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Irish Budgetary Committee Calls For WHT On Vulture Funds

by Jason Gorringe,, London

05 October 2016

Ireland's new Committee on Budgetary Oversight has called for the introduction of a withholding tax (WHT) to prevent tax evasion by so-called vulture funds.

The recommendation was made in the committee's Report on Budget 2017. The report expressed the committee's concern that the Government's efforts to tackle vulture funds will not have the desired impact.

In September, the Government published an amendment to Section 110 of the Taxes Consolidation Act 1997, which governs the taxation of special purpose companies set up to securitize assets. According to Finance Minister Michael Noonan, the aim of the reform is "to address the perceived misuse of Section 110 and to ensure that the tax provisions are ring-fenced for bona-fide securitization purposes." It followed reports that some companies are using the Section 110 rules to avoid tax on Irish property transactions.

The committee warned that the reform will be ineffective because it allows the assets concerned to be marked to current market value, and applies only to property. In addition, it cautioned that vulture funds will continue to use arm's length loan notes, which can be set against profits made.

A Section 110 company must be tax resident in Ireland and carry on the business of holding or managing "qualifying assets," which must be at least EUR10m (USD11.2m) at the time they were acquired. Apart from the holding or managing of these assets, the company cannot carry on any other activities.

The profits or gains of a Section 110 company are subject to corporation tax at 25 percent. This is the rate for passive income, but the taxable profit is calculated using the normal rules that apply to trading activities. A Section 110 company is allowed a full deduction for interest paid, in recognition of their role in raising funding for the originator of the securitization.

Commenting on the alleged practices of vulture funds, the report stated: "While the Committee understands that Section 110 was originally designed to facilitate finance entities located in the Irish International Financial Services Centre but whose financial assets were located internationally, the funds that acquired the underlying loans are dealing with financial assets located in the State and therefore profits on those assets should be taxable in the State. For that reason, the Committee recommends that the amendments proposed to Section 110 deal with that distinction."

The Committee also suggested that the current review of Section 110 "examine whether a form of withholding tax can be introduced so that taxes are not artificially eroded through loan notes."

TAGS: compliance | tax | business | tax compliance | Ireland | tax avoidance | interest | government committee | corporation tax | ministry of finance | tax rates | withholding tax | tax breaks | tax reform

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