State losing more than €1bn a year to vulture funds, says Donnelly

Independent TD Stephen Donnelly, who exposed the massive tax avoidance by so-called vulture funds last year, has said he accepts that the Government has sought to close down tax loopholes but that the exchequer will still lose out on hundreds of millions of euros every year in untaxed profits.

Mr Donnelly, who has been advised, he says, by a number of people working in the industry, outlined last year how international investors – including so-called "vulture funds" who bought up distressed debt in Ireland – were avoiding any tax on Irish property investments through a series of specially created corporate structures designed to exploit loopholes in the tax code.

Funds and investors were extracting hundreds of millions of euros in profit while paying nominal amounts of tax in Ireland, no more than a few thousand euros in many cases. Typically, the funds bought up the distressed assets from banks or from Nama at heavily discounted prices.

As a result, the Government moved to close down the loopholes in the Finance Act which followed the October budget. Mr Donnelly said when the Bill was published that vulture funds and international investors would continue to avoid tax on commercial property investments but he now accepts that subsequent amendments mean most of the loopholes have been closed, as the department insists.

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Sweeping

Property industry sources said that the Government’s action in closing the loopholes was sweeping and dramatic, with an entire group of investors who were previously able to avoid tax now eligible for tax. There was significant lobbying by property and investor interests against the changes before the budget, but, conscious of the political cost of being seen to defend such funds and their extravagant returns while ordinary householders were burdened with huge debts, the Government pushed through the changes.

The Department of Finance has insisted that all known loopholes have been closed, while Minister for Finance Michael Noonan promised during Dáil debates on the Finance Bill that if any further loopholes were found to facilitate tax avoidance, they would be closed next year. European pension funds will continue to be tax-exempt on commercial property investments, said one industry source, although US investors, for example, will be taxed in future.

Mr Donnelly warned, however, that some companies would continue to reap enormous rewards from investments made when property prices in Ireland were at rock bottom.

“The returns that global distressed debt funds are going to achieve on Irish assets will be among the highest achieved globally from the credit crisis. Early indications from Cerberus on their own investor fundraising roadshows are that the Irish distressed loans will be some of the highest returns ever achieved in Cerberus’s history,” he said.

Documentary

Last night, an RTÉ documentary, The Great Irish Sell Off, reported that giant US investment funds, most with few if any people employed in Ireland, were able to cut their tax bills to just a few hundred euros a year – despite making enormous profits on the Irish investments.

The programme estimated that the State could be foregoing up to €350 million a year in tax due to the use of tax loopholes exploited by the investment funds. Mr Donnelly said he estimates the true figure is between €1-1.4 billion a year, as the value of assets held by the funds and the length of time which they will hold them is greater than the programme estimated.

Property sources acknowledged that the returns being made by investors in Irish commercial property are extremely good, but pointed out that many of them took significant risks on buying into the country during the uncertainty of the bailout period.