Ship of Fools (11 page)

One of the effects of the sense of victimhood in which much of Ireland's billionaire class wrapped itself (see Chapter 5) was the absence of any sense of social responsibility. The patriotic urge was more than adequately fulfilled by taking over old Ascendancy estates or buying up half of London's West End. It did not need to be expressed in sentimental gestures like paying one's taxes. This was a
noblesse
untroubled by
oblige.

For much of the early period of the Irish boom, sophisticated tax avoidance was entirely unnecessary. Good old-fashioned tax evasion was perfectly adequate and almost entirely risk-free. The Revenue, indeed, began the boom period by writing off, in 1996, €1.8 billion in unpaid taxes - none of it, it is safe to say, owed by ordinary PAYE workers - as ‘uncollectable'.

In 2002, the Comptroller and Auditor General gave the public a unique glimpse into the tax dealings of a highly successful, but unfortunately unnamed, property developer. He (a safe assumption is that it is a ‘he') was in business since 1970 but, presumably not being a man to rush things, didn't make a tax return until 1988. Not one - for eighteen years. He was tempted out of the shadows by a tax amnesty brought
in by Fianna Fáil in that year. For eighteen years of property development, he paid a grand total of €79,000 in tax. This was ‘considered inadequate' by the Revenue but it never got round to asking for more money.

Having made his grand gesture, the developer promptly disappeared again. A demand from the Revenue for €450,000 in corporation tax was returned to sender. The Revenue let it lie on the basis that ‘neither of the two directors could be contacted', and in 2000 this tax was written off. Remarkably, this Invisible Man was involved, throughout the 1990s, in thirty-five major property developments, including ‘several major industrial estates, office blocks, apartment blocks, townhouse schemes and a shopping centre, with recent [in 2002] developments valued at over €125m'.

The idea that one of the country's larger property developers couldn't be contacted with a tax demand may seem implausible, but the story actually became even more fantastical. Of the developer's thirty-five companies that were registered for corporation tax (they paid a measly total of €250,000 between them), twenty-five were registered for VAT and none was registered for PAYE or PRSI. In the paper world of officialdom, their employees could not pay tax because they did not exist. One company that was recorded in the official records as ‘dormant' somehow managed to construct with this staff of ghosts ‘two townhouse developments and an apartment block in the early 1990s which sold for €10m'.

When one Revenue demand for €34,000 in VAT arrears was returned to sender, a tax official contacted the developer's registered address and was informed that the company had transferred to another address, and that the whereabouts
of the directors were unknown. At the second address, the official was told that the company no longer existed. Again, the VAT arrears were simply written off.

In an ordinarily dysfunctional society, the property developer who could build thirty-five major developments without paying tax and avoid prosecution would be content to bask quietly in the knowledge that he could do whatever he liked. Our hero, however, had the panache of the true aristocrat. When he sold his own house for €3.9 million, he was not considered to have any liability for residential property tax because ‘his declared income was below the income threshold'. There was a genuine elegance about the circularity of this brazenness - he didn't pay tax because he had declared hardly any of his income; he didn't have to pay tax because the income he declared was so low. The V-sign was flicked with a nerveless insouciance that commands applause.

With the relatively brief upsurge of public disquiet that followed various tribunal revelations - Haughey's voracity, Burke's backhanders, Lowry's evasions - and the DIRT inquiry in the early 2000s, this kind of open taunting of the tax authorities became rather less advisable. What happened, however, was that the Fianna Fáil/Progressive Democrats government offered an alternative. The alternative was not, as might naively be imagined, that people who were making millions would pay their taxes in the same way as those who were making mere thousands. That would imply that these categories of people were somehow to be regarded as equals. Instead, illegal (though unpunished) tax evasion would be turned into perfectly legal tax avoidance.

