The German authorities go to "considerable lengths" to double tax profits made by German financial operations located in the IFSC, German bankers have told the Revenue Commissioners.
The financial centre has "acquired a reputation as a tax haven" in Germany, according to the bankers, who suggested that a "less transparent" way of subjecting them to low taxes should be devised. The suggestion was rejected by the Revenue.
In a memo submitted to the Revenue through the office of Dr Martin Mansergh, special adviser to the Taoiseach, two German IFSC bankers suggested high-level meetings on the IFSC should take place between Ireland and Germany.
"Unless an agreement on a political level is achieved between Ireland and Germany, uncertainty will prevail and therefore inhibit the expansion of German banks in the IFSC."
High-level German administrators must be told that "Dublin is not a tax haven with the negative impressions that this conveys, but a financial centre in its own right".
They also said "alternatives to the high-profile, low-single corporate tax rate could also be considered (for instance tax-efficient loan provisioning) and might achieve the same economic result without attaching unfavourable publicity".
The memo, sent to the Revenue Commissioners in June following a meeting between Dr Mansergh and the unidentified bankers, said the activities of German banks in the IFSC should be encouraged by "giving proactive guidance and by diffusing potential dangers at an early stage".
However the bankers did not take up a subsequent offer from the Revenue for a meeting to discuss their concerns.
Copies of correspondence concerning German investment in the IFSC were received on foot of a Freedom of Information request.
There are about 35 stand-alone German operations in the IFSC, representing about 12 per cent of the total stand-alone projects in the centre. About half of the German operations are in the banking and fund-management area, employing approximately 500 people. A further 50 managed operations are of German origin, accounting for 9 per cent of total managed entities.
Germany's foreign tax law does not apply to banks but does to other types of financial operations. According to the memo, changes in the German tax law have created "high uncertainty" among potential German investors in the IFSC.
It has also led to a sharp drop-off in the funds invested in German "special purpose investment companies" (SPICs) located in the centre.
"Unfortunately in Germany Dublin has acquired a reputation as a tax haven," the memo states. "In practice this means that the authorities go to considerable lengths to tax again the profits remitted from Dublin.
In particular a single-tax rate corporation tax of 10 per cent provokes a reaction from a sensitive tax administration which must also deal with other countries with less obviously beneficial tax structures."
German foreign tax law attributes the foreign profits of companies abroad, derived from passive investment activity, to the German parent company and subjects those profits to full German tax unless they have suffered foreign tax at a rate not less than 30 per cent.
Special purpose investment companies (SPICs) are the main target of this law. SPICs are standalone subsidiaries created by banks to manage funds for German corporations.
A large number of these companies moved to the IFSC from the US in the late 1980s, following changes in US/German tax treaties. The number of SPICs in the IFSC has fallen from 110 in 1992 to 50 now, according to a Revenue response to the German memo, written in September. Funds currently under management amount to £1.6 billion.
"It is anticipated that the number of SPICs and the value of funds under management will continue to fall as a result of the uncertainty created by court actions taken by the German tax authorities" against such companies, according to the Revenue document.
SPICs located at the IFSC are taxed at the normal corporation tax level, rather than the special IFSC rate of 10 per cent, so as to avoid double taxation. Profits earned outside Germany and taxed at less than 30 per cent are taxed again when brought back to Germany.
As of January 1st, normal corporation tax falls from 32 per cent to 28 per cent, and so falls below the 30 per cent limit set by the German tax law. This matter is currently being examined by the Department of Finance.
Meanwhile, EU leaders meeting at the weekend in Vienna announced they would proceed with plans to co-ordinate taxing interest on private savings but said general harmonisation of tax rates was not on their agenda.
"Co-operation in the tax policy area is not aiming at general tax harmonisation and is not inconsistent with fair tax competition but is called for to reduce distortions in the internal market, to safeguard tax revenues from highly mobile bases and to improve the prospects for labour-intensive growth," according to the draft of a statement released at the summit.
(EU Summit coverage: pages 14 and 15)
