Government must protect people behind distressed loans

In 2014, US investment fund Cerberus paid about £1.3 billion to buy a portfolio of assets and loans controlled by Nama in Northern Ireland. It was hailed as a great deal by the agency, a job lot sale of a bunch of rotten loans that Nama could have spent years trying to sell off on a piecemeal basis.

The following year allegations of skulduggery and potential fraud emerged, and the deal is now the subject of a number of investigations and inquiries, notably by the Public Accounts Committee here and the National Crime Agency in the UK.

Given the stink off this deal and the related furore and the potential reputational damage to the fund, you might have thought Cerberus would simply wash its hands of Ireland and move on to other markets.

Not a bit of it. The US fund has continued to buy and bid for loans and assets here. Why? Because there is so much money to be made in this market from buying distressed assets at a knockdown price, sweating them and squeezing them for large and mostly tax-free profits.

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And, as demonstrated by RTÉ's television programme, The Great Irish Sell-Off, and by this newspaper through various reports over the past year, the legislative framework here wasn't strong enough to prevent it happening.

In November, my colleague Barry O’Halloran revealed how Cerberus had paid less than €1,900 in tax on the €77 million profit it earned from the Project Eagle assets last year.

Last month, Cerberus was announced as the preferred bidder by Nama for Project Gem, a €3 billion face value portfolio of loans and assets. It is expected to pick this up at a substantial discount to its par value.

In October, it acquired the €2.5 billion face value Project Oyster loan portfolio from Ulster Bank. This included €2.15 billion of loans based in the Republic and mortgages held by 900 borrowers who were said to be in a legal process with the bank.

We don’t know how much Cerberus paid for the portfolio but we can assume it was acquired at a substantial discount.

Knockdown prices

Sinn Féin’s finance spokesman

Pearse Doherty

has challenged the narrative that the mortgage holders were all customers who had not engaged with Ulster Bank. The borrowers might soon discover that Cerberus is more ruthless in dealing with their arrears than Ulster Bank ever was.

That same month, Cerberus purchased the rump of Permanent TSB’s CHL buy-to-let mortgage business in the UK.

The deal involved a 15 per cent discount on the £2.29 billion face value of the CHL portfolio and crystallised a loss for the bank, of which 75 per cent is attributable to Irish taxpayers.

And on it goes.

RTÉ’s programme highlighted how vulture funds had acquired €200 billion of property assets and some 90,000 mortgages at knockdown prices and were paying little or no tax on the profits derived here.

It focused on the fact that just a small number of overseas funds had acquired these assets but that’s merely a secondary consideration.

What is important is that people behind the loans and assets – be they developers, SMEs, home owners or tenants – are treated fairly. It is also important that the various funds pay a fair share of tax at a time when the Government is still borrowing money to pay for the country’s day-to-day costs.

Sadly, in the headlong rush to attract overseas money into the bankrupt Irish economy, the Government and various agencies were slow to put in place proper regulation or to ensure that the investors couldn’t exploit the legislation relating to section 110 companies and other structures to swerve paying tax here.

As revealed by this newspaper, many of these companies were registered charities set up with the assistance of law firms.

Lost revenue

Many of these matters were brought to light by Independent TD

Stephen Donnelly

, who estimates that it is costing the exchequer about €1 billion or more each year in lost tax revenue.

The Government moved to close off these loopholes last year and has said it will close any others that come to light.

But the funds, advised by leading accounting and law firms here, will no doubt figure out a way around them. If all else fails, they can always suck out large management fees or charges to sister companies overseas to avoid any tax liability.

In many ways, we only have ourselves to blame. Ireland has actively promoted itself as a low-tax location since 1980 when the 10 per cent manufacturing tax was introduced.

It was later broadened out to all companies at a rate of 12.5 per cent while a myriad of tax breaks have been introduced over the years to the benefit of many sectors, the film industry, horse breeding, financial services, artists, property and hospitality among them. The trade-off was the promise of foreign direct investment and jobs.

The strategy worked for many years – IDA clients now employ just shy of 200,000 people here – but has come back to bite us in the past 12 months, notably through the European Commission's ruling in August that Apple must repay €13 billion in taxes to Ireland and the loopholes aggressively exploited by the vulture funds.

In this era of new politics and with Donald Trump promising to slash business taxes in the US, a revised strategy on corporate taxation might be in order.

Twitter: @Ciaran Hancock1