Some of this strategy consisted in either cutting taxes or deliberately leaving loopholes in tax laws. The wealthy, and
especially property developers, benefited enormously from one of Charlie McCreevy's first moves as Minister for Finance - cutting the rate of capital gains tax from 40 per cent to 20 per cent. Developers also gained enormously from a loophole in stamp duty legislation, which allowed them to purchase or transfer, tax-free, shares in companies owning land rather than technically buying the land itself. (The whole transaction was treated as a transfer of company ownership rather than of property, thus avoiding the bulk of the tax.) This created a bonanza for the super-rich: the developer Bernard McNamara saved €36 million on a single deal (the purchase of the Glass Bottle Company site in Dublin's docklands). Over 40 per cent of big property deals exploited this loophole, but the government refused to close it.

For complete aristocratic immunity from taxation, however, it was necessary for the government to construct an even more abject scheme. Most democracies have problems with what the Irish called ‘tax exiles' (making them sound like melancholy and martyred refugees) and the Americans, who take tax more seriously, rightly call ‘tax fugitives'. Ireland was one of the very few countries to go out of its way to make it as easy as possible to be a tax fugitive. In essence, Fianna Fáil and the PDs deliberately concocted a ruse whereby it was possible, if you had your own jet, to live in Ireland and abroad at the same time. As if Ireland did not have enough bogus non-residents, they summoned into existence a whole new (and entirely lawful) host of spectral beings whose whereabouts were more a matter of hovering than of being.

Again, the gift was bestowed by Charlie McCreevy. The existing situation was that, in order to claim not to be resident in Ireland for tax purposes, it was necessary to spend
more than half the year (183 days) abroad. This did not suit the super-rich, so McCreevy played Fairy Godmother and invented the ‘Cinderella clause'. A day, it turned out, was not a day if you left the country by midnight. It was possible to work in Ireland all day and still technically not be in Ireland. So long as the golden carriage of the Lear jet was in the air at the witching hour, you were in no danger of returning to the plebeian ashes and rags of nasty taxes.

Not that anyone was likely to be checking anyway. Figures uncovered by the
Sunday Tribune
in July 2009 showed that just nine individuals (0.15 per cent of the total number of tax fugitives) were audited by the Revenue to ensure that they were operating within the rules. It was hardly surprising that the numbers of rich people accepting McCreevy's gift rose steadily. While McCreevy was in office, the numbers were never revealed. From 2005 onwards, they became public: in 2005, there were 3,050 people claiming non-residency for tax purposes. In 2006, there were 3,996. In 2007, there were 5,142. And in 2008, there were 5,803.

These figures included 440 ‘high net worth' individuals - defined by the Revenue as those with net assets of more than €50 million. This was a very large slice of the Irish business elite. Most of the best-known figures amongst the super-rich were tax-resident elsewhere: Dermot Desmond in Gibraltar, John Magnier, J. P. McManus and Hugh McKeown in Geneva, Michael Smurfit in Monaco. (Tony O'Reilly has not been tax-resident in Ireland since he left Ireland to work for Heinz in the 1960s.) These men all retained major business interests in Ireland: Desmond, for example, remained active in fields ranging from health insurance to telecommunications to banking, and was even offered the chairmanship of Aer Lingus in 2008. McKeown remains chairman of the
largest private company in Ireland, the food distributors Musgrave. Smurfit was chairman of the biggest Irish-based multinational company, the packaging conglomerate Smurfit Kappa, until 2007.

The starkest case was that of the telecoms and media billionaire Denis O'Brien. O'Brien built the bulk of his fortune from the acquisition of a public asset - the state's second mobile phone licence - in circumstances subsequently investigated by the Moriarty tribunal. He then sold on the company that held the licence, Esat, to British Telecom for €2.4 billion. Just before he did so, however, he changed his tax residency to Portugal, saving himself capital gains tax of €55 million. He continued to live in his mansion on Raglan Road in Dublin, which the Revenue tried to insist was his ‘principal residence'. He established that he could not in fact live there because the house did not have a kitchen. He also maintained a large house in Thomastown, County Kilkenny, and continued to run his large Irish media businesses.

