What "loophole" are the Vulture Funds exploiting to pay so little tax?

[Brendan Burgess]

Has anyone followed this story?

I presume that the vulture funds are not doing anything illegal?

Why are they paying so little tax?

Do we know how much profit they are making? Or Capital Gains?

If I buy American assets and sell them at a profit, am I subject to CGT in America?

Presumably if a foreign company makes a gain on Irish assets, it's not liable to CGT in Ireland?

Brendan

 

[Andy836]

If you sell them at a PROFIT you are liable to CGT in the US.

Increase your costs sufficiently to reduce your PROFIT and you're tax liability is reduced. So you push costs into high tax jurisdictions and move profits into low/no tax jurisdiction. Within a corporate structure it is possible to do this - as a regular investor it isn't (no scale).

This is essentially how the much of the MNC/IFSC industry works and this "scandal" is essentially the Irish now complaining about what this country has been doing to other countries for over a decade.

Much of what you've heard in the media/from politicians is both (i) a fundamental misunderstanding of return ratios, (ii) a misunderstanding of purchase prices and leverage and (iii) hysterical attention seeking rubbish - billions being forgone etc.

However, to focus purely on the tax rates selectively ignores the balancing/mitigating effect these structures have. If you close these structure what happens? Cash flows to foreign investors from these bad loan portfolios reduce (due to higher taxes) therefor the price they are willing to pay in the first place is lowered (the value of the portfolio falls). The prices they paid for these portfolios were based on the existing structures so while we may forgo some future tax receipts we actually received a larger up front amount on the portfolio sale. Given the state is the beneficiary of both the portfolio sales proceeds and the future potential taxes there isn't much leakage there.

Some will make the argument that these guys are making huge profits on individual loans but they don't buy each individual loan - they buy all of them in one go. This is the easiest thing for politicians to do as they can cherry pick examples to make their argument. The blended discount doesn't represent the discount value for each individual loan it only represents the discount value for the portfolio. Some loans will be higher value to make up for some loans which are lower value and in the round they balance to the blended discount rate.

The fact property prices increased since many of these transactions were completed is irrelevant - if the state/Banks etc thought prices would increase then they should've kept hold of them - but they didn't (that's the fault of politicians). Prices could've easily stagnated or fallen (the risk aspect).

Edit:
The "loopholes" they use relate to standard corporate structures used in structured finance transactions to ensure assets and liabilities are stored in isolated/orphan SPVs (charitable trust ownership means they are not owned by the fund which provides comfort to the senior lenders). While they raise senior debt to purchase these portfolios at loan to costs of approx 50%/60% the other 50%/40% of the purchase price is not pure equity but provided via a subordinated loan from the fund parent in another jurisdiction. This loan accrues interest sufficient to account for most of the surplus cash in the SPVs.

 

[Brendan Burgess]

Great article by John McManus on the issue in the Irish Times

Outrage over vulture fund tax avoidance rings a little hollow

Charties have been used for years to reduce tax on international deals done from Dublin

The logic behind how we tax multinationals is pretty well understood and accepted. We tax them very little. We have created a very robust and relatively transparent corporate tax system to facilitate this. The wheels of the system are greased by a network of professional intermediaries. In return we get investment, jobs and downstream tax revenues such as income tax and VAT.
...
Full-blown investigation
Donnelly told the Dáil that the use of this and other loopholes could result in the state missing out on tens of billions in tax. He wants a full-blown investigation and the [broken link removed] has responded by saying that it is examining recent media coverage of of the use of certain vehicles for property investment. The Revenue Commissioners have also taken an interest.
The question is why now? Why is it different this time? The use of these structures has been going on for years. It was no secret.

Apparently it is no problem to use an Irish charity to set up an elaborate structure to minimise the tax bill on an international deal. Nobody in Ireland really cares if the Icelandic or any other government loses out on some tax because a deal involving the bonds of defunct Iceland banks was routed through Ireland.

Irish scheme
But it is something else entirely for these structures to be used to minimise the tax paid on a deal in Ireland involving Irish assets. Particularly if these assets were sold by the Government as part of a State-backed scheme to rescue the bank that cost the tax payer billions.
It seems we do care when we are the losers.

 

[Delboy]

So we get jobs and we therefore turn a blind eye set ups like this!
And if it was so transparent, why are there now investigations into this?

 

[Brendan Burgess]

It's a very interesting point - we provide corporates with a low tax structure and we don't care if they cannibalise the tax revenues in another country.

But when they use the same structures on the profits generated in Ireland, we get all upset over it. Especially, as Taylor points out, when they make those profits on the back of assets bought from state owned institutions.

Brendan

 

[Delboy]

I'm no expert on tax law and I struggle with understanding the legalities etc when it comes to Corporations.
But if I may, can I point to analysis of these Section 110 Organisations on thepropertypin.com and the posts by Observer35?

See pages 21 and 24
http://www.thepropertypin.com/viewtopic.php?f=4&t=61614&start=300

3. Core Fallacy of John McManus Argument. The crux of John's argument (similar to Comical Ali's) is that this is IFSC type structuring, and while distasteful, is the quid-pro-quo for having an IFSC empire. This is false. Section 110 type structures are available all over the world (one of the few true lines in Professor Eamonn Walsh's shameful RTE piece). However, they are NEVER (ever) allowed to suck domestic profits, gross, out of any economy (without paying domestic corporate or withholding taxes) to re-route elsewhere. That is tax law everywhere. It is the law in Ireland too (until Revenue began to issue rulings to fit the vultures Section 110 zero-tax schemes into our own domestic economy). It is the law in the US. Everywhere.

He reckons this could run into tens of billions.

Like I said I'm no expert and while some of Observer35's posts stray into conspiracy theory territory, he does seem to have a good understanding of this topic and is quiet outraged by it