Take 5: What to expect from today’s Finance Bill
Posted by admin on 20 Oct, 2016
Measures to close vulture fund tax loopholes set to be unveiled
By Mary Hallissey, Andrew FanningOct 20, 2016
Today will be a busy day for those in the property industry and their tax advisers, who will be poring over the Finance Bill to see what changes the government is planning to the way controversial structures used by property investment companies are taxed.
It has been suggested that the Department of Finance is preparing to split the Bill in two, with today’s document focusing mainly on the detail of the measures announced in the Budget. However, there has been much to-ing and fro-ing in recent days, with an unprecedented lobbying front presented by the industry.
There will also be scrutiny of moves such as the help-to-buy scheme for first-time buyers, the tax measures aimed at entrepreneurs and the new childcare scheme, to see if there are any additional details or tweaks. There are reports that the help-to-buy plan may be changed slightly to reflect Central Bank concerns about how much debt people will be allowed to take on.
The Finance Bill also usually contains some measures not already announced in the Budget. Many of these are technical or administrative, but some can be significant.
For instance, last year’s Bill increased the maximum tax rate on oil and gas fields and brought in an exemption from the USC on employer contributions to personal retirement savings accounts (PRSAs).
This year, the main focus will be on measures to deal with the way some property investment companies are using controversial structures under Section 110 of the 1997 Taxes Consolidation Act to slash their tax bills.
In his Budget speech, Finance Minister Michael Noonan said Section 110 was now being used in a way that was never intended. He signalled that further amendments to Section 110 would be published in the Finance Bill.
As a Sunday Business Post investigation revealed, Section 110 structures such as QIAIFs (Qualifying Investor Alternative Investment Funds) and ICAVs (Irish Collective Asset-management Vehicles) were being used by so-called vulture funds to slash their tax bills. It emerged that some firms were using Section 110 companies to send loan repayments arising from distressed Irish assets abroad.
The Sunday Business Post reported last weekend that the property industry was lobbying intensely to prevent the proposals applying to past deals, as well as those which take place from now on.
Some in the property industry have suggested that some deals are being put on hold until the new tax regime is clarified.
Meanwhile, Noonan also signalled on Budget day that the bill would contain moves to restrict the opportunity for offshore defaulters to use the voluntary disclosure regime from May next year. Details of a new strict liability criminal offence to facilitate the prosecution of serious cases of offshore tax evasion are also expected.
Businesspost.ie spoke to five experts in the property and tax sector about their expectations of the Finance Bill. Most are hoping, at least, for an end to the uncertainty surrounding the treatment of Section 110 investments.
Jim Clery, head of real estate and tax partner KPMG
“The commentators arguing to impose taxation on foreign investors have quite short memories as to the role that these investors played in stabilising not only our property market, but also our economy.
The law has been crystal clear that such investors are not subject to Irish tax.
It is the government’s prerogative as to what it wants to do for new investments into the future.
But to impose tax on transactions already undertaken is a huge risk for Ireland’s international reputation.”
Peter Vale, tax partner at Grant Thornton
“Section 110 vehicles are often used by private equity investors in the acquisition of distressed loans relating to property. Section 110s are typically tax-neutral vehicles. Profits generated within these companies are generally returned to investors by way of a tax deductible payment.
The draft legislation released on 6 September is expected to be included in the Finance Bill, with some updates. Broadly, these changes will remove that tax neutrality for purchasers of Irish-related property debt or property. Gains generated from 6 September will be subject to tax at 25 per cent, with more limited scope to reduce the tax charge.
Unquestionably this has altered the landscape for investors into the Irish property market, with an inherent increased tax cost for certain investors. This may mean a diminution of the attractiveness of the Irish property market for certain overseas investors.
What we don’t know is what is coming down the tracks for those who have invested into the Irish property market through regulated fund vehicles. There is an expectation that investors in the Irish property market through regulated fund vehicles will also see the tax landscape alter. At this stage it’s uncertain as to what the nature of these changes will be, and whether they will included in Thursday’s bill or deferred until a later date. However indications are that the Finance Bill will include provisions impacted on the funds sector.
The exact nature of the changes to the taxation of funds is uncertain. It is possible that a withholding tax will apply to payments to investors in respect of gains generated from Irish property investments. It’s also unclear as to when the new provisions will take effect, although this is likely to be the date of the Bill or Act.
While there is still some uncertainty regarding the exact nature of the changes, the intention to make changes has been well flagged. Long-term, certain overseas investors will look at Ireland as having an additional tax cost associated with Irish property investment.
As uncertainty isn’t helpful, the sooner the nature of the new legislation becomes clear, the better. It’s also important to note that investment in Irish property is a tiny portion of the investment portfolio of both Irish funds and SPVs. The industry employs huge numbers in Ireland and will continue to remain very attractive to investors, notwithstanding the changes.”
Marie Hunt, head of research at CBRE
“The Finance Bill tomorrow may not contain the detail we were expecting. There is a lack of clarity and we may still be in limbo after Thursday.
We don’t know what’s going to change, if anything, and that’s the problem. The market doesn’t like uncertainty. It is frustrating that investors now have to wait until the publication of the Finance Bill to get clarity on what is being proposed and how this might affect them.
This uncertainty is definitely causing some deals to be put on hold. Our concern is that after Thursday, there will still be uncertainty, if we don’t get sufficient detail from the minister. This is the first time there have been two tranches to the Finance Bill. From an investor perspective, all they want is certainty and then they can proceed.
On the upside, the help-to-buy scheme has been very topical since the Budget and we welcome any further clarity on how that scheme will operate.”
John Vaudin, director at WK Nowlan Real Estate Advisors
“The key issue for the commercial property sector at the moment is the nature of the changes the government plans in relation to the tax management vehicles (ICAVs, QUIAIFs, S110 structures) that have been used by many investors in the Irish property recovery. It is sounding like some clarity on this will be given in tomorrow’s Finance Bill, although it may be some weeks before the finer details are worked through.
The mooted changes have caused uncertainty that is unnerving the market and causing some investors to postpone the completion of deals.
Significant changes to the current regime could make Irish property investments less attractive to overseas investors and weaken demand in the market.
Hopefully the Department of Finance will have taken on board some of the feedback and concerns that have been voiced in recent weeks, but we will only really know when we see the plans published.”
Ted McGrath, head of William Fry’s Financial Services Tax Group
“The consultation announced by the Minister on his proposed changes is welcome. This will highlight the importance of ensuring that any changes are specific, targeted, based on international taxation norms and are in line with Ireland’s existing international tax commitments.
In addition to the proposed changes, a clear statement on what exactly is the perceived misuse that the minister refers to would be very welcome.
As much clarity as possible on what is in and what is out of scope of the changes will be of the utmost importance to ensure the changes do not damage the broader industry.
The initial draft proposals potentially impact activities that provide a valuable contribution to the economy, including allowing Irish banks raise capital internationally for new lending through securitisation of existing mortgages and the provision of finance to property developers to build new homes. Taxing the international providers of such finance will simply increase the cost they will require for that finance.
The financial services industry depends on transparency and certainty. Clearly-defined and targeted changes are critical to avoid damaging the Ireland’s hard-earned reputation for transparency and certainty in tax matters.”