Vulture funds: Winners take all
The Government delayed too long in closing the loophole that allowed large scale tax avoidance
Vulture funds are large private equity investors that buy distressed debt at a cheap price, hoping to make a quick sale and to achieve a large profit on their investment.
They have invested heavily in Ireland – in the Republic and the North – in the wake of the economic collapse, typically buying assets from Nama and other financial institutions.These deals have been controversial, at times, not least the Cerberus purchase of Nama’s Project Eagle in Northern Ireland.
The vulture funds invested in Ireland at a time when the State was strapped for cash. Their entry here was probably inevitable and it must be recognised that they brought badly needed capital and aided Ireland’s move back to recovery.
However, the terms on which they invested here are now under intense scrutiny. One major issue is that they have paid virtually no tax on the profits made here because their gains have been shielded from corporate tax thanks to the skilful use of legal tax avoidance measures.
The Government delayed too long in closing the loophole that allowed such large scale tax avoidance. The priority as the State faltered was to attract overseas funds to invest in a bankrupt economy and to expedite the sale of distressed debt. The terms under which these funds operated were not given sufficient attention.
The belated legislative changes should help to ensure the operations of the funds become more transparent and that they pay a higher rate of tax on their profits.
But this change is not straightforward – in trying to also protect longer-term investors, the Government faced a tricky task and the likely revenue yield remains limited. In some cases, vulture funds may transfer some of their assets into real estate investment trusts (Reits).
However much of the profits that would have been subject to tax will already have left the economy. The gains made by these funds on buying and selling assets are, unfortunately, just another sign of the huge and ongoing cost of the financial crisis which gripped the State. We are still still paying the price.