No desks. No staff. No tax. Ireland’s shadow banks

Ireland’s unregulated and barely visible ‘shadow banking’ industry is 10 times the size of our GNP. Is it a benefit or a threat to the economy?

Lobby correspondence: one modest building can house hundreds of financial-vehicle corporations. Photograph: UpperCut Images/Getty

Lobby correspondence: one modest building can house hundreds of financial-vehicle corporations. Photograph: UpperCut Images/Getty

Sat, May 11, 2013, 08:40

So many companies are listed in the marble-tiled, plant-filled foyer that there are no brass plates or printed guides. Instead, it takes a computer to search through them all. This is 5 Harbourmaster Place, a Celtic Tiger-era chrome-and-glass building at the edge of the International Financial Services Centre, in Dublin.

It might not look big enough to house them all, but this modest-sized building is home to about 250 companies. One is Orpington Structured Finance I. It has gross assets of €1.7 billion, which would make it one of the most valuable firms in Ireland. Except it has no employees. It has no buildings or machinery. Nor does it pay any tax.

It is one of hundreds of so-called financial-vehicle corporations, which are companies set up to house or trade in securitised investments, in other words to package and resell loans.

It’s part of a much wider area of financial activity known as shadow banking, a term coined five years ago when the US economist Paul McCulley defined the area as the “whole alphabet soup of levered-up non-bank investment conduits, vehicles and structures”.

The term spread almost as fast as the financial crisis, and regulators and governments have been mobilising ever since to try to map this largely uncharted world.

It’s big business: the total value of assets in the Republic’s shadow-banking sector, at €1.7 trillion, is almost 11 times the State’s gross national product, which is the total value of all products and services produced in a single year.

Supporters of low taxes and multinational-friendly policies say these companies help create much-needed jobs in a country with 14 per cent unemployment and stagnant growth. The wider IFSC employs an estimated 32,000 people, for example, and contributes about €1 billion in corporation tax. Of those employees, about 1,000 work in companies linked to the securitisation industry. If Ireland weren’t courting this kind of business, the argument goes, it would end up in rival jurisdictions, such as the UK or the Netherlands.

But detractors question whether the benefits really stack up.

Much shadow-banking activity is set up to attract little, if any, tax. This reliance on aggressive tax avoidance, critics say, distorts the country’s industrial policy and leaves it vulnerable to appealing changes in tax rates around the world.

Moral argument
There is also a moral argument: companies and people who don’t pay a fair proportion of tax shift the burden on to those who do. At a time when PAYE workers and the middle classes are bearing the brunt of tax increases, many grumble that corporations are able to escape without paying their share.

On Tuesday, at a meeting of the EU’s finance and economics ministers, issues such as aggressive tax avoidance and profit-shifting across borders will be out of the shadows and in the spotlight.

In its role as president of the council of the European Union, the Government says it is leading efforts to tackle this area.

Yet Ireland has been under pressure from some of its neighbours to tackle its low-tax regime and plug loopholes such as the “double Irish”, which allow Google and other US multinationals to lower their tax liabilities dramatically.

Although Ireland has avoided being labelled a tax haven by international bodies such as the Organisation for Economic Co-operation and Development, some academics say it deserves the name.

Nicholas Shaxson, an associate fellow of the UK think tank Chatham House and the author of Treasure Islands , a book about the offshore system, says Ireland is a tax haven by his definition in light of the country’s regulation of financial services.

“What I have seen in Ireland does fit so closely the pattern I’ve seen again and again in tax havens, which is this willingness to do what the financiers want, really not ask any questions, and to have all sorts of measures for keeping Irish democracy out and keeping debate out of the way,” he says.

“That’s by either doing things behind closed doors and the shaping of a national consensus that ‘this is the goose that lays the golden egg and we mustn’t do anything to trouble it’ . . . to arguments that all this stuff is going to go overseas if we touch it, so let’s not rock the boat.”

Shaxson calls this “the captured state”: a world in which policymaking has been largely taken over by financial interests that can pick and choose between jurisdictions and in effect write the laws they need. “That happens in its purest form in the very small tax havens where there is just no local democracy to do anything. There is a little bit of a counterweight but it isn’t very strong in Ireland.”

Others go further still. Dr Conor McCabe of the Equality Studies Centre at University College Dublin, who is a campaigner in the area of tax justice, says companies can ride roughshod across competing jurisdictions, extracting what they want and contributing little. “They want all the pluses of a modern democracy while seeking to reduce their obligations to zero. They are behaving like parasites,” says McCabe.

The financial services sector insists Ireland has benefited hugely from its competitive tax regime through large-scale employment and investment.

“Ireland is not a tax haven. It has an excellent network of treaties with other jurisdictions and operates a simple and transparent corporation-tax system,” says Fergal O’Brien, the chief economist with the employers’ group Ibec, which represents financial services.

He says Ireland is simply competing with other countries for business, and one of the key reasons our low-tax regime attracts comment from our neighbours is because it has nothing to hide.

“In many ways, the very transparency of Ireland’s corporation tax regime has meant that it attracts such attention. Many other jurisdictions compete more aggressively on allowances and write-off, but have a higher headline tax rate.

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