-to-GDP ratio underestimates the size of the debt burden and overstates its rate of improvement last year. High debt levels leave the public finances uncomfortably exposed to domestic and international risks, one of which has already materialised in the form of the UK’s vote to leave the EU.”
The FAC calculates that the measures already announced in the spring economic statement last April will cost €1bn. When this is added to the €900m of 2017 public spending increases already announced and the €500m increase in health spending agreed in June, an increase which will be carried forward into 2017, the Government has already committed itself to €2.4bn of spending increases for 2017.
“The Council assesses that the resulting fiscal stance is at the limit of the range of prudent policies when the risks facing the economy and the high level of debt are considered.”
Instead of sanctioning further increases in public spending, the FAC urges the Government to take advantage of the current strong growth in tax revenues to eliminate the remaining budget deficit and reduce the still high debtGDP ratio — a ratio that has of course been flattered by the ‘Leprechaun economics’ phenomenon.
One doesn’t have to be in total agreement with the FAC to be cautious. While the Council pointed to the recent strong growth in tax revenues, particularly corporation tax receipts from the multinationals, in its pre-budget statement, there are at least some straws in the wind to indicate that the best may already be behind us on the revenue front.
Income tax receipts were 0.2pc behind target in July and a massive 6.5pc short of target in August. VAT receipts were 3.3pc behind target in July, a shortfall that was only partially reversed by August coming in 2.3pc ahead of target.
Even corporation tax receipts, the star revenue performer of recent years, were 16.5pc off target in July, but 16.2pc ahead of target in August, still slightly off target over the twomonth period.
However, it is excise duty receipts which must be causing the most concern in the Department of Finance. These were 5pc behind target in July and a massive 19.6pc shy of target in August. About the only good news here is that the collapse in excise duty receipts almost certainly means that Finance Minister Noonan will be reluctant to pick the pockets of motorists, smokers and drinkers once more on October 11.
While the FAC may be urging caution on Budget day, others — not all of them on the political left — are urging Mr Noonan to adopt a more expansionary stance.
In its recent pre-budget submission, employers’ body Ibec called on the Government “not to deviate from its plans for a modestly expansionary budget for 2017”.
Ibec recommends that, in addition to the €1bn of measures flagged in the spring economic statement, the Government should seek a special derogation from the European Commission to spend a further €1bn on social housing. Fergal O’Brien, Ibec director of policy, stresses the importance of measures to increase investment in housing, infrastructure and education in the Budget.
“We have the lowest level of investment in the EU but the fastest-growing population in the EU. We are already seeing the consequences of this under-investment in housing. If we are not making the investment in these sectors then our competitiveness will fall away very quickly.”
The problems caused by this underinvestment have been compounded by last June’s vote in favour of Brexit. Irish companies doing business in the UK have seen their costs slip against British competitors following the post-Brexit devaluation of sterling.
“One of the crucial things for us is to respond to Brexit in the Budget”, says Mr O’Brien. “We have just had a massive blow to our short-term competitiveness with a 15pc currency drop against our major trading partner.”
Irish personal and capital gains tax rates are far higher than those in the UK while the gap between the Irish and British corporation tax rates is rapidly narrowing. The UK corporation tax rate had already been cut from 28pc to 20pc by former Chancellor of the Exchequer George Osborne. In the immediate aftermath of the vote for Brexit on June 23, Mr Osborne had suggested cutting the UK corporation tax rate to “under 15pc” — as near as makes no difference to our 12.5pc rate.
While Mr Osborne was subsequently sacked by the new British Prime Minister Theresa May, there are already clear signs that they will use low tax rates as a competitive weapon in the post-Brexit world. Ibec argues that Ireland needs to narrow the cross-channel tax gap. “We need to level the tax playing field for SMEs”, says Mr O’Brien.
KBC Bank Ireland economist Austin Hughes has been tracking Irish consumer confidence for almost two decades. His index showed that, after a sharp dip in July following the UK vote for Brexit, Irish consumer confidence recovered in August.
However, Hughes stresses that this recovery in confidence is fragile. While the headline consumer confidence index figure was up in August, a somewhat more mixed picture emerges when one delves into the detailed survey questionnaires with only 23pc of households believing that their financial situation will be better in 12 months’ time as against 27pc who believe it will be worse.
KBC’s Hughes also points to the latest retail sales index, which showed that while the volume of retail sales in July was up by 6.3pc compared to the same month last year, the value of those sales rose by only 3.9pc. This points to a fall in average prices of more than 2pc.
“Consumers are being very selective,” he says. “Even if you are in a job, your pay and conditions aren’t improving dramatically. The economy may be doing well in macro terms but a lot of people aren’t feeling that.”
This continuing nervousness on the part of consumers leads Hughes to call on the Government to use whatever fiscal leeway it possesses to increase spending and cut taxes. “There is a definite need to improve infrastructure and services.”
But what about the FAC’s strictures? Hughes begs to differ. While the FAC may argue that the aforementioned €2.4bn is the upper limit of what is fiscally feasible, he reckons that it is the lower limit of what is economically and politically feasible.
With the mood music from Europe shifting — witness last week’s call by ECB president Mario Draghi upon European governments to do more to support economic activity — don’t be surprised if Michael Noonan turns a Nelsonian blind eye towards the FAC’s recommendations on October 11.