Lawyers, accountants and other service providers to hundreds of special purpose entities (SPEs) in Dublin’s International Financial Services Centre shared €273 million of fees for their work last year – more than double the amount these unregulated and often opaque vehicles paid in taxes to the State.
An analysis by the Central Bank of Ireland on Monday also detailed how Russian banks have made the most use of Irish-domiciled "other SPEs" to raise funds, accounting for 8 per cent or €21.5 billion of a €269 billion market.
Investors in vehicles linked to Russian lenders such as Tatfondbank and Vneshprombank have been burned in recent years as the banks ran into trouble.
Based on data from Revenue, the Central Bank reports shows that SPEs only paid €128 million of tax in Ireland in 2017, equivalent to less than 0.02 per cent of the value of their assets. Professional service firms, however, would be liable for tax on fees they receive.
Section 110 of tax laws introduced in 1997 to encourage companies to set up SPEs and make Ireland a global financing and fundraising hub have turned the country into one of the world’s main locations for such financing activities.
Two categories
Irish SPEs, which contained some €676 billion of assets at the end of June, are divided into two categories: financial vehicle corporations (FVCs) which are involved in raising funds through the securitisation of assets such as mortgages in global bond markets, and “other SPEs”.
Although SPEs play an important role in the flow of money through the global economy, one of the reports, written by Brian Golden and Patrick Hughes of the Central Bank, highlighted that such vehicles "could potentially be employed to achieve levels of tax efficiency or take advantage of legal opportunities to engage in regulatory arbitrage that may not be aligned with society's wider interest".
While assets in Irish SPEs typically have little to do with the domestic economy, the Central Bank has claimed it is at the forefront in terms of seeking to shine a light on this darkest part of the so-called shadow banking, or non-banking financial activities.
It is understood to have contacted authorities in other jurisdictions in recent months to get a greater understanding of Irish SPEs interact with banks and companies elsewhere. A spokesman for the bank declined to give further details.
Quarterly data
The European Central Bank has required that FVCs file quarterly data on their assets and liabilities since 2009, in the wake of the role of securitisation vehicles in the global financial crisis. The Central Bank of Ireland ordered "other SPEs" availing of section 110 status to start submitting data to it in late 2015.
"Non-securitisation SPEs resident in Ireland are sponsored by entities from 40 countries," according to one the Central Bank reports published on Monday, written by Mr Golden and Eduardo Maqui. "In many cases, a single structure may involve entities spanning several countries."
“Our empirical results show that banks sponsoring Irish-resident SPEs are larger and financially weaker across a range of indicators to other banks,” Mr Golden and Mr Maqui said in one of the reports. “However, a key purpose of banks issuing debt through Irish-resident SPEs may be to access debt markets elsewhere,” they said, adding that they observed that banks “markedly” increased debt-raising elsewhere after using Irish vehicles.