There was, though, a further refinement on this abstract game of absence and presence. Some very rich men began to wonder whether it was actually necessary to spend any time outside Ireland at all. Why not send the wife instead? Gerry McCaughey, who had stood unsuccessfully for the PDs in the 2002 general election, owned and ran Ireland's largest timber-framed house construction company, Century Homes. He sold it for €74 million in 2005 - his share was €31 million. Behind this transaction, however, there was a touch of magic from the accountants KPMG. They suggested that McCaughey and three other main shareholders should sell their shares to their wives, who would in turn sell them on to the real purchaser. The wives, meanwhile, would go to live in Italy to avoid capital gains tax. All that was required to stop
the peasants from getting their hands on any of McCaughey's gains was a languid 183-day holiday on the Riviera.

This ruse was perfectly legal, but it also perfectly illustrated the almost pathological aversion to paying tax among the Irish rich. Capital gains tax, at 20 per cent, was low. In McCaughey's case, it would have left him with €25 million instead of €31 million. How much difference would this have made to his family's way of life? But the money itself was not really the point. As McCaughey explained when the ruse was revealed, ‘People do everything they can to reduce their tax liability.' Not to engage in tax avoidance was to be a non-person. In some societies, and for ‘maverick' Irish billionaires like Ryanair's Michael O'Leary, paying substantial taxes might be a source of pride. For the Irish elite, it was a source of shame. To be in on the latest wizard scheme was to be ‘one of us'. It was the definitive mark of separation between the First Estate of unimaginable wealth and the Third Estate of PAYE toilers who didn't get to play the game.

It would be wrong to conclude, however, that the game itself was particularly difficult or that it could only be played with smart-alec schemes. This was a game whose rules were fixed to ensure that there could only be one winner. The government, which was supposed to be the referee, was relentlessly biased towards tax-phobic citizens. It introduced, and kept in place, a dazzling variety of tax reliefs. In 2004, the Revenue Commissioners estimated that these reliefs had an annual cost of €8.4 billion - nearly a quarter of the entire annual tax take at the time. This huge expenditure was so poorly policed, and so sketchily analysed in terms of the relationship between the costs and the supposed benefits, that the Revenue literally could not say, in the case of forty-four different schemes, how many people were claiming and how
much money they were getting. The reliefs, of course, were overwhelmingly of benefit to the better-off.

The result was that, even leaving aside the top layer of the wealthy elite that was paying no tax at all in Ireland, the minor aristocracy enjoyed the privilege of paying tax at far lower rates than those that pertained to the rest of the country. The findings of a Revenue study of the 400 top earners (defined, it is important to remember, by their declared income rather than their actual wealth) in 2002 were stark. Six had an effective tax rate of zero - they had quite lawfully managed to pay no tax at all. Forty-three paid less than 5 per cent. Seventy-nine paid tax at less than 15 per cent. Conversely, just 83 paid more than 40 per cent, and none paid more than 45 per cent. To put this in perspective, the top tax rate for PAYE workers in the same year was 42 per cent.

Even when these reliefs were eventually limited in 2006, the impact on high earners was still relatively minimal. In that year, 439 individuals declaring over €250,000 each were able to claim €288 million in tax reliefs - an average of €650,000 each. For the 214 people in a Revenue study declaring over €500,000 in income each, three-quarters had an effective tax rate of between 15 and 20 per cent, and the rest paid between 20 and 25 per cent. Not one of them paid anything like the 41 per cent rate that then applied to middle-class incomes. Scott Fitzgerald began his 1926 short story ‘The Rich Boy' with the words ‘Let me tell you about the very rich. They are different from you and me.' Beneath its surface of classless bonhomie, Irish society in the boom years was underpinned by this dictum.

The government's response to figures like these unconsciously betrayed the belief that the rich elite did in fact constitute an aristocracy. Aristocrats are not taxed - they are
bountiful. The government's chief ideologue, Mary Harney, responding in 2004 to questions about the ability of the rich to pay little or no tax, specifically ruled out any attempt to make them cough up on the same basis as everybody else. They might, however, feel like throwing some coins from their balconies: ‘I would like to see perhaps in Ireland, on a voluntary basis, a greater culture of some of the wealth that is acquired going back to the state, not necessarily through taxes or through legislation but perhaps through endowments, through foundations.' There were, in other words, quite explicitly two classes of citizens: those at the bottom for whom taxation was compulsory and those at the top for whom it was voluntary.