IFSC in eye of gathering storm

IT’S NO SURPRISE that the Government stood firm behind the IFSC this week in its avowal to stay outside Europe’s new Financial Transactions Tax (FTT) zone.

After all, the international financial services sector in the Republic was born of a Government decision to cut tax

to 10 per cent for qualifying activities back in 1987, while favourable tax decisions have played a major part both in attracting international business to Ireland and in retaining it.

But in its support for the IFSC, has the Government missed an opportunity to generate much needed tax revenue? And given that 11 countries are due to go ahead anyway, will there still be a cost for IFSC businesses?

It’s a proposal that the EU says could raise €80 billion a year in tax revenues if all 27 countries signed up to it, but despite Ireland’s parlous economic position, it has walked away from joining. For the financial services industry, the move was seen as essential to sidestep the French and German-driven measure, given that other European financial centres such as London, Luxembourg and Netherlands are set to stay outside the zone. Failure to do so would have cost jobs, they argue.

“In a situation where London didn’t go in , you would have seen business moving,” says Brendan Bruen, director of Ibec body Financial Services Ireland, arguing that, “it would have hit a very substantial number of jobs across all the activities in the IFSC”.

For Gary Palmer, chief executive of the newly-formed Irish Debt Securities Association (IDSA), introducing the tax would have put the IFSC at a competitive disadvantage.

“Ireland can’t afford to introduce it. If we did, not only would we restrict future growth and employment opportunities, we would compromise our current business and all the jobs in it,” he says.

While the tax would have affected all sectors, from banking to insurance to treasury, it is funds that would have likely taken the biggest hit. With some €2 trillion in assets serviced from Ireland, and more than 10,000 jobs, it could have been a costly strike.

“It’s an extremely flexible industry. It’s very easy for that number of assets under management to be significantly reduced,” warns Seamus Hand, a partner with KPMG, adding that it is estimated that every fund established in Ireland is equivalent to one-and-a-half to two jobs.

Under the original EU proposal, the tax of between 0.01 and 0.1 per cent would have applied to the €1 trillion or so Irish-domiciled funds, and would have applied to money coming into the funds as well as to investments by the funds themselves. Some estimates suggest that Irish-based funds could have been hit by the tax as many as seven or eight times.

But while there would have been a cost issue, it’s the overall perception of being within the zone that might do the most damage. “It’s the impact on the centre. Being within a FTT zone is just not attractive,” notes Bruen.

On the other hand, some would argue that it’s time the financial services sector stumped up more in tax. During the boom, the IFSC could be counted on to contribute more than

€1 billion in corporation tax – as well as additional employment taxes, etc – but this has more than halved to €466 million.

While some of the decline is due to a re-classification by the Revenue Commissioners of the figures, it’s also because profitability has been decimated in some sectors, most notably banking. And while a 1 per cent stamp duty applies to Irish shares, its yield has also fallen, down from €406 million in 2006 to €195 million last year.

However, if the fears proved correct about the mobility of the business, then a levy on what might end up being nothing is of little use.

“Countries that have introduced FTT-type transactions in the past have found industries such as funds and similar investing industries have tended to migrate,” says Hand, citing the example of Sweden in the 1980s.

When that country introduced a tax on financial transactions, it managed to raise only marginal revenues, as the business simply moved to other centres such as London.

“It’s the displacement effect,” argues Bruen, acknowledging that it is impossible to gauge the exact impact of the tax.

“It’s a very, very hard one to call, but it’s very hard to see it raising anything like the amount of money they say,” he says.

The other issue is that it remains unclear what the money raised will be used for. It has been suggested that if Ireland was to sign up for the tax, revenues raised here would go towards reducing its contribution to the EU budget.

But while Ireland may now be safely outside the FTT zone, given that 11 countries have signed up to it, it will still have an impact. An Irish-based fund investing in French or German equities for example, will have to stomach the levy, which will be an additional cost to those funds.

“There are still going to be implications for IFSC operations when they do business with parties within the scope of these 11 countries,” notes John O’Leary, a partner with PwC. He says, however, that with Ireland out of the FTT zone, it will only take the hit once on funds based here.

Another important distinction is that so too will UK or Luxembourg funds.

“Doing business with a German counterpart could have a FTT cost, but the key point is that so too would have a UK or Luxembourg entity,” says O’Leary.

In any case, while the 11 countries may have signed up to use the previous EU proposals as a template for the FTT, it’s still unclear what shape this might actually take, and agreement is unlikely to come before the second half of next year.

“They’ve gone ahead with an indication or willingness to engage on the introduction of the transaction tax. But there’s a bit more work to be done before it will be implemented, and the Commission has a significant role to play to make sure that it doesn’t distort the internal market in the EU,” says Hand, adding that he wouldn’t be surprised if the initiative didn’t go ahead at all.

“There’s an awful long way to go before you reach any political agreement on it,” agrees Bruen. “If it’s going to work it has to be done on a very wide basis.”

In the meantime, regardless of whether or not the FTT becomes a reality, what is certain is that this process has demonstrated a willingness in Europe to bring forward tax changes on an enhanced co-operation, rather than unanimous, basis.

“It is groundbreaking because it’s the first time it’s been done on the tax side, and it does show there’s an appetite to use it,” says O’Leary.

In this regard, it could pave the way for tax harmonisation through the Common Consolidated Corporate Tax Base (CCCTB), which Ireland also opposes, fearing it could weaken the 12.5 per cent corporate tax rate.

But for Hand, the CCCTB will be a whole different affair, and he argues that to introduce it in certain countries where cross-border activities are more prevalent would be “a lot more challenging”.

“I wouldn’t assume that because countries agree to this, that they would be willing to agree to the CCCTB,” he says.

The IFSC by the numbers

* Employees: 33,000 approx (Funds: 11-12,000; Insurance: 5,000; Banking and custody: 10,000; Ancillary/professional services: 7,000-8,000)

* Number of companies: 500+

* Value of funds serviced in Ireland: €2 trillion

* Corporation tax contribution (2011): €466 million

* Global financial centre ranking (Sept 2012): 49th

* Average salary for an IFSC employee: €60,100

Sources: Accenture; IFIA; GFCI; Revenue Commissioners; Central Bank; FSI