Irish Independant 05.08

Investing in overseas property was the perfect way to hide cash from the taxman. But as the boom cools, Revenue has turned detective

(15th May 2008)

WHEN you consider it, it can't have been hard over the last few years for people with a few hundred thousand euro of undeclared income to salt it away in overseas property. In fact it's been difficult to stroll through a hotel in even the smallest Irish town at the weekends and not be accosted by a fresh-faced Hungarian, say, eager to expound on the investment opportunities in Budapest.

But as the taxman casts his net overseas, many Irish foreign property owners may have to reconsider how they bought into the dream in the near future.

"The whole problem is that it's an unregulated industry," explains Tom McGrath, a legal expert in overseas property. "Anybody has the right to sell foreign properties. A lot of people buy through agents that aren't even registered so there won't be any record."

A year ago the Revenue Commissioner finally cottoned on to the scam. A sample investigation into overseas bank account holders carried out last year revealed a whopping 41pc who "had further questions to answer" about how they purchased an overseas property, according to Tom Weynes, principal officer in the Revenue's Offshore Assets Group.

"We can't say what percentage of those cases was 'hot money'", he said. "Some people just freak out when they see a letter from the Revenue. Others may have gotten into a panic and talked to their accountant and then realised they're okay."

Still the figure is surprisingly high, he admitted. "I imagine it is a popular scam. Even if two-thirds of people bought properties legitimately then there's one third that didn't. If we say there are 60,000 properties owned by Irish investors then that's 20,000 people with hot money in properties and obviously we would be anxious to track them down."

To underline the Revenue's determination, last month chair Josephine Feehily declared war. She promised new legislation, new computer systems and newly shared information with foreign authorities that would have Irish tax evaders squirming on their sun loungers in fear.

But just how easy is it going to be to track down hot money in overseas property hotspots? And is the Revenue even yet underestimating the extent of the problem?

While Mr Weynes refers to a recent survey which estimated that Irish investors owned 60,000 properties overseas worth about €5.5bn, Tom McGrath believes that figure to be far too conservative. He suggests that in Spain alone Irish people own about 200,000 properties.

"It's not an exact science and because it's unregulated it's almost impossible to tell," he says. "It was a fairly big step to buy something overseas for many years. The legal services weren't there - we only set up five years ago. But in recent years there's been huge growth in the market. Most people might not take legal advice. There's a trend now to go directly to the developer through the internet."

'Historically, it never had focus from the Revenue. We had the Irish building boom generating billions. With the slowdown, it has gone full circle. And with the strain on the public purse, Revenue will be looking to fill the void'



Untouched

Colm Murphy of Property Tax International agrees. "It's an industry that has been untouched since the boom began. Anyone could set up shop. The general consensus was that it's a good way of hiding money. I'd say about 40pc to 50pc of people who own property overseas may not be tax compliant.

"Historically it never had any focus from the Revenue. We had the construction boom with billions generated. The overseas property market, anyone could see it was making lots of money. You only had to open the paper, go to a hotel at the weekend and there'd be some guy or company selling properties.

"Now with the slowdown, it's gone complete full circle. The spin-off is with the strain on the public purse, the Revenue will be looking to fill the void."

Of course there is an enormous difference between failing to tell the Revenue about an overseas apartment bought with a lump sum from an SSIA and a mortgage, and paying undeclared cash.

"I don't think it's an issue for a huge number of people," says the Revenue's Mr Weynes. "A lot of people want to use an overseas property during the peak rental period or family members use them. We don't see that there's a huge vein there for tax compliance. Our focus is on the purchase of the properties, the people who have €200,000 they didn't declare here and go off and buy a property with it."

One of the Revenue's first steps in tracking down such investors was to write to the Dublin estate agent Savills Hamilton Osborne King (SHOK) to get its client list for the overseas property division. SHOK obtained a High Court injunction and after an exchange of affidavits, the Revenue is now examining whether it needs a change in legislation to obtain details of overseas property buyers from Irish estate agents.

"I think that information would be useful," says Mr Weynes. "There's probably more in that single area than there would be anywhere else. I think we will get a fairly substantial amount of information."

