The Revenue's decision to announce a tax on contracts for difference in 2006 threatened the size of the Irish stock market, writes COLM KEENA
THE DECISION of the Revenue Commissioners to announce in March 2006 that it was going to charge stamp duty on stock purchases by institutions selling contracts for difference (CFDs), caused market turnover to fall sharply, Department of Finance documents show.
The then minister for finance, Brian Cowen, eventually announced that he would review the matter and the Revenue withdrew its announcement. The tax was never implemented.
CFDs are the method by which Seán Quinn and his family built up an undisclosed interest in Anglo Irish Bank last year, which cost them about €1 billion when they unwound their position. The family may have lost substantially more than half that again by way of its subsequent purchase of a 15 per cent stake in the bank.
The Revenue announced on Friday, March 17th, 2006, that it was going to impose stamp duty charges on institutions selling CFDs that in turn bought the shares at issue so as to hedge their position.
Department of Finance documents, released under the Freedom of Information Act, show that immediate attention to the matter was paid by officials in the department and the Irish Stock Exchange (ISE).
On Wednesday, March 22nd, Tony Garry, chief executive of Davy, e-mailed Tom Considine in the department saying the stockbrokers “continue to get hugely negative feedback from overseas investors together with comments to the effect that they will cease to invest in Irish equities”. He said he had been speaking to Revenue official John Leamy who told him the Revenue statement had been sent to the ISE a week prior to its issuance, for comment. Officials from PriceewaterhouseCoopers met officials from the department on March 24th.
A script note from the meeting records someone saying that CFDs are used by hedge funds, “not private clients” and that they are usually held for two or three weeks’ duration. A note was sent to Cowen that same day.
On the following Monday a meeting took place between officials from the ISE, the Revenue, and the department. Notes produced by the ISE said much of the increased activity in the Irish market in 2005 was due to the emergence of hedge funds as significant players.
“It is now estimated that hedge funds account for around 30 per cent of overall activity and they use CFDs as their preferred instrument. They are likely to withdraw completely from the market if this interpretation is maintained; indeed a number of funds with significant investments in Irish equities have already ceased trading.”
The ISE said the tax would place trading on the Irish market at a competitive disadvantage and the loss in liquidity involved could lead to an overall drop of 50 per cent in activity, hitting stamp duty receipts overall.
The move would mean “that the very companies who are behind Ireland’s fund administration industry would be put in a position where it was uniquely uneconomic to invest in Irish equities”.
The ISE was also concerned that Irish listed companies would de-register in Ireland and move to the UK and elsewhere. “Irish companies have put considerable resources into building their international shareholder base and improving liquidity in their shares, and will not be prepared to see this work undone.”
The additional costs on a slim margin business could mean the difference between success and failure. “Ireland, as a small market, would simply be seen as closed for business and the fund managers would look for opportunities elsewhere,” the ISE said. A note to the minister on March 27th explained that the Revenue announcement was “causing consternation in the market for Irish shares”.
In a letter to Leamy the following day, Brian Healy of the ISE said inquiries had been made of the 11 member firms of the ISE. “The responses from those firms indicate that the aggregate of their CFD transactions over Irish equities in 2005 was €33.1 billion, comprised €27.7 billion of institutional transactions and €5.4 billion of retail sources transactions.” Total turnover for the exchange was €108.8 billion.
Large investment banks had told the ISE that their hedge fund business in Irish shares had “dried up” since the Revenue announcement and there had been a “very immediate and alarming fall in overall Irish equity market turnover”, Healy said. His letter was also sent to Kevin Cardiff, assistant secretary in the department.
Ian Harrison, director of the London Investment Banking Association, also wrote to Leamy and Cardiff, saying his members were “extremely concerned” about the Revenue announcement. On March 30th, the minister announced his review and the Revenue withdrew its notice to the market.
The market responded positively. Tom Healy, the then chief executive of the ISE, e-mailed Cardiff on March 30th, thanked him for his assistance, and said he would “contact you soon to propose lunch”.
