Would an INM write-down involve moral hazard?
The debt deal negotiations between Independent News & Media (INM) and its eight banks, which include State-owned AIB and State-supported Bank of Ireland, are politically interesting not just because of the findings of the 2011 Moriarty tribunal report in relation to Denis O’Brien, but also because of his tax residency status.
O’Brien, as most people know, is INM’s largest shareholder. In the course of his recent, successful libel case against the Irish Daily Mail, he said it was not correct to say that he was a tax exile, and that he paid his taxes in all the countries in which he operated.
Of course there is no conflict between saying someone is a tax exile and their paying all the taxes that are due in the jurisdictions in which they operate. Irish people who earn money outside Ireland but are tax resident here pay tax on all their taxable income, subject to the international rules on double taxation. Irish people who are not tax resident here and who operate internationally, only pay Irish tax on the taxable income that is generated in Ireland. The controversial issue in the “tax exile” debate is where the person is tax resident.
Google and Microsoft, for instance, are not normally referred to as tax exiles, but their use of offshore locations to drive down their tax bills is a matter of legitimate public debate. As the Organisation for Economic Corporation and Development put it last month, in a report on multinational tax planning: “If other taxpayers, including ordinary individuals, think that multinational corporations can legally avoid paying income tax, it will undermine voluntary compliance by all taxpayers – upon which modern tax administration depends”. *
When O’Brien’s Esat Digifone won the 1995 mobile phone licence competition, it became one of only two mobile phone companies licenced to operate in Ireland, the other being State-owned Eircell. A few short years after it was launched, Esat was sold to British Telecom and O’Brien personally got €295 million. That sum would have been subject to capital gains tax were it not for the fact that he had by then moved his tax residence to Portugal.
The reasons for O’Brien’s move to Portugal, or his subsequent move to Malta, need not detain us here other than to observe that the moves are believed to have involved substantial tax benefits.
The holding company for his Digicel group is based in Bermuda, one of the world’s best known offshore locations. How this affects the amount of tax its subsidiaries pay in the countries in which they operate, is not known.
O’Brien has been paid enormous sums by Digicel. A deal in 2007 is believed to have netted him approximately $800 million. In the last two years he has received more than $400 million and another enormous dividend is expected shortly.
Last year he bought the Irish business support firm, Siteserv, for €45.4 million. As part of the deal the Irish Bank Resolution Corporation, which incorporated Anglo Irish Bank, wrote off 70 per cent of a €150 million debt Siteserv had with Anglo. Now INM is reportedly seeking the write-off of up to a quarter of its €400 million bank debt. How much is being asked of the Irish banks is not known.
No-one is arguing that it is better that companies with unsustainable debts be allowed collapse rather than have their debts reduced to manageable levels. But giving write-downs to companies that are wholly or in part owned by non-resident billionaires who appear to be flush with cash, raises the kind of issues referred to in the OECD report. This is especially so when so many people on moderate incomes are being levied with extra taxes, while also struggling with debts which the banks, and the Government, say should not be written off if the debtor can pay, least it create a moral hazard.
*Addressing Base Erosion and Profit Shifting, published by the OECD