Charity status for vulture funds – someone shout stop!

Can you trust charities any more? In an inefficient and poorly regulated sector with huge overlap in terms of service provision, not only do we contend with a string of scandals, we now learn charitable status is being used by vulture funds to shield incomes earned in Ireland from the Irish tax system.

That is, to put it mildly, not a good thing. Facilitated by legal firms, somehow special purpose investment vehicles are being given charitable status, which allows them to pay almost no tax. Irish tax legislation, via Section 110 of the Taxes Consolidation Act 1997, provides for special treatment for qualifying SPVs (special purpose vehicles). Essentially this allows a tax deduction for interest payments.

As one legal firm writes when trying to sell the SPV structure:

“Through proper and careful planning the position can be achieved such that the SPV earns a minimal profit (there is no specified minimum amount required by law) subject to the corporation tax rate of 25 per cent.”

Translation: we’ll help you pay almost no tax on assets held in Ireland using a charity status as the vehicle.

Social Democrats TD Stephen Donnelly discussed the case of one firm that paid corporation tax of €250 on net interest income of over €8 million in the Dáil.

This is all legal, but it is wrong.

The Revenue Commissioners should investigate and recover any funds it deems the Irish state is due.

Despite the legal complexities involved, vulture funds have a very simple business model. They buy low, and they sell high. Vulture funds bought distressed assets from Nama and other sellers, loaded these assets into special purpose vehicles to minimise their tax liabilities, and need only wait until conditions improve to sell the assets on again.

Moving up from individual firms, we should be aware that Ireland is a world centre of financialisation. Financialisation as a broad concept refers to an overall increase in financial activities of various kinds, the introduction and use of new financial instruments contributing to an ever increasing emphasis of financial over real economic activities. So we see more firms paid to set up and administer SPVs, and fewer plumbers and teachers.

Ireland and Iceland are good case studies of financialisation. Financialisation has been held up as one reason for declining business sector investment, increased household indebtedness, and a more unequal distribution of income. The international dimension of financialisation emphasises the role of capital-account liberalisation and financial globalisation in increasing financial fragility before the 2008 crisis. We all know what happened to both Ireland and Iceland once the money stopped flowing in 2007.

Since the crisis, the role of multinational tax avoidance and tax havens has been under the spotlight and researched brilliantly by people like UC Berkeley’s Gabriel Zucman, who estimates 8 per cent of the world’s wealth is held in tax havens. That’s $7.5 trillion, with a ‘T’.

Ireland has benefitted from the OECD’s base erosion profit shifting (Beps) process, because Ireland wisely put its hands up and worked with the OECD in trying to solve many of the problems associated with Ireland’s status as a country whose tax laws have been used to facilitate tax havens in the past.

The Finance Act (No. 2) 2013 and Finance Act 2014 created amendments to Irish company residency rules to remedy situations where multinationals could exploit differences in residency rules in different jurisdictions to minimise their tax bills.

These Acts were seen as strong signals Ireland meant to get its house in order as part of the Beps process.

Ironically, this shift in international tax policy has increased interest in the Irish SPV market by many international investors, who don’t want to be called out for holding their offshore assets in tax havens like the Cayman Islands, but who also don’t want to pay any taxes on those assets. So they move to Ireland. As one firm marketing SPVs to international investors puts it:

“Ireland is a member of the European Union (EU) and also of the Organisation for Economic Cooperation and Development (OECD). In the current environment many originators and arrangers prefer not to use offshore entities in their transaction structure. In fact, many investors in structured finance transactions will only invest in notes issued by SPVs located in EU or OECD member countries.”

It’s important not to infer that everything that goes on in the world of structured finance is improper or unethical. But it does deserve serious scrutiny by our tax authorities, because we could use that taxation to help solve the problems of housing, homelessness, health, and water. It’s also a matter of tax justice. I pay my taxes. You pay your taxes.

Our taxes help fund our society. It’s part of our social contract. Those who cheat on their taxes, or aggressively minimise them, break this contract. All of society loses.

This movement of foreign capital to Ireland is far more important than the issue of tax inversions, where one company buys another and can transfer its tax liability to the merged entity’s corporate headquarters, paying taxes at a much lower rate than before. It is far more important than the issue of GDP measurement, where because of the scale of some of these international transactions, the measurement of the health of our economy is suspect.

Ireland’s corporation tax receipts are booming. In 2014 Ireland took in €4.6 billion from corporation tax.

In 2016 the Department of Finance expects that number to be €6.6 billion. Ireland has the lowest statutory corporate income tax rate of OECD countries at 12.5 per cent. Paul Tancred from the Revenue Commissioners did a good job trying to figure out what was going on. He found much of the increase comes from a small number of very large companies. Foreign owned multinationals account for around 80 per cent of all corporation taxes. They are making lots of profits, and they are paying taxes in Ireland on some of them. They are moving money for currency reasons, for tax reasons, and because of the Beps process.

None of our Section 110 charity-SPVs show up in Paul Tancred’s analysis, of course. Because they paid less tax on €8 million than I paid in bank charges last year.

Pope Francis recently said that charity wasn’t just for the poor. Rich people needed charity, too. I don’t think he was talking about SPVs.