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?
“A number of studies have shown that Ireland’s effective tax rate is fairly close to its headline 12.5 per cent rate, whereas in many other jurisdictions the effective rate is substantially lower than the headline rate.”
Minister for Finance Michael Noonan has also insisted that Ireland has always been above board in how it operates. He says the issue of tax avoidance is an international one rather than an Irish question.
“The ability of companies to lower their effective rate of tax using international structures reflects the global context in which Ireland, and indeed all countries, operate,” he said recently.
“The tax system in Ireland has a positive international reputation based on transparency and on the fact that it is applied equally and openly to all corporate taxpayers. Ireland has an extensive tax-treaty network, which confirms our international standing.
Orpington Structured Finance I
Orpington Structured Finance I is set up like many financial-vehicle corporations based in Ireland. It has two named directors, David McGuinness and Eimir McGrath, who are employees of a management company – in this case Deutsche International Corporate Services, a division of Deutsche Bank that provides corporate and secretarial services to a range of companies.
In fact, both individuals are also directors of hundreds of other companies: McGuinness is listed as a director or former director of 167 firms; McGrath is a director or former director of 183. This is not improper or unusual. Many directors in this sector are linked to large numbers of companies.
Most of these companies are involved in what appear to be financial services. Although the company is registered and domiciled in Ireland, the investments appear to be managed from the UK. Its “banker and custodian” is listed as the London-based RBC Dexia Investor Services Trust.
It is unclear who owns Orpington Structured Finance I. It has close links to HSBC Bank, one of the world’s largest financial institutions. Orpington’s company accounts and annual report show that all administrative and other expenses, such as the company audit and tax fees, were paid by the bank. HSBC declines to comment on its relationship to the firm, citing “client confidentiality”.
Deutsche International Corporate Services says its business is not to help companies with “aggressive tax planning”. It says any companies it is linked with are obliged to comply with Irish company law and Irish tax law.
As for the number of companies listed to directors, it says Irish law specifically permits individuals to hold multiple directorships. “All directors of Irish companies are obliged to comply with their legal obligations and responsibilities in carrying out their role as directors. There is no concept of nominee directorships in Irish law,” the company says in a statement.
Ireland has more of these types of companies than any other EU country. We have 27 per cent of them; Spain, the Netherlands and Luxembourg come next. Typically, the firms are set up so that debt securities – the packaging and reselling of loans – can be issued and controlled through a financial vehicle that has the legal form of a public limited company. They file accounts, and most have debt securities that are quoted on the Irish stock exchange. They are often owned by trusts, but many are linked to larger financial institutions or investment pools.
Jim Stewart, associate professor of finance at Trinity College Dublin, is trying to map shadow banking in Ireland. Part of his work has involved peering into the accounts of dozens of financial-vehicle corporations. He has examined 80 of the estimated 700-plus firms, which, in turn, are linked to about 4,000 securitised funds.
There are some striking similarities: all the corporations he studied, he says, had zero employees. All had administrative services performed by management companies in Ireland, and all tended to be managed from centres such as London or New York. Many had links with advisory firms in other low-tax centres, such as Luxembourg and Jersey; others were based in the Cayman Islands, Bermuda or other tax havens. There is no evidence that this is the case with Orpington.
Stewart says many of them are a way of removing assets or liabilities from a parent company’s balance sheet and escaping the regulatory requirements that come with this. Again, there is no evidence this is the case with Orpington.
These companies, which are classified as nontrading firms, have a theoretical tax rate of 25 per cent. In reality, they are able to use write-offs in Irish legislation to ensure they make no profits and so have no tax liabilities. Overall, Stewart is sceptical about the benefits of shadow banking to Ireland. “As far we’re concerned, we don’t get much out of this,” he says. “There might be modest fees for company secretarial services or Irish auditors. But the real work is done abroad.”
Gary Palmer, the chief executive of the Irish Debt Securities Association, an industry representative group, would like to see Ireland take the lead in the area. “It’s a well-known fact that some securitisations performed incredibly badly during the financial crisis, but not all performed badly and some performed very, very well,” he says. He believes more people could one day work in the securitisation industry in Ireland.
As for tax benefits, although the financial services are done on a “fairly tax-neutral basis”, the jobs they create provide taxes for the State, he says. “The entity doesn’t do anything, and doesn’t do anything here. It doesn’t do anything anywhere, but the moving parts are the servicing, support and the management, and they are all done here in Ireland, and that’s where the tax take is.”
Some in the industry believe the term “shadow banking” unfairly implies some sort of furtive or sinister activity. Instead, they point out, governments use it to invest sovereign wealth funds, and state agencies in areas such as oil, gas and mining make legitimate transactions across borders.