Stephen Donnelly (Wicklow, Social Democrats) | Oireachtas source

The Minister was absent on Committee Stage. I reiterate that there is recognition of what has been achieved. Huge progress has been made and I thank the Minister and his officials for the time spent on this issue. The original draft proposal was leaky, but it seemed to have been tightened considerably and was tightened again between Committee and Report Stages. I acknowledge what is very good and important work.

The Minister of State, Deputy Eoghan Murphy, stood in for the Minister on Committee Stage. He spoke about the quantum of money involved. The figure of €50 million is widely accepted to be a placeholder in the budget document, but the Minister of State provided some useful information on how Revenue had reached the figure of €50 million. It took a sample of loans, estimated what would be received in tax on them if the loopholes for vulture funds were closed and scaled upwards to a base of €20 billion of loans. I want to go through it quickly to get the Minister's thoughts on it. If €50 million was to be the amount received in tax receipts on loans of €20 billion - we know from the companies involved that they are making a figure of approximately 9% or 10% a year - it would give annual profits of €2 billion. If we were to get €50 million in tax on that €2 billion, the tax rate would be 2.5 %.

The section 110 tax rate is 25%. I believe the Minister of State said it was the intention of the amendment to section 110 that all trading profits and all capital gains would be fully taxed at the rate of 25%. If we move from a tax rate of 2.5% to 25%, we should move from the figure of €50 million to €500 million. At €40 billion, the data suggest the asset base is twice the figure of €20 billion used by the Revenue Commissioners. On the €50 million placeholder, if we really do tax the vulture funds, as I believe the Minister has said we will and as I believe we should, the figure of €50 million would actually grow to €1 billion a year. Inevitably, there would be some leakage, but on a €40 billion asset base and given that we know that they are making a figure of about 9% a year, that gives them trading profits of about €3.6 billion a year. If we were to tax that €3.6 billion at the section 110 rate of 25% which I believe is the objective, it would bring in about €900 million a year in tax. On top of this, there would be taxes on capital gains which would also be levied at the section 110 rate of 25%. Therefore, if we were to do this properly, we should be looking at taxes to the State in the next ten years of €10 billion to €20 billion.

I appreciate that the Minister has very little time in which to reply to everybody, but the first question I have for him is whether that calculation seems reasonable. If the figure of €50 million represents a tax rate of about 2.5%, does he agree that we should be looking to tax full trading profits and capital gains at the section 110 tax rate of 25%, in which case the figure would not be €50 million but €500 million a year?

I raised the following on Committee Stage and it refers specifically to one of the Minister's amendments. The tax experts were suggesting that this ability of vulture funds to securitise their loans was a way out. The amendment to section 110 states it will no longer be possible to use PPNs to offshore profits any longer. However, exempt from that is securitised loans. Therefore, the tax advisers are saying this is fine and a way out and that the funds can securitise their loans which takes about two weeks. It is asserted that they will no longer be constrained and can continue to offshore profits. The Minister of State, Deputy Eoghan Murphy, stated that the vulture funds would not be able to securitise their loans and that they were explicitly prohibited from doing it. He said the only group that could securitise the loans and thereby continue to offshore profits were loan originators. Will the Minister confirm to the House that it is his understanding that vulture funds will not be able to securitise their loans and thereby get around clampdown here?

I have covered some of the following in the numbers I have just gone through, but is the following the Minister's intention for all these vulture funds? They are making a lot of money, as is absolutely their right, from trading income and, as is absolutely their right, from capital gains. Will the full amount of those profits now be taxed at the 25% under section 110? That is the second question I have for the Minister.

My third question is around the idea of internal loans. Obviously, how the vulture funds have been operating to date has been to set up a loan from a fund they own in the Cayman Islands which has a variable interest rate. The interest rate rises and, therefore, all the profits get paid out to the Cayman Islands. We spoke at some length on Committee Stage about the rate at which the vulture funds will continue to be allowed to pay interest. The amendment states they will only be allowed to do so at a reasonable commercial return. The Minister of State, Deputy Eoghan Murphy, and I went through this in some detail and I am personally very worried about it. I believe they will be able to get portfolios of evidence to bring to Revenue which show that a reasonable commercial return in this situation is 18%. If they achieve that, it will continue. The rate that is being used at the moment that pretty much offshores all the profits is 18% to 20%. There is a great deal of evidence around that could be compiled by the large bona fide accounting firms to show that a mezzanine rate of 18% or 19% is still reasonable.

I have a concern about that issue. The Minister of State assured the select committee that Revenue would not tolerate that sort of rate and, at this point, we have to take it on faith. However, I ask the Minister if he is absolutely confident that, regardless of what the rate is, there will be no ability to do these internal loans any more. Obviously, they can structure a fund in the Cayman Islands, lend the money into a Luxembourg company which lends it on to another Luxembourg company and eventually it is lent into the vulture funds here. Therefore, while it might look like a vulture fund is getting a loan from a completely independent fund in Luxembourg, if one follows the international breadcrumbs, it turns out that the same parent company owns them both. They are very good at this because the IRS in the USA has very serious rules around internal loans. Therefore, my third question is whether the Minister is absolutely confident that the amendment is sufficiently robust that they are not going to be able to use international structures to hide the fact that they are still lending money to each other.

I appreciate that the Minister is not going to be able to answer all this in two minutes, but my final question is around allowing domestic assets into the section 110 companies at all. The Minister's stated policy position is that assets which generate economic returns in Ireland should be taxed in Ireland. The amendment, therefore, represents a game of chess. It states that if a company tries to do X, we will stop it here; that there is anti-avoidance there, that a company cannot do Y anymore, that there must be reasonable commercial returns and that they cannot securitise and get it that way. It goes on and on and it is a game of chess. If it were simply stated that domestic assets were not allowed in a section 110 company, the game of chess would be over. It is check mate. If a vulture fund had loans on Irish homes or businesses or unsecured debt like credit cards or car loans, as long as they resided in the State, it could not bring them into a section 110 company. The game of chess is then not required.

Inevitably, if a game of chess is played by very sophisticated corporates and the State, the State will win some days and the corporates will win the others. Rather than construct very complicated rules and anti-avoidance mechanisms, why not just state that domestic assets cannot be used in section 110 companies? We have looked at various tax jurisdictions around the world and have not been able to find any country which is not a tax haven that allows a box to operate in its economy which is a tax-free box that allows domestic assets in there. I understand fully why they are there for global securitisation. The profits are not derived here so we do not tax those profits. Having spent a great deal of time on this over the last few months, I still do not understand why we do not say that loans on mortgages, hotels and credit cards that are in Ireland are just not allowed in. It would shut the whole thing down and force the vulture funds to operate, and be taxed, like normal companies. I finish with that and reiterate that very significant work and progress has been made here, which is very welcome.

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