Dublin is likely to gain from current tax discussions.
The effective abolition of the special tax regime for companies located in Dublin's International Financial Services Sector (IFSC) presents both a challenge and opportunity for the insurance sector, according to Pat Wall, a partner in PricewaterhouseCoopers' Dublin office.To conform to European Union competition policy, the special tax rate of 10% for insurance and other companies in the IFSC, a docklands renewal site, had either to be abandoned or extended to all insurance companies in the country generally. Thanks to a buoyant economy, the Irish government was able to opt to harmonise all corporation tax at 12.5%, with the new rate applying to insurance companies from 1 January 2003. As a result, the distinction in taxation between financial companies based in the IFSC and the rest of Dublin will disappear.
Mr Wall argues that the debate now taking place within the EU and the Organisation of Economic Co-operation and Development (OECD) on nominal tax rates tends to obscure the real issue: the level of effective taxation. This is as much a function of the taxable profit or tax base as it is the rate and in this light, Ireland does not offer an unfairly favourable regime for (re)insurance companies. Ireland also has an extensive and growing network of tax treaties.“Germany, with the highest level of nominal corporate tax rates has one of the lowest levels of effective corporation tax in the EU,” Mr Wall points out in his article on tax in the special Dublin 1999 edition of Global Reinsurance.
Tax distortions, he says, are, having an increasingly obvious and material impact on business behaviour, particularly on financial services. “It is to be expected that OECD and EU member countries will tighten up their tax rules designed to prevent the outflow of business to tax havens. If Ireland positions itself properly, it could benefit from these developments.”
Mr Wall says it is, however, fair to ask whether there is a future risk of Ireland being forced to increase its corporation tax rate in light of the debate on EU tax harmonisation. He believes the risk is low. “There is no EU policy on tax harmonisation. There is certainly a debate on whether a single market can be completed in the absence of tax harmonisation, but those who argue for harmonisation seem to ignore the experience of the United States which, while having a common system of federal taxes, tolerates wide differences in the rates of state taxes. I do not think anybody would argue that the US is not a single market for goods and services!”
Certainly, once the European Commission gave its blessing to Ireland's new corporation tax policy, a source of fiscal concern was removed. According to David Smith, international insurance representative of the Industrial Development Agency (IDA) Ireland, the Royal Bank of Canada has now set up a captive outside the IFSC regime and is paying the current 28% standard rate of corporation tax, knowing that it will fall by 4% annually to 12.5% in 2003.
Also, the IDA and the Dublin International Insurance and Management Association (DIMA) have increased their marketing efforts. A major initiative this year has been the conference Merging insurance and financial risk - the next five years, which was held at Dublin Castle on 15 and 16 March 1999.
Having opened its doors to captives in 1987, Dublin was host to 153 by the end of 1998. Fourteen new captives were added to the register during the year and three were removed for a total gain of 11. Gross premiums for Dublin captives were IR£1.402 billion in 1997, and total assets were £1.242 billion. Figures for 1998 are not yet available.
David Smith says that interest in Dublin captives continues from the United States, United Kingdom, Japan and Italy, and Dublin has now registered its first captives from Turkey and Austria. Another continuing trend has been the use of Dublin by sponsors who already have a captive in the US, Bermuda or the Cayman Islands.
Italy and Japan are geographical areas which the IDA and DIMA have targeted for growth. Dublin is already the third largest domicile for Japanese captives after Bermuda and Singapore, according to a study by the Tillinghast Towers-Perrin Captive Insurance Company Report (CICR) in February 1999. CICR believes that there are 78 companies sponsored by Japanese owners or their subsidiaries which can be described as captives of “semi-captives” and of these 11 are registered in Dublin.
The ability of Dublin captives to write direct business throughout the EU has always been one of its most important attractions along with the low tax rate, and Mr Smith reports that one captive relocated from the Isle of Man in 1998 and another is expected from Guernsey this year, because both sponsors need direct access to Europe.
All but one of Dublin's captives are single owner but the IDA is hoping to attract more association captives and it is also interested in P&I clubs. Protected cell structures are being considered.