What is Ireland's International Financial Services Centre?

The history of Ireland's International Financial Services Centre's begins in 1987, when it was founded, although its genesis dates back to the early 1970s. It is one of the most successful financial services centre initiatives by a national Government anywhere. Like most successful initatives, it has its detractors, and there are a considerable number of misunderstandings and inaccuracies about its nature, and history, many of which are published on the internet. For an example of some of these see the page 'International Financial Services Centre' on Wikipedia.

This page repeats some of the terminological usages about the Irish 'IFSC', which are at odds with the understanding of the term within the Irish financial services industry itself. Indeed it ascribes the term "International Financial Services Centre" ( a generic term) to just one financial centre (Ireland). 'IFSC' is a term used by several other centres, e.g. the Botswana 'IFSC'.

This results in statements in the Wikipedia account such as:

1) "it is a major financial services centre in North Wall, Dublin, Ireland".

2) "the centre employs 14,000 people"

3) "It was the brainchild of an associate of the billionaire Dermot Desmond. Both the associate and Mr Desmond approached Charles Haughey, then in opposition, who made it the centrepiece of his economic manifesto when he came back into power. The Finance Act, 1987 (Section 30) allowed for the designation of such an area."

The Financial Services Industry's perspective

Finance Dublin, and the Finance Dublin Yearbook of Ireland's International Financial Services Industry' (ISBN 0 9547 344 5 9) has consistently employed an alternative designation of the term 'IFSC', which is the term normally used within the financial services industry itself, and the terminology employed in the Act setting up the Irish IFSC in 1987.

In terms of the general understanding of the term 'IFSC' within the industry, the above terminology would therefore be regarded within the financial services industry as inaccurate.

Inaccuracy No 1: " it is a major financial services centre in North Wall, Dublin, Ireland".

Ireland's IFSC historically did not correspond to a particular geographic area. It derived its status from a defined tax incentive designation (in the Finance Act 1987) which was awarded by a 'licencing' process operated by the Department of Finance. These licences were awarded to IFSC companies in any part of the Republic of Ireland on an understanding that they would re-locate in a designated area in the Custom House Docks area of Dublin. Indeed, for the first five years of the IFSC's existence no companies located in that area, because it was a building site. Office blocks in the Custom House Docks Complex began to be completed in the mid 1990s, and by the early 2000s almost 50 per cent of all employees in IFSC companies were based in the North Wall complex.

It was a stipulation in the original IFSC licences that companies would re-locate in the North Wall complex when appropriate accomodation became available. The Centre proved so successful that its employment exceeded the wildest dreams of its original promoters, (Charles Haughey, the Irish Prime Minister and his adviser Mr Dermot Desmond, who was an independent stock and money broker in Dublin at the time). Available office accommodation in the North Wall complex never actually matched the demand for space in the IFSC, with the result that when the EU intervened to bring the original IFSC incentive to an end, (under European Union State Aid rules) in the 2000-2005 period most IFSC employment actually was located outside of the designated Docks area.

Inaccuracy No 2: "the centre employs 14,000 people".

On the understanding that the Irish IFSC represents not a geographic complex of buildings, incorporating businesses of all kinds, but the internationaly trading financial services industry in the Republic of Ireland, employment in the IFSC sector is approximately 25,000. The Finance Dublin Yearbook of Ireland's IFSC conducts an annual census of employment in all IFSC companies, and on December 2008 the total employment level stood at 24,906, down from 25,058 at the end of December 2007. Employment in the IFSC remained solid at 24,692 jobs at the end of 2009 and is down just 0.9 per cent or just 214 jobs in 2009 on the end 2008 figure of 24,906. The three IFSC sectors of banking, funds and insurance all performed well in the survey relative to some other international financial centres where job losses have been greater. At a time when Ireland’s live register has risen steadily over the past two years, the IFSC has remained a bright spot in employment in the Irish economy by pretty much maintaining its total jobs figure. The annual employment survey conducted in conjunction with the Finance Dublin Yearbook shows the number of IFSC jobs at the end of 2009 standing at 24,692, a fall since the end of 2008 of just 0.9 per cent or 214 jobs when the total figure was 24,906.

History of Ireland's IFSC

2009 marks the twenty second anniversary of the launch of the IFSC, a project which was first announced in 1987. In April of that year, the IFSC Clearing House Group met for the first time, while the Finance Act of 1987 introduced the 10 per cent tax rate on corporation profits for certified international financial services businesses. By the end of the first year, 18 projects had been put forward for IFSC licenses, and work on the buildings in the Custom House Docks would commence soon after.

For perspectives on the IFSC's history as its success unfolded during the early years of this decade see the following supplements which were published in Finance Dublin, the first in 2002, and the second in 2006.

The IFSC Story

The IFSC tax incentive zone was established with EU approval as an initiative of the Irish State in 1987. Although the process of approving IFSC companies came to an end in December 2000, IFSC companies which came into existence before that date benefited from the fiscal regime of the IFSC until the end of 2005. The IFSC regime came to an end as of December 31st, 2005, and all companies operating in the international financial services sector from 2006 onwards pay corporation tax at the prevailing rate of 12.5 per cent.

As well as the preferential corporation tax rate, IFSC companies have availed of Ireland’s network of double taxation agreements, as well as other incentives including: No withholding tax on interest paid to non-residents • Tax exemption for collective investment/life assurance funds • No net asset value tax on funds • No municipal taxes • Double rent allowances for certain IFSC tenants • First year depreciation allowance on certain items of capital expenditure It was a condition of the incentive that companies would locate in a the Custom House Docks site as soon as practicable.

