The following is the full text of a letter, dated February 11th, from the chairman of the Financial Services Industry Association, Mr Ron Bolger, to the Minister for Finance, Mr McCreevy. Mr Bolger sent the same letter to the chairman of the Revenue Commissioners, Mr Dermot Quigley, and copies of both to the Taoiseach, Mr Ahern, seeking his support for the FSIA's position.

Dear Minister,

IFSC Banks and DIRT

As discussed with your officials, the FSIA [Financial Service Industry Association] has recently become aware of a problem whereby certain IFSC banks have not completed declarations in accordance with Section 265, Taxes Consolidation Act, 1997.

What is involved is international banking activity carried on within the IFSC with no underlying liability to DIRT and confined exclusively to bona fide corporate and inter-bank business.

The IFSC entities involved are not actively engaged in gathering deposits but rather borrow money from corporates or on the inter-bank market to fund their international business (e.g. acquisition of loans, assets etc).

The following are examples of the type of situations where the above documentation was not completed at the time of the transactions:

Payment of interest gross to non-resident banks in non-double taxation agreement countries;

Payment of interest gross to non-EU based banks in countries with which Ireland has a double taxation agreement, but where the period of deposit exceeds three months;

Payment of interest gross by an IFSC bank to a subsidiary which has issued it with euro commercial paper and where all the gross interest was included in the relevant tax returns;

Payment of interest gross by an IFSC bank to a non-resident foreign corporate;

Payment of interest gross by an IFSC bank to stand-alone IFSC-licensed corporate treasury entities.

This problem must be resolved urgently due to consolidation of accounts of IFSC banks into the accounts of their parent companies with end-December year-ends.

It would appear that some external auditors have taken the view that if the declaration has not been properly completed within the appropriate time frame, then a note will have to be put to the accounts indicating a contingent tax liability. This note in turn will feature on the accounts of the parent bank.

In some situations where the liability is unquantifiable but potentially large, the auditors will qualify the accounts. (Any such notes are investigated by the SEC [Securities & Exchange Commission] if the institution in question is quoted on a US exchange, bringing recent controversies in Ireland into the limelight).

This will cause significant ill will in the parent company as it will be seen as punctiliousness on the part of the Irish authorities. There will be enormous damage to the reputation of the IFSC as an international banking location because the regulatory climate will be seen as hostile.

This will be exploited by our competitors and will be taken account of by international financial institutions when deciding whether to locate activities or business in Ireland; some IFSC institutions may be closed down by their parents.

Such an approach will also have implications for Ireland's relations with the many large multinationals, which have been the holders of funds in non-resident accounts.

On the assumption that the situation is as represented above, I would like you to consider this matter further. As a matter of public policy there should be a decision that where there was no underlying DIRT liability, where there was purely a technical omission of documentation and where interest was paid gross to non-resident banks or corporates or where interest was paid gross to a resident corporate who, in turn, declared the interest to Revenue (subject to checking by Revenue), the institution involved should be given comfort by the authorities on this matter in the context of its annual audit.

A different issue is where IFSC banks have bona fide non-resident accounts and have documentation in place which is incomplete or somewhat inaccurate. In these circumstances, there has been no attempt to evade DIRT and the documentary errors have been entirely innocent. In this set of circumstances, comfort should also be given.

A meeting with key IFSC institutions involved is requested urgently to elaborate on this matter.

Yours sincerely,

Ronald J Bolger,

Chairman.