Closing down tax avoidance by large investors is part of the difference between the State having, and not having, enough money to invest in public services and infrastructure for the next decade. And to that end, the latest Project Eagle accounts tell us three important things.
First, they vindicate the Comptroller and Auditor General's (C&AG) assertion that Nama undersold Project Eagle, though by far more than the C&AG's figure of £170m. Nama believed the portfolio would yield £85m a year in rent and interest payments. This would represent a 7pc yield on an investment of £1.2bn. The C&AG points out that, when you take out the non-income-producing land that was in the portfolio, the real yield was in fact nearly 9pc. If this upset the C&AG, he's going to be sick when he looks at Cerberus' 2015 filed accounts for Project Eagle.
Why? Because Cerberus, the New York-based private equity firm that bought the portfolio, didn't bring in £85m. In their 2014 accounts, they showed that they brought in £112m, nearly a third more than Nama forecast. But in their latest accounts, they show that in 2015, Cerberus got this income level up to £162m. That's a yield of nearly 14pc (there's a reason these folks make a lot of money).
Why does this matter? Nama sold the portfolio for £1.2bn. Based on the new accounts, Cerberus could sell the portfolio today for £2.2bn. So the Irish people have not lost £170m, we have lost at least £1bn, or €1.2bn. Enough to build two children's hospitals.
The second thing the new accounts highlight is just how little tax is being paid. By my reckoning, Cerberus made about £168m on Project Eagle in 2015. On that, they paid just under £1,600 in tax. That's a tax rate of 0.001pc. It's 13,000 times less than Ireland's already low corporation tax rate of 12.5pc.
Thirdly, the accounts suggest that the benefit to the State of shutting down this tax avoidance could be even bigger than initially thought. My previous estimate was that €10-€20bn could be avoided in Irish taxes in the next decade by the so-called vulture funds. That's between a quarter and a half of the total cost of the bank bailout. This was based on the funds making yields of 9pc, as Cerberus did in 2014. But Cerberus are now seeing a yield of nearly 14pc. Now it's unlikely that all so-called vulture funds will get to this level. However, it does suggest they'll move well north of 9pc. And if this happens, the total Irish taxes at stake will rise by several billion euro.
It's worth taking a moment to understand just how much money these funds are making in Ireland. The 9pc returns referenced above are based on the total sales price of the loan books. But these funds make 'leveraged' purchases, meaning they use some of their own money (about one third) and borrow the rest. The plan, as per their own brochures, was to get an annual return on their own money of around 15pc (that turns €100m into €400m in 10 years). For Cerberus, that return for 2015 wasn't 15pc, it was over 30pc. It's an incredible profit margin. And it's before capital gains. And until last week, completely tax free. Nama knew it was selling to tax-free entities. My guess is that IBRC knew too. And of course, the government knew. We really are "the best small country in the world in which to do business".
So let's make sure that taxes are paid on these profits. To that end, here's what we need to do.
1 Mandate that all funds, vehicles and other tax structures must file publicly accessible Irish accounts. The 2015 Cerberus accounts show that about half the Project Eagle asset base has now been moved out of their Irish Section 110 company. Were these assets to be put into a different type of Irish vehicle (i.e. QIAIF, a trust), it would no longer be possible to see what profits are being made, and what Irish taxes are being avoided, because many investment vehicles in Ireland don't have to file publicly accessible accounts. Such a lack of transparency has no place in a modern democracy. It is not credible that an Irish fund, vehicle or other structure can get to avoid the Irish taxes that a normal Irish company pays and not file public accounts.
2 Disallow the technique of 'orphaning' - which often involves Irish charities - for the purpose of tax avoidance. If you or I told the Revenue that the money we'd invested in a local shop was really a high-interest loan, to ourselves, based in the Cayman Islands, through which all our Irish profits are exported - untaxed - they would laugh. Funds can get around this using 'orphaning', where they get a third party (often an Irish charity) to 'own' their company, and then apply for full Irish tax deduction on their internal high-interest loans. The same tax rules and practices that apply to citizens must also apply to these funds. We should not allow charities to be used in this way.
3 Tax the profits from domestic Irish property assets like other Irish companies. That means 12.5pc Corporation tax on Irish trading profits, 33pc capital gains tax on any Irish gains, and 20pc dividend withholding tax on net Irish profits distributed to all shareholders.
4 Despite co-called vulture funds and foreign landlords having an almost embarrassment of choice in vehicles for Irish tax avoidance, the Government has, in addition, decided to give a blanket exemption on capital gains tax. Why? It makes no sense.
We live in turbulent times. The stakes are growing. There is much we cannot control. But there is much we can. We must make sure we tax all domestic Irish economic activity fairly, and not make one sector or class of investors tax free. And we must invest those taxes smartly, in the long term health of our nation.