Stephen Donnelly (Wicklow, Social Democrats) | Oireachtas source

I will focus on amendments made in the Finance Bill to tackle tax avoidance by vulture funds. As I have laid out previously, if the current situation is allowed to continue, with vulture funds paying virtually zero taxes, the State will lose out on €10 billion to €20 billion in taxes it should be collecting and that would be collected in other eurozone countries. That amount of money would obviously make a huge difference if invested in public services, housing, infrastructure, communities and the supporting of enterprise. The tax avoidance we see does not need to be curtailed, rather it needs to be shut down completely. That is the stated intent of the Minister for Finance, Deputy Michael Noonan, and the Government and the Finance Bill is the mechanism with which to do it. The question for us, therefore, is how the Bill measures up to the Minister's and the Government's stated intent to shut down tax avoidance by vulture funds. Having analysed the proposed changes and consulted industry experts, I would like to make four points, the first of which is that the amendments made in the Bill do represent genuine progress in shutting down tax avoidance by vulture funds. The second is that, in spite of this, the amendments still allow multiple loopholes that will allow vulture funds to continue to pay almost 0% tax. The third is that the amendments include new loopholes that could lead to even greater tax avoidance in the property sector and beyond. The fourth is that the new loopholes relating to property tax could make the existing commercial property asset bubble even worse, leading to a knock-on deterioration in the housing crisis.

I will go into more detail on each of these points, but, before I do, let us recall how little tax vulture funds pay in Ireland. In the past few years they have spent about €40 billion in buying loans from NAMA, IBRC and the private banks. Based on numerous filed accounts by vulture funds, they appear to be making annual profits in the region of €3 billion. Were the State taxing these profits in exactly the same way it taxes all other companies in Ireland, it would take in an additional €1 billion a year in taxes. These are some examples of what is actually being paid.

In 2014 Tanager made €9 million in profit and paid €500 paid in tax, giving an effective tax rate of 0.006%. In 2015 Mars Capital made €11 million in profit and paid €250 in tax, giving a tax rate of 0.002%. In 2014 - my favourite - Beltany made €36 million in profit and paid €250 in tax, giving a tax rate of 0.0007%. Believe it or not, that is a tax rate that is 43,000 times lower than the rate at which Irish companies all over the country are paying every year. At this rate we are looking at lost revenues to the State of about €10 billion. However, it gets worse because that is just the figure for lost taxes from vulture funds on the interest payments they are receiving from families who are paying their mortgages and businesses in servicing their commercial loans. The values of the underlying assets are increasing as loan impairment costs fall and property prices rise. Based on the accounts of several vulture funds, it seems that if capital gains were also taken into account, the State would receive an additional €10 billion in tax. Therefore, taking into account profits for the vulture funds on both interest payments and in capital gains, the State is looking at avoided taxes in the region of €20 billion.

The Finance Bill does represent some real progress in shutting this tax avoidance down. First, marking to market has been explicitly ruled out. Had it not been, vulture funds would have been able to avoid billions of euro in capital gains tax on gains they have seen to date in the value of assets. Second, a 20% dividend on withholding tax has been applied to a new class of property investment fund known as Irish real estate funds, IREFs. Third, the Revenue Commissioners have been given stronger powers of oversight over section 110 schemes, the financial vehicle of choice for tax-avoiding vulture funds. Unfortunately, in spite of this progress, the Bill leaves several other loopholes open and provides for some new ones. The result, as it stands, is that vulture funds will be able to continue paying taxes at close to 0%. Many vulture funds set themselves up as section 110 special purpose vehicles. This makes them exempt from all taxes, including VAT, stamp duty, corporation tax and dividend withholding tax. Instead, they are meant to pay a flat tax rate of 25% on their profits, but, as can be seen in the examples I have given, they reduce their declared profits to almost zero, yielding a few hundred quid on tens of millions of euro in profit. They do this essentially by making loans to themselves at very high interest rates. The loans are located offshore, typically in zero-tax jurisdictions such as the Cayman Islands and the interest rates on the loans are adjusted upwards to account for all the profits generated in Ireland, leaving no profits to be taxed here or where the loans reside in the Caymans and other places.

The Finance Bill states these loans must now offer a "reasonable commercial return", which is welcome. This is an attempt to stop profits being moved offshore using very high interest rates. However, the Bill does not state whether this applies to existing or to new loans only. If it does not apply to existing loans, the vulture funds have nothing to worry about and can continue to place offshore all of their profits, as they currently do. However, even if it does apply to existing arrangements, we have evidence of lending rates in Dublin in the case of commercial property of greater than 15%. A few corporate finance tricks can then be used to justify a "reasonable commercial return" of, say, 20%, and that 20% will be enough to keep things going as they are, with no profits being declared in Ireland. We, therefore, need to amend the Bill to ensure this provision on a "reasonable commercial return" will apply to existing arrangements and that reasonable commercial rates will reflect normal banking rates, usually around 3% or 4%, not the higher rates of 15% or 20%.

