The Irish government will fight to maintain the success of the International Financial Service Centre (IFSC) which has so helped transform its position in Europe, says Eibhir Mulqueen.
Dublin's “financial global village” is in its 12th year, and its success is a symbol of the transformation of the country from a peripheral economy receiving, like a sick child, the most favoured status of European Union structural funding, and approval of the 10% corporation tax zone, to one whose annual economic growth rate is the highest in the eurozone family.
Ruairi Quinn, the leader of the opposition Labour Party and former minister for finance, says future policy cannot be based on the “poor mouth”, a Gaelic expression meaning one who continually bemoans his condition. While the realisation that Ireland must pay its own way is trickling into the national consciousness, the government is fighting to retain a standard low corporation tax regime and maintain a crucial stability for international financial companies.The present administration is committed - with EU approval - to retain the special 10% corporation tax rate for IFSC companies until a new standard rate of 12.5% is introduced in 2003. The 12.5% rate will replace the current 28% on a phased basis. IFSC companies established before August 1998, have a special bonus, being allowed to pay the 10% rate until 1 January 2005. Apart from the low corporation tax regime, funds domiciled in Ireland by IFSC companies are not subject to Irish taxes, and companies have also taken advantage of rent and rates reliefs.
Although the European Commission has approved a standard Irish corporation tax rate of 12.5% beyond 2003, Ireland cannot help but get caught up in the wider debate over tax harmonisation. Some member countries are pressing for more standardised EU corporation tax, and those member states generally have quite high rates, such as Germany where it ranges from 44% to 56%.
Thanks to the large differential between the IFSC and some of the continental countries, two unnamed German bankers told the Irish Inland Revenue that Dublin has “acquired a reputation as a tax haven'' according to a report in the Irish Times in December 1998. The bankers said that the German authorities went to “considerable lengths” to double tax profits made by German financial operations located in the IFSC double taxation, and suggested less transparent ways of applying a low tax rate, which was rejected by the Inland Revenue.
The minister for finance, Charlie McCreevy refutes the tax haven claim. He points to the EU approval of both the special 10% tax rate and the planned 12.5% one, and the double taxation agreements in place with EU partners.
However, tax reliefs and rent or rate allowances granted to IFSC property developers at the IFSC by the government since 1993 are being reviewed by the European Commission because it was not formally notified of their introduction. The commission is examining, on a retrospective basis, special capital allowances for investment in buildings and the double rent deductions and rates remissions for which tenants qualify.
While the government will have to defend its record of granting double rent and rates allowances since 1993, capital allowances have extended to cover more than 400,000 sq ft of office space being built in a 12 acre extension to the IFSC, over half of which is marked as the European headquarters of Citibank. The US insurance company, AIG, the country's largest law firm, A&L Goodbody, and Bank of Ireland are other tenants who will occupy the offices.Larry Sherin, general manager of Zurich International, and chairman of the Dublin International Insurance Managers Association (DIMA) discounts the effect that the absence of rent or rates reliefs may cause further prospective tenants. “I do not think any company would be looking at whether they would stay or go based on double rent relief. Tax breaks are a temporary measure, structural funds will be phased out. The long term success of the economy is really based on what is going to attract companies and maintain companies here,'' he says.
Insurance in the IFSC
Ireland's geographic location allows for good links with European, American and Far Eastern markets. Coupled with its English-speaking culture and its well regulated environment within an EU and eurozone framework, the IFSC can claim an edge on other European domiciles such as the Channel Islands and the Isle of Man. Only Gibraltar can offer the benefits of full EU membership, but it has not joined the eurozone and is in its youth as an insurance centre.An official recognition of the role insurance companies can play in developing the IFSC occurred last year with the appointment by the government of an international insurance representative, David Smith, at the state development agency, IDA Ireland.
For insurance companies, the IFSC's attraction as a European base above other centres is that companies can write insurance cover directly into all EU countries, according to Eamon O'Brien, managing director of Aon Insurance Managers, and chairman of the IFSC's insurance working group. “In international insurance and reinsurance terms, we are trying to make Dublin the Bermuda of Europe,'' he says.
Official statistics bear out the economic success mentioned by Larry Sherin as the critical factor. Although Ireland's effective tax rate is estimated by the OECD at 36% of GDP, the lowest in the EU whose average is 45%, the Exchequer surplus, at IR£747 million, is the highest in the history of the state. Tax revenue is up by 13% and corporation tax receipts have surged by 21.6%, while the annual growth rate is projected to be 6.7% this year, and 6.4% in 2000.Fears of inflationary pressures, however, have been grounded in an inflation rate of 2.4%, the second highest in the eurozone, and partly reflect house price inflation which is rampant in Dublin. However, the stability of being in the euro, with the lower mortgage rates this will bring, is expected to put downward pressure on the rate in 1999.
Last year Fortune magazine voted Dublin the best city for business in Europe. The magazine cited the country's education system, the policy of attracting corporations and the cost of personnel, which was “less expensive'' than London. The republic is only the 11th most expensive place to live in the EU, according to the human resources consultancy, ECA International compared. Britain is in 6th place.
At the time of its launch by the former prime minister, Charles Haughey, the IFSC was dismissed as a pre-election gimmick, but the scheme defied the views of sceptics, weathered the Black Monday stock market crash in October 1987 and attracted a queue of clients seeking licences. Within a year it was being referred to as a “commercial Camelot” and a secretary to the prime minister's department enthused about the reception a delegation received in the City of London: “Never in the history of financial services have so many gathered together in so short a time to learn so much about how profitable this venture could be.''
The original IR£250 million development on a 27-acre docklands site was modelled on the London Docks development at St Katherine-by-the Tower, designed by the renowned architect and engineer, Peter Drew. Port authorities in New York, Boston and Baltimore embarked on their own urban renewal schemes, also using the London model as a reference.
At the time, the Dublin scheme was described as the most important development in the city for at least 100 years and having a profound effect on the city's future over the next 100 years. The country's main indigenous banks, Bank of Ireland and AIB established treasury operations there, with their participation being seen as crucial to signing up foreign financial institutions. By 1989, when the government legislated to introduce a zero corporation tax rate for international fund management companies, in direct competition with Luxembourg and the Channel Islands, the centre was appealing to fund and asset managers and currency and securities traders and insurance companies.
If some view Ireland's future relationship with the EU to be one of a spoilt child, unwilling to give up some of the perks it enjoys, the players associated with the IFSC have come of age and will fight to hold on to their success.
Eibhir Mulqueen is a business journalist based in Dublin.