Dáil Éireann Debate, Tuesday - 1 December 2020
211. Deputy Pearse Doherty asked the Minister for Finance the amount of corporation tax paid by a company (details supplied) on its profits from the sale of loans previously purchased from a bank in 2018; the manner in which the company avoided tax liability through debt transactions; and if he will make a statement on the matter. [39777/20]
View answerI would like to advise the Deputy that I am not in a position to comment on the activities of individual taxpayers. The examination of accounts and tax returns submitted by taxpayers is a matter for Revenue and, in monitoring tax compliance, Revenue can scrutinise returns received to ensure they comply with legislative provisions.
While I cannot comment on a specific taxpayer, I can give the following overview of Section 110 of the Taxes Consolidation Act 1997 as it relates to the securitisation of mortgages.
Securitisation allows banks to raise capital and to share risk and, by providing a repackaging and resale market for corporate debt, it lowers the cost of debt financing. It is accepted that having the option for more diversified sources of financing is good for investment and business. It is also important for financial stability in the economy, as the ability to securitise loan books plays an important role in allowing banks to meet their capital requirement obligations and to continue lending to businesses and individuals.
The importance of securitisation has been recognised by the European Commission through their work on Capital Markets Union, one of the aims of which is to seek to build a sustainable securitisation regime across the European Union.
Section 110 sets out a regime for the taxation of special purpose companies. The tax provisions are intended to create a tax neutral regime for bona-fide securitisation and structured finance purposes. The section 110 regime enables noteholders to invest through one structured vehicle without giving rise to an additional layer of tax as compared to a direct investment in the underlying assets. As such, having regard only to the taxation of the company, and not also to the taxation of its noteholders, gives only a partial picture.
The regime is subject to a number of anti-avoidance provisions designed to ensure that a deduction / no inclusion outcome does not arise. For example, Finance Act 2011 restricted the ability of a section 110 company to take a tax deduction for interest payments to connected persons in respect of the “profit participating note” (PPN). In general terms, this means that a section 110 company cannot take a tax deduction for interest paid to a connected party unless that connected party is taxable on the interest. More recently, in Finance Act 2019, I brought forward amendments to strengthen this anti-avoidance rule to ensure that it is effective and operates as intended. The focus of the 2019 amendment was to ensure that the anti-avoidance rules apply to all connected parties.
Concerns with regard to investments in financial assets backed by Irish property, such as mortgage loans, were addressed in Finance Act 2016. The changes restricted the ability of a section 110 company to claim a deduction for profit-participating interest to any noteholder (be it a connected party or third party) unless it is liable to tax on receipt in an EU Member State. An exception is allowed for bona-fide securitisations carried out in line with the Capital Requirement Regulation of 2013 on prudential requirements for credit institutions and investment firms (CRR). However, I would note that these Finance Act 2016 restrictions are layered on top of the Finance Act 2011 provisions. This means in that, even in the case of a CRR securitisation, a deduction is not available on PPN interest paid to a connected party unless it is subject to tax on receipt.
Finance Act 2019 also introduced anti-hybrid rules which apply to all corporate taxpayers in Ireland with effect from 1 January 2020. While the anti-hybrid rules introduced a general rule to prevent deduction / no inclusion mismatch outcomes arising due to hybridity, they also include more stringent rules to deal with those mismatch outcomes which arise in relation to hybrid financial instruments. The anti-hybrid rules require that a deduction is denied in situations where such a mismatch outcome would otherwise arise. These anti-hybrid rules apply to section 110 companies in addition to the specific anti-avoidance rules contained within section 110.
I am aware that there are competing concerns in this area – on the one hand, ongoing concerns regarding loan-book sales and appropriate levels of taxation, and on the other hand a recognition that bona-fide securitisation is an essential support to both consumer lending and bank capital requirements. My officials, together with officials in Revenue, therefore continue to monitor the sector on an ongoing basis, with a view to taking action should it be deemed necessary.