Even if we were to do this, there is another loophole because the Finance Bill states the new restrictions will not apply if the loans are listed on a stock exchange as a collateralised loan obligation, commercial mortgage-backed or residential mortgage-backed securities. It takes about two weeks and about €50,000 in legal fees for a vulture fund or any other financial institution to take all of its loans and have them packaged in a nice prospectus and listed on a stock exchange. Once it does this, we are back to zero taxes. This loophole smacks of very heavy lobbying by the industry. I am told it has the financial advisers very excited because if this can be done for vulture funds, it can also be done for every other financial corporation holding loans - for example, banks, pension funds and life assurance companies. Therefore, in effect what the Bill would be doing in allowing this is creating a new market in mortgage-backed securities based on tax avoidance. What would the result of this be? Not only would vulture funds be able to continue to avoid paying taxes, so too would a new host of other foreign investors, essentially taking a sizeable asset base out of the Irish tax net. This new mechanism needs to be deleted from the Bill.

Even if we were to do this, there will be yet another loophole because the Finance Bill provides for IREFs to be exempt from capital gains and withholding taxes once they hold an asset for five years or if it is owned by something called a collective investment undertaking. Therefore, if all else fails, if we manage to clamp down on interest rates and somehow not have them list their loans on a stock exchange, vulture funds can make an internal transfer of their loans from the section 110 company to the IREF. They can backdate the move to before 5 September and then organise the IREF to be owned by a collective investment undertaking located offshore and, yet again, they will pay zero tax. Therefore, with all of these loopholes still available, it is unlikely that the Bill, without significant further changes, will have much effect in stopping tax avoidance by vulture funds and the Department of Finance agrees.

The budget estimates that additional revenues through these changes for next year will come to €50 million. Based on the profits being earned by the vulture funds, that €50 million would represent an effective tax rate of about 0.7%, so we are still good. We may no longer be at the 0.0007%, but 0.7% is also not acceptable.

Not only is the Finance Bill as it stands unlikely to succeed with vulture funds, but it appears to facilitate new tax avoidance in the property sector and beyond. For example, the amendments appear to open the door to tax avoidance by any Irish company worth over €10 million. How is that done? Any Irish company worth over €10 million can go through a set of legal and financial steps which would allow the owners of the company to no longer own the company but to own a loan to the company. This loan could be used, as they are now by the vulture funds, to suck all the profits out of the company, into a section 110 vehicle, and then offshore, thereby avoiding all corporate taxes.

As already discussed, the Bill also creates a mechanism for commercial and residential mortgages to be offshored, moving them into a tax-free world, but there is more. Through IREFs, it also creates a mechanism for funds to buy commercial property directly and never pay any taxes on income or capital gains. So the owners of commercial property will not have to pay any tax and the owners of the loans to property will not have to pay tax. Therefore, we are now at risk of taking the entire Irish commercial property sector, one of our biggest asset classes, out of the Irish tax base. No other eurozone country does this and neither should we.

If we do, two things will happen. First, the corporate tax base will be significantly eroded. Second, an existing asset bubble in commercial property will inflate further. Dublin is now the second most expensive commercial property market in the eurozone. Why is this? We have about the same cost to build and more or less the same average wages as everybody else, so commercial property prices should be about the same here as they are in the rest of the eurozone, but they are not. Commercial property in Dublin is now the second most expensive in the eurozone, which is cause for concern. That is an asset bubble. It is happening because we are offering massive tax incentives to people investing in commercial property.

So demand increases and rents become too high for businesses. With such high returns, zoned land is developed, not for housing which is what we need, but for offices and other commercial property because the returns on developing commercial property far exceed the returns on developing residential property.

Why are we giving tax incentives to foreign institutional investors to maintain this bubble? Why are we on the verge of making this bubble worse by giving even more tax breaks? Are we not afraid of Irish banks lending Irish deposits yet again against inflated property values? Is it not better to have commercial property investors paying Irish taxes as they do in the rest of the EU? Do we not want more rational Irish commercial property prices, against which our Irish banks can lend safely?

If we are serious about shutting down tax avoidance in the domestic economy, I offer my suggestions as to what the Finance Bill needs to do. First, section 110 status must be ruled out fully for all activity in the domestic economy. Once a tax free vehicle is allowed to exist in the domestic economy, smart accountants and clever lawyers will find ways of using it, as I hope I have already demonstrated they are already planning to do after the enactment of the Finance Bill.

Second, the five-year capital gains exemption should be removed from the IREFs and we should properly tax Irish commercial property.

Third, any amendments giving tax exemptions for listed mortgage-backed securities should be deleted.

Fourth, all Irish companies paying reduced Irish taxes should file publicly accessible accounts with the Companies Registration Office. We only found out about the vulture fund tax avoidance because section 110 companies have to file their accounts publicly. However, many other tax-avoidance vehicles do not, meaning we have no idea what is going on in other parts of the economy.

I have prepared a detailed policy note which I will send to the Minister, Deputy Noonan, for consideration. I will also send it to Members of the House. My hope is that these changes can be incorporated on Committee Stage. If they are not, we can look forward to continued, growing, massive tax avoidance leading to underfunding in public services and infrastructure; a growing bubble in commercial property with rising rents for businesses; the Irish banking sector lending into another commercial property bubble; and a lack of development of residential housing, leading to yet higher prices.

If we make the changes, we can look forward to something altogether better: better public services, higher quality infrastructure, thriving communities, reduced costs of doing business, more affordable housing, a level playing field for businesses paying their taxes in this country and, critically, less risk of yet another property and foreign-capital-fuelled bubble and collapse.

It is entirely up to us, as legislators, to make this choice and in the coming weeks we will find out what choices are made.

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