Tuesday 25 October 2016

The 'tax neutral' quandary: just because it is legal does not mean that it is right

Published 25/07/2016 | 02:30

Finance Minister Michael Noonan Photo: Tom Burke
Finance Minister Michael Noonan Photo: Tom Burke

The trick to hiding in plain sight is to look boring.

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And there are few areas in life that look, at first glance, as boring as corporate tax structures.

This is especially when those "innovative" tax structures involve complex concepts like debt securitisation and the setting up of entities such as off-balance Special Purpose Vehicles (SPVs) to engage in financial transactions in a 'tax neutral' manner.

See? I've lost you already.

But when you hear that so-called vulture funds have been buying distressed Irish property assets and paying as little as €250 a year in tax on multi-million-euro revenues, corporate tax suddenly gets more interesting.

When you hear that there has been a surge in the number of foreign and domestic investors using other "creative" tax vehicles that are fully exempt on their income and profits to invest in property, your newfound interest quickly converts to anger.

And when you hear further still that the Revenue has, in fact, been inquiring of the activities of at least 40 companies based on "various risk indicators" since late 2014 - without any prosecution - your heart sinks.

The controversy over the growth of and potential misuse of 'tax neutral' structures is exacerbated by the fact that the companies and their coterie of legal, tax and accounting experts have been operating in plain sight all along. And it's all perfectly legal, even if it's not right. The present outcry, highlighted robustly in the Dáil by Social Democrats co-leader Stephen Donnelly, is over Section 110 companies that are hoovering up distressed Irish property assets at steep discounts whilst paying no tax on their Irish profits.

These are handsome profits that are typically re-routed to the S110's parent company in the US via exotic and established tax havens such as the Cayman Islands.

To be fair, Ireland - which is constantly fighting a rearguard action over our low 12.5pc corporate tax rate - is not the only country in the world to offer effective tax-neutral status to certain companies.

In Ireland, S110 companies or SPVs must be tax resident here and conduct a specified (albeit very broad range) of economic activities such as the acquisition and management of assets, including domestic mortgage loans. Section 110 of the Taxes Consolidation Act 1997 is regarded as the cornerstone of Ireland's onshore debt regime. And it's incredibly generous.

As long as a S110's payments out match payments in, they pay as little as €250 a year in tax.

The section, which was extended five years ago to include even more assets, does have an anti-avoidance provision to prevent abuse.

The problem with the anti-avoidance provision is that the ordinary, let alone criminal, understanding of avoidance can often amount to whatever you're having yourself.

And when an entirely legal scheme's sole purpose is to achieve 'tax neutrality' - tax avoidance by another name - at what point does legitimate use become flagrant abuse?

Finance Minister Michael Noonan said he is willing to make changes to the law if S110 and other schemes are being used for tax avoidance.

It is no coincidence that the huge increase in the number of S110s coincided with the establishment of Nama and the sale of billions of euro worth of distressed property assets.

It was inevitable, given the depths of the Irish property bust, that vultures would feed and, yes, profit from our distress. That's unpalatable to many. What's utterly unforgiveable is that they don't have to pay tax on those Irish profits.

Dearbhail McDonald is INM Group Business Editor

Irish Independent

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