Europe

Apple tax case: Ireland's other taxing issue

Euros Image copyright Creatas
Image caption No matter how big their portfolios, investment funds are legally paying almost no corporation tax

Ireland's Apple tax case has made headlines around the world, but there is another slow-burning tax issue which is causing growing anger in the country.

When the Irish economy crashed in 2008, the country's banks were buckling under the weight of billions of euros of bad property loans.

A state "bad bank", the National Asset Management Agency (Nama), took control of the bulk of these loans while non-Irish banks in the country also set up internal "bad banks".

They then began to parcel up the loans and sell them off in billion-euro chunks to risk-hungry investment funds.

These funds are almost exclusively American and include names like Cerberus, Oaktree and Lone Star, as well as the distressed debt arm of Goldman Sachs.

They are popularly known as the "vulture funds" - a name which reflects their sometimes robust approach to their multi-billion euro portfolios.

Image caption US firm Cerberus is one of those that has bought loans from Nama

They all have similar strategies - intensively manage these risky debts for three to five years, making double digit annual returns.

Reaching those profit targets has been helped enormously by a loophole in Irish tax law.

Zero tax

No matter how big their portfolios, these funds are legally paying almost no corporation tax.

It all comes down to an obscure corner of the Irish tax code known as Section 110.

It was introduced in 1997 with the intention of boosting Dublin's International Financial Services Centre.

It allowed for the creation of companies, known as Special Purpose Vehicles (SPV), which could undertake certain international transactions effectively tax free.

A key point is that this regime had little to do with activity in the Irish domestic economy, beyond work for tax and accountancy specialists.

Fast forward to post-crash Ireland and those specialists are now advising the vulture funds that they too can use Section 110.

But this time the scheme is squarely in the middle of the Irish domestic economy.

The funds are earning revenue from their effective control of office blocks, shopping centres and houses right across the island of Ireland.

Section 110 is allowing them to use various techniques to legally strip out the revenues and so minimise taxable profits.

Moves to close loophole

However, the Irish government has now moved to close the loophole.

Minister for Finance Michael Noonan has published an amendment to Section 110 saying concerns had been raised about "aggressive tax practices".

Mr Noonan said "the proposed amendment targets the issues that have been raised and will ensure that the Irish tax base is appropriately protected".

Image copyright Getty Images
Image caption Apple intends to appeal against the European Commission's ruling demanding it pays €13bn in taxes to Ireland

Fees to subsidiaries

An example of how section 110 is being used can be seen from Promontoria Eagle, a Dublin SPV used by Cerberus for a £1bn portfolio of former Nama loans.

Its accounts for the first eight months of operation show that income of £113m was largely swallowed up by interest payments and other fees.

Those fees include a £31m "asset management fee" paid to Promontoria Holding 82 BV, a Cerberus subsidiary registered in the Netherlands.

A further £46m was paid in interest charges to another Netherlands subsidiary, Promontoria Holding 83 BV.

In the end taxable profits were just £6,000, attracting tax of just £1,947.

By the standards of the vulture funds that was a big tax bill.

Research by the Sunday Business Post newspaper shows that many of the funds have managed to structure their businesses so the annual corporation tax charge is just 250 euros.

There is no implication that Cerberus or any of the other funds have done anything unlawful.

Image caption Protesters outside the Irish Parliament last week demanding the government call in the taxes owed by Apple

However, an independent member of parliament who has raised concerns about the use of Section 110 fears that it could see the Irish state losing out on tax in the region of 20bn euros over 10 years.

"It needs to be stopped, now, and we need to know how it was ever allowed to happen," said Stephen Donnelly.

Mr Donnelly may see the first of his demands met in the forthcoming Irish budget.

The government seems committed to closing off a number of loopholes as it seeks to clean up Ireland's reputation in the aftermath of the Apple tax ruling.

But any change is unlikely to be retrospective, so the funds already using Section 110 will continue to pay tiny tax bills.

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