Companies which had IFSC certificates fell into two categories (1) those whose tax certificates ceased to have effect after 31 December 2002 and (2) those whose tax certificates ceased to have effect after 31 December 2005. Once the IFSC tax certificate ceases to have effect, the company is no longer entitled to claim accelerated tax depreciation allowances. The double rent allowance incentive for operations located in the IFSC will end on 31 December 2008, but the availability of the allowance during that time is dependent on the date on which the construction or refurbishment of the building was completed. Expatriate staff relocated to Ireland were formerly taxed only on remuneration or remittances they bring into Ireland, and not on world-wide income. However, this changed in the 2006 Budget, when the remittance basis of taxation was abolished.

Transition

All new cross-border financial services enterprises establishing in Ireland since January 1st, 2003 are subject to a corporation tax rate of 12.5 per cent on trading income. While this new tax rate is higher than the IFSC 10 per cent rate, the new regime is simpler, has the approval of the EU, the guarantee of the Irish Government (which, like all EU Governments, has the right of veto on tax matters) and no geographic restrictions on location within Ireland.

This fiscal independence (i.e. confirmation of the veto concerning the rights of individual EU nations to self regulation in national tax matters) was upheld at the European Council in Nice in December 2000.

As the 12.5 per cent regime is neither limited with regard to the activity of corporations or to their geographic location. It is neither a ‘state aids’ nor does it fall under the rubric of ‘harmful tax competition’.

The Irish Government as a matter of tax law and policy continues to oppose any measures to introduce tax harmonisation within the EU.

The original IFSC incentive system involved a 10 per cent rate of corporation tax until 2005, but coinciding with the agreement on the new 12.5 per cent regime, the Irish Government introduced in 1998 a phasing-out period for the old regime.

The corporation tax rate applying to non-IFSC companies was stepped down to 12.5 per cent in the intervening years as follows: The Finance Act 1999 also provided that any ‘non-trading income’ of a company would be taxed at a rate of 25 per cent. Another significant development to enable the IFSC to go nationwide is the extension of the IFSC gross roll-up tax treatment for life assurance and funds to the rest of the Irish economy. This change has been provided for in Finance Act 2000 and enables fully tax transparent international life and funds business to be offered by both IFSC and non-IFSC companies. Further enabling legislation in the area was included in the Finance Act 2001.

Most IFSC companies benefited from the 10 per cent rate until the start of 2006, and are now taxed at the prevailing tax rate of 12.5 per cent. Those IFSC companies that were approved after July 1998 were given a 10 per cent tax certificate up to the end of 2002. With effect from 1 January 2003, these companies are subject to tax at the standard rate of 12.5 per cent.

Additional entities

New agency managed companies or ‘additional entities’ e.g. captive finance, insurance companies, and securitisation vehicles, are taxed at a rate of 12.5 per cent and as of 2003 are no longer approved by the Minister for Finance.

The incentives in detail

Irish tax resident funds enjoy exemption from tax on dividend and interest income and capital gains. This tax-exempt status is encompassed in Ireland’s domestic legislation and includes not only funds whose operations are carried out in the IFSC but also funds whose operations are carried out anywhere in Ireland. The Finance Bill 2004 exempts investment funds from VAT, in the post-IFSC era.

IFSC life assurance companies can obtain gross roll-up (effective exemption from Irish tax) on investment returns accruing to non- resident policyholders. From 1 January 2001, non-IFSC life assurers operating in Ireland are also taxed in this way so that there is no annual tax imposed on policyholders’ funds.

Other incentives for companies that have an IFSC certificate include the ability to offset certain capital allowances on commercial leasing activities against other IFSC sources of income and a 100 per cent write-off of new equipment purchased by the IFSC company. There are detailed rules for the computation of trading profits and, by and large, relief is available for expenditure of a non-capital nature, which is wholly and exclusively incurred for the purposes of the trade.

Irish law

Ireland is a common law jurisdiction as modified by legislation and by the written constitution of 1937. Justice is administered in public courts, with judges appointed by the President on the advice of the Government.

The Judiciary and the legal system is constitutionally independent of Government. The Courts system is divided into the District Court (the court of summary jurisdiction), the Circuit Court, the High Court and the court of final appeal, the Supreme Court. Cases - if they are considered to involve aspects of EU Law - may also be referred to the European Court of Justice while decisions of the European Court may also have implications for the domestic law.

The legal profession is divided into solicitors and barristers. In the higher courts, cases are normally conducted by barristers, and usually advised by solicitors.

Regulation of financial services entities in Ireland is subject to the general regulation of the relevant financial sectors by the Irish Financial Regulator. In turn, Irish regulatory regimes are subject to overall EU legislation and Directives as part of the Single Market in financial services.

EU law

European Union law is an independent system of law, which applies equally and uniformly in all member states of the Union, of which Ireland is a full member. EU law is distinct from national law and it takes precedence over national law in those spheres in which it applies (for example the free movement of capital, and the operation of the Single Market, the areas in which competency has been extended by Member States to the Union).

The system of EU law comprises two elements - primary law, which is contained in the Treaties of the Union (in effect the ‘constitution’ of the EU), and secondary law, which is to say the day-to-day law making of the Union (Regulations and Directives) as promulgated by its institutions. The European Court of Justice decides points of law and interpretation. Failure by a member state to properly implement EU law (for example an aspect of the Treaties, a Directive or a Regulation) may result in the Commission taking a case against it in the Court. The Court also has jurisdiction over disputes involving or concerning the institutions of the Union, undertakings and private individuals.