Ronan O'Driscoll of SHOK's overseas property division begs to differ, although he is at pains to point out the company is keen to comply with the Revenue when and if the right legislation is in place. "I'd say the percentage of people who bought abroad - legitimately or otherwise - and dealt with an Irish estate agent is probably about 1pc. The vast majority would have bought from agents abroad."

Minimal

"If you were a major tax dodger, you're not going to go to an auctioneer in Dublin. I've sold a lot of property abroad and nobody came into me with a big bag of money. If you're dodging tax you'll go to an auctioneer in Spain or a builder directly. I'm sure within all the sales we made there are some people who haven't declared it but I'd say it's minimal."

Does Mr O'Driscoll think the Revenue can track properties through overseas agents? "Not a hope," he says. "There was a time when Spain was the big thing and if you walked around Marbella every shop was a little estate agent's place. You haven't a prayer of tracking down these. A lot of them have since closed down."

But the taxman is very resourceful.

The European Savings Directive provides it with the information on Irish nationals with interest-generating bank accounts across the EU. When a sample of these was polled, 96 pc were found also to own overseas property.



“I would take the view that if someone has a bank account in Spain they are more likely to have a property there, because you don’t normally open a bank account if you visit a foreign country for a holiday”, says Mr Weynes. "We have also registered with a number of foreign land registries and we have access to information there. And we keep an eye on various websites and publications to see the people who are selling properties or generating rental income. We would also go to exhibitions so we can identify where the popular areas are," he says.

At one point his team even considered tracking companies which shipped furniture overseas. "Strangely enough you have people who want to go live in an exotic location but they want their home furnishings with them. So they might hire a shipping company. But to try and find out who are the shipping agents and the amount of work involved might not justify what you'd get out of it. But we keep trying to come up with new ways of doing this and if we hit a successful way we'll go with it."

Tax expert Colm Murphy believes that, despite the difficulties, it is inevitable that tax evaders with overseas properties will get caught.

"There is always the paper trail," he says. "There is a notary deed with a name on it. If you have rental income, you need a tax ID number for the country so there's a paper trail there. It's only going to become much easier because as time goes on, there will be more collusion between tax authorities across Europe.

"Maybe one or two will slip through the net, but the majority will be caught."

Getting the money back into Ireland proves quite a dilemma

PITY the poor Liechtenstein trust holder. Despite availing of the Rolls Royce of tax evasion scams, at no point can the money managed there ever be repatriated to Ireland Even to save a business from going under.

It's a problem faced by all tax evaders with money in overseas accounts. How do you get it home?

"An easy way if you have money abroad and you want to be able to spend it in Ireland is through a credit card," says Tom Weynes principal officer of the Revenue's Off-shore Assets Group.

"You can spend money to your heart's content here, take money out of the hole in the wall and at the end of the month the bill is settled through the off-shore account. You can access the funds without then ever coming into the state."

The Revenue faces two difficulties: in tracking down Irish residents with off-shore credit cards. The first is that credit card transactions in Ireland are mostly processed in the UK, which makes it more difficult to get a court order for the information Secondly, with eight million tourists a year visiting the island, off-shore credit card use is relatively common here.

"We have a huge filtering organisation to do when we do get the information," says Weynes.

"You might get someone importing say €5m of spare parts but they may get a €100,000 rebate from the supplier which never comes into Ireland. An auditor may see a purchase order for €5m but may not be aware that there's a side agreement for a rebate."

False invoicing is an ever popular way of getting money out of the country. "So I might set up a quality control company to monitor the quality of the spare parts I'm importing but that company might be a brass plate," says Weynes.

Businesses with a lot of offshore activity - holiday companies, for example - can do side deals with suppliers where money is paid into an overseas bank account.

Weynes admits less is known about how wealthy individuals get their money overseas to avoid the taxman. "I know they've done it but I don't know the ins and outs of it, he says.

Meanwhile, data is still arriving on off-shore bank transactions from court orders granted two years ago "There's a huge amount involved," says Weynes. "They (the banks send information at three monthly intervals. These orders are going back to 1990.

"We have to identify the taxpayer through a PPS number. We generate letters every three or four months -about 500-600 letters at a time. Often there's a time lag between writing the letter and the person getting onto the accountant and the accountant talking to us."

But there is a much greater scale of co-operation across Europe. At the end of this month 21 countries will participate at a conference on using intelligence to combat tax evasion.