Nama developers exploit loophole to avoid millions in tax

24 October 2010 By David Clerkin Markets Correspondent - Business Post Property developers with Nama-bound loans are enjoying multimillion-euro benefits by exploiting a loophole that allows them to claim tax deductions on interest payments even if they are not making the payments to their banks. This could, in effect, create a double whammy for the taxpayer if the loan is from a state-owned lender, such as Anglo Irish Bank or Irish Nationwide. The state would be forgoing interest income from the borrower and also losing out on tax revenue because of reduced tax liabilities. The Sunday Business Post has established that the Revenue is examining the practice of developers claiming tax deductions on interest charged on their loans. Officials are believed to be concerned that borrowers who are not making repayments to their banks may still be claiming tax deductions on their interest bills and using them to shelter other income from tax. Some developers - who also have extensive commercial property investment portfolios that include office blocks or shopping centres - are believed to be retaining significant amounts of rent coming in from tenants. They are refusing to pass on the money to their banks, using it to fund lifestyle spending instead. By claiming a tax deduction on the interest bill - even if that bill is not being paid - the developers in question can avoid paying tax on this rental income. A Revenue spokesman confirmed that it was possible for a borrower to claim an interest deduction even if the loan was not being repaid. Banking sources told The Sunday Business Post that the discrepancy arose because tax legislation allows for a deduction if the interest is charged on a loan. It is not necessary to pay the interest in cash to qualify for the deduction. Neither Revenue nor the Department of Finance would comment on the likelihood of the loophole being closed in the coming Budget or next year’s Finance Bill. In a statement released to this newspaper, the Department of Finance said: ‘‘It is normal practice for the Office of the Revenue Commissioners to review matters relating to the tax code on an ongoing basis, and to raise any issues of concern or perceived anomalies with the Department of Finance in the lead-in period in advance of the annual budget and Finance Bill. ‘‘Similar to previous years, in preparation for the budget and Finance Bill 2011, all reliefs and issues of concern fall to be considered as part of the deliberative process."