Saturday 22 October 2016

Vulture funds are feasting tax-free on carcass of our property crash

Published 30/08/2016 | 02:30

Social Democrat TD Stephen Donnelly Photo: Fergal Phillips
Social Democrat TD Stephen Donnelly Photo: Fergal Phillips

Irish workers have shouldered a hugely increased tax burden since the financial collapse in order to keep the country afloat. The least we should expect is that companies operating in this country pay their fair share.

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The Irish government could soon find itself in the embarrassing position of having to decline possibly billions from Apple, while simultaneously lecturing taxpayers about the collective need to continue tightening our belts in the forthcoming budget.

Following a lengthy investigation, the EU Commission is set to decree that Apple's tax arrangements in Ireland constituted illegal state aid, necessitating the payment of a huge amount of back taxes.

Once the definitive judgment has been published, there will be a lot of time to pore over it and debate whether or not the Government should take the money and run.

However, what's not up for debate is that Apple is more than a mere brass plate set up with the sole intention of taking advantage of what can euphemistically be described as our 'competitive tax rates'.

Currently, Apple directly employs 5,000 people in Cork, with those numbers expected to swell to 6,000 by early next year. It has been estimated that the company also supports 18,000 jobs indirectly.

So, whatever about the, up to now, perfectly legal ways in which Apple has minimised its global tax bill, it has at least been an important employer in this country with the State benefiting from jobs and investment. However, there are other companies that have based themselves in Ireland, with the express purpose of making a quick buck, that are immune from paying almost any tax.

Speaking in the Dáil recently, Social Democrat TD Stephen Donnelly claimed, "vulture funds are about to pull off the largest avoidance of tax on Irish profits in the history of the State".

The scale, he said, is likely to be "tens of billions of euro in missed taxes - missed taxes being avoided by Irish companies on Irish domestic profits..."

How does he know this? Because the State created the scheme that vulture funds are now exploiting, with the express purpose of enabling corporations to avoid tax.

Don't take my word for it. Here's a helpful summary of Section 110 entities, named after the section of the 1997 tax legislation which gave birth to them, from law firm Dillon Eustace.

"Transactions involving a Section 110 company may be structured to be tax neutral", because these Special Purpose Vehicles (SPVs), "can utilise various techniques to strip profit out on its underlying investments and can reduce or eliminate the tax it is required to pay".

To explain just how lucrative these SPVs have been to vulture funds, feasting on the carcass of the Irish property sector, Mr Donnelly cited the example of Mars Capital.

"In spite of annual revenues in year one of over €14m, Mars Capital paid total corporation tax to the Irish state of €250," he said.

To put that figure in context, a minimum wage worker currently pays €887 in tax every year, meaning the person serving you burgers or cleaning the toilets in your hotel room pays nearly four times more tax than Mars Capital.

Mars Capital is not the only fund taking advantage of Ireland's perfectly legal tax avoidance scheme. An entity controlled by CarVal made profits of €16.45m but its tax bill was just €250. A company controlled by Cerberus has earned nearly €90m from its Irish investments but paid just €2,325 in tax. There is no suggestion that any of these companies did anything illegal - and that is precisely the problem. Tax avoidance on this scale, by companies earning money in Ireland, should not be legal.

It's hard to understand why it is. A study by the Central Bank of Section 110 companies, published last year, found the majority have no direct employees in Ireland.

Instead, "the main benefit to the Irish economy comes through fees paid to Irish corporate service providers". So, the only people earning any money from these schemes are the lawyers and accountants with the professional expertise to set them up.

According to the Central Bank, "the average set-up fee paid to Irish service providers is approximately €50,000 and the average annual administrative fee ranges in broad terms between €40,000 to €80,000".

While these companies pay little or no tax, they have at least one important impact on our economy. All of the money sloshing around these SPVs grossly inflates our GDP figures, contributing to the "leprechaun economics" that saw Ireland's GDP growth reach 26pc last year.

The number of vulture funds using SPVs to buy distressed loan books, from Nama and Irish-based banks, also raises questions about whether the government and the Revenue Commissioners knew about this loophole before these loans were sold. Specifically, were these vulture funds given assurances that they could use Section 110 entities to manage their Irish investments, as a quid pro quo for buying billions in loans?

Was the State willing to do a special deal with these vulture funds because they wanted rid of these loans?

And, if vulture funds can use Section 110 entities to avoid tax on Irish earnings, how many other companies operating in this country are availing of the same or similar schemes?

Currently, the Department of Finance and the Revenue Commissioners are examining Mr Donnelly's claim that billions of euro in taxes is in danger of being lost.

However, if these SPVs are ultimately found to have facilitated tax avoidance on an industrial scale, who will investigate whether the Government or the Revenue Commissioners were complicit in allowing this to happen?

Perhaps the EU Commission, once it has finished investigating Apple, can open a separate investigation into vulture funds and their use of SPVs.

Irish Independent

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