Cowen Cowers before Landlord Class
Cowen’s stamp duty crux Sunday Business Post 08 July 2007 Property developers are wiping millions of euro off their tax bills because the Minister for Finance has not closed a controversial stamp duty loophole, writes Ian Kehoe. The government announced last week that revenues from property-related taxes were significantly below expectations during the first six months of the year. In particular, the yield from stamp duty - the state’s major cash cow in recent years - was down more than €200 million on previous forecasts. Yet, with one stroke of his pen, the Minister for Finance, Brian Cowen, could go a long way towards relieving the shortfall. By enacting a law already on the statute book, he could bolster government coffers by at least €40 million a year. If he chose to do so, Cowen could close off a major stamp duty loophole used by some of the state’s wealthiest property developers and builders to cut millions of euro from their tax bills. However, Cowen has so far refused to put his name to the legislation. Instead, the Offaly TD has commissioned an independent study to examine the potential effects of closing off the loophole. The decision to bring in a team of consultants comes just five months after Cowen announced that he was closing the loophole, which allows developers to structure commercial and residential property deals in such a way as to minimise their stamp duty liability. Cowen acknowledged the loophole had become ‘‘common practice’’ and that the Revenue Commissioners had ‘‘devised a proposal to deal with it’’. Cowen then put this proposal onto the statute books in a late amendment to this year’s Finance Act. All that is required to make the amendment law is Cowen’s signature on a commencement order. So, just what happened in the space of five months to change Cowen’s mind about closing the loophole? According to Joan Burton, the Labour Party spokeswoman on finance, Cowen ‘‘caved in to the power and influence of the building lobby’’. ‘‘Fianna Fail is very close to the developers, and Cowen does not want to do anything that might upset them,” she said. ‘‘They have immense influence, and I imagine Cowen is wary and nervous of going against their interests. It’s classic Fianna Fail.” Cowen, unsurprisingly, has a different view. In response to a recent parliamentary question, he outlined his reasons for stalling on bringing the new law into effect. Cowen said that he had ‘‘to consider the state of the property market before the provision comes into effect, to ensure that it does not have an unforeseen negative effect on the market’’. For this reason, he said, he had now decided to ‘‘commission an independent study of the potential effects that such a provision may have on the market’’. Terms of reference for the study are being finalised by Cowen’s department and a request for tenders will be issued shortly. If Cowen signed the commencement order, the legislation would close off certain lawful stamp duty planning techniques, such as resting on contract and building licences - both of which have been widely used by developers and builders (see below). The loopholes are complex, but centre on the relationship between the landowner and developer. The common feature of each is that they allow the developer to pay the landowner the full purchase price for the land without triggering a stamp duty liability. The developer then builds the houses or apartments, and the stamp duty liability on the transaction then falls to the person who buys the units, rather than the developer. The new measures, if signed into law, would force the developer to pay stamp duty when more than 25 per cent of the value of the land transaction was paid. This would have the effect of closing the loophole. According to preliminary figures compiled by the Revenue Commissioners, the loophole cost the exchequer at least €40 million last year. Between 1999 and 2006, the total cost to state coffers is believed to be more than €200 million. A recent Revenue survey found 60 instances where the loophole was used between 2003 and 2005, although the tax authority has acknowledged that its survey is ‘‘not exhaustive’’. Many believe the real figure is much higher. ‘‘It is my information that the figure is far more than €40 million a year, significantly more’’ said Burton. ‘‘This has become common practice among many rich developers; it is part and parcel of how they do business. The minister said he was shutting it down, but has done nothing. The big question is why?” Although widely used by developers for more than a decade, the loophole has only been on the Revenue’s radar for the past three years. As part of its broader crackdown on the construction sector, the Revenue began to notice that an increasing number of developers were using the technique to cut their stamp duty liability dramatically. The tax authority examined the scheme, and determined that it was not illegal. Nonetheless, it made representations to the Department of Finance, asking for the loophole to be closed. Once details of the scheme began to seep into the public domain, Cowen and his department also came under considerable political pressure to put a stop to the practice. ‘‘There is a view out there that this is some sort of technique used exclusively by wealthy developers,” said Matt Gallagher, a property developer and vice-president of the Construction Industry Federation (CIF). ‘‘This is not the case at all. Local authorities and county councils have been using it for years. It is not simply confined to the building trade. Furthermore, it is perfectly legal - I think some people are forgetting that.” According to Gallagher, the scheme makes very little difference to the government’s overall tax take. While it reduces the amount of stamp duty revenue, Gallagher said this was ‘‘mitigated’’ by the fact that developers had to pay more corporation tax on their profits. ‘‘Obviously, there is a certain benefit for the developers, but there is also a benefit to the landowner and to the person who purchases the property. Basically, it is keeping the price of the final product down, maintaining market stability,” said Gallagher. Solid prices and market stability are the key points for Cowen. According to government sources, the minister is wary of introducing any measures that would have a destabilising effect on the property market. ‘‘The minister will never say it, but I imagine that the government is very cautious about what might happen to the building trade over the coming years,” said Gallagher. ‘‘The government do not want to rock the boat at the moment, and they are being sensible. They are conscious that any change to the status quo might have a major effect on the wider market.” This is particularly crucial at a time of uncertainty in the property market. Last week, the Economic and Social Research Institute (ESRI) sharply reduced its forecast for the property market and said that average house prices would drop by 3 per cent this year. ‘‘The minister clearly does not want to overtly interfere in the property market, as it could result in developers passing on an extra stamp duty cost onto the end purchaser,” said Emmet Scully, a partner in LK Shields Solicitors and an expert on stamp duty. ‘‘By commissioning a study, he buys extra time. I imagine the terms of reference will specify that responses will have to be submitted before Budget Day.” Scully said he could only see the minister bringing the measures contained in the Finance Act into force when the market was stable. For the last few months, the market had been too unstable to discern any long-term trends, he said. ‘‘The minister is going out of his way to avoid any surprises and also to dispel any hopes of further stamp duty breaks which could cause a continuation of the hiatus in the market. He is clearly trying to stabilise the property market,” said Scully. Even bringing the law onto the statute books seems to have had an immediate effect. Banks and financial institutions are no longer lending to developers who use the loophole as part of their overall business plan. Solicitors and accountants who specialise in commercial property have also noted a decline in the number of builders availing of the loophole. ‘‘It is a classic Irish solution to an Irish problem,” said one tax source. ‘‘Cowen wanted to get rid of the loophole, but did not want to create unrest in the industry. The fact that it is on the statute books and not in law has enabled him to do the two things.” How the loopholes work The loopholes have one thing in common – they allow property developers to pay landowners the full purchase price for land without triggering a stamp duty bill. There are a number of ways to structure a deal in order to take advantage of the loopholes: Resting on contract One frequently-used technique involves the purchaser of the land entering into a contract to buy the property and paying the purchase price to the landowner. However, the purchaser does not take a deed of conveyance of the land at that time. Instead, when the development is completed, the developer asks the landowner to deliver the conveyances to the people who have bought individual houses or apartments from the developer. This eliminates the stamp duty liability for the developer. Licences Another development structure involves the transaction being split into two separate deals. The land is bought from the landowner by one party and then left to rest on contract until completion of the development. A company controlled by the purchaser would then enter into a licence agreement with the landowner to develop the site. Again, this eliminates the stamp duty liability.