IFSC tax yield down 25 per cent last year

TAX REVENUES fell sharply from international financial services companies based in Ireland last year, as business was yet again affected by the ongoing turmoil in financial markets, while losses carried forward from 2008 reduced the levels of taxable income.

According to estimates from the Revenue Commissioners, the total IFSC tax yield fell by 25 per cent in 2009, to €642 million.

From a high of €1.1 billion in 2006, tax revenues are now back at 2004 levels, having fallen by 42 per cent from their peak. However, the IFSC’s contribution to the overall Irish corporate tax take has remained steady, at about 16 per cent for 2009.

Based on the tax revenue estimates, profits among IFSC companies appear to have dropped by about €1.7 billion last year, falling back to €5.1 billion. However, this may not be an accurate reflection on profitability in 2009, given that many companies may have carried forward losses from 2008, the “annus horribilis” for the financial services sector.

While the degree to which the “carry forward” of previous year losses to reduce corporation tax exposure is behind the fall-off in the IFSC tax yield is unknown, as the Revenue does not disclose this information, it is likely to be a significant factor.

“What you’re seeing in 2009 is the full impact of 2008, with the losses of 2008 having been kicked into 2009 to reduce the tax take,” says Paul Reck, a tax partner with Deloitte.

Given the level of losses and writedowns sustained over the past two years, particularly among institutions that were very exposed to the asset-backed securitisation markets, IFSC tax yields are likely to remain low.

Although the international funds and insurance sectors have both suffered from a decline in profitability due to falling investment values, they have, nevertheless, weathered the storm of the credit crisis. The past year has seen a recovery of sorts in values.

For banking, however, where most of the losses were likely recorded, the future looks uncertain, with assets of wholesale foreign banks in Ireland continuing to slide, falling by a third from a high of €540 billion in February 2008, down to just €357 billion by the end of 2009.

According to Mr Reck, the events of the past two years will also have called the viability of some IFSC banking operations into question. Given that many institutions have incurred significant losses in their home countries, Mr Reck notes they will find it hard to justify multiple locations carrying out similar functions.

Moreover, the level of losses sustained seriously undermines the attractiveness of the 12.5 per cent corporation tax regime.