FINANCIAL SERVICES:While our international financial services sector has weathered the recession quite well a proposed new tax could pose a challenge, writes FIONA REDDAN
WHILE IRELAND’S international financial services sector, which this June will mark its 25th anniversary, may have weathered the storm better than the domestic financial sector, it has not been immune to the meltdown in global finance.
Now it’s facing another significant challenge in rebuilding its reputation in the face of a tax which could threaten its future viability. So can it survive another 25 years?
Overall, while the domestic banking sector is coping with a flood of redundancies, employment levels in the IFSC have held up quite well, at about 33,000. However, profitability levels have fallen. While IFSC companies could be comfortably expected to bring in upwards of €1 billion in corporate taxes each year – regardless of the low headline rate - times have changed.
According to the Revenue Commissioners, IFSC companies contributed just €466 million in corporation tax in 2011 – a slump of 58 per cent from the peak of €1.1 billion in 2006, although some of the decline is due a re-classification of the figures.
Internationally, Dublin’s reputation has also taken a battering. In the Global Financial Centres Index, which polls financial services professionals on their perceptions of global centres, Dublin has slid from an eminent top 10 position all the way down to 43rd, behind close competitors Luxembourg and Jersey.
Mark Yeandle, author of the index, says that Dublin, along with other capital cities particularly affected by the European sovereign debt crisis such as Madrid and Rome, have all suffered as a result. “Dublin still has good fundamentals behind it. It’s just due to reputational tarnish, because of a combination of the domestic crisis and problems in the euro area,” he says.
And now the Financial Transaction Tax (FTT) is on the horizon. Given the UK’s stated opposition to the initiative, which hopes to raise €55 billion by imposing a 0.1 per cent tax on financial transactions, it could put Ireland at a significant disadvantage to its neighbour.
Ireland already levies a 1 per cent stamp duty on equity transactions, but this only applies to Irish shares. In this respect, it is the international industry that could really suffer.
While the funds industry has rebounded from its lows, pushing past the €1 trillion level for Irish domiciled funds, such a tax could damage it.
“It would have a particularly negative impact on the funds industry,” says Seamus Hand, a partner with KPMG.
It could also hurt efforts to push ahead with the Green IFSC initiative.
“If it was more cost-effective to set up financing structures in London, then we would clearly be at a disadvantage,” says David Guest, chairman of the Green IFSC steering group.
It could also hurt the hedge funds sector. As currently proposed, the tax would not apply to funds that are established outside of Ireland but administered in Ireland, such as hedge funds that are domiciled in the Cayman Islands and serviced here.
This could affect efforts to bring as much of the hedge fund industry into Ireland as possible, and also hurt the continuing process of trying to upskill and attract more “front-office” activities to Ireland.
But almost as worrying is the message that London is sending out via its refusal to accept the tax – does this mean that it intends to move its financial sector further away from its fellow EU partners?
And with a steady stream of regulations on the way from Brussels, what might this mean for Dublin? After all, if this was to be the case, a sort of regulatory arbitrage opportunity could open up between Dublin and London, with financial institutions opting for the more relaxed environment across the Irish Sea.
Hand doesn’t think so. Referring to discussions he has had in London on the issue, he thinks the industry would be “nervous” if they took it much further.
“Hedge-fund managers seem to have a strong enough view that while it’s useful for the UK to stamp some independence in supporting its own currency, they strongly feel that it needs to remain in the EU system, and particularly that the regulatory system needs to remain in the EU.”
In any case, European experts don’t see the initiative going ahead without full agreement – a recent KPMG report on the topic for example pointed to the fact that just three (France, Germany and Spain) out of 27 EU member states strongly favour the tax.
Karel Lannoo, chief executive of the Brussels-based think tank, the Centre for European Policy Studies, doesn’t think it will happen.
“If it has to go through with enhanced co-operation I don’t see it happening. Why would France and Germany act against their own financial services industry?”
Lannoo’s hypothesis is that it’s a political issue and we will probably see European politicians drop the FTT in favour of a Financial Activities Tax (FAT), which might be more appealing to countries like the UK. It could be levied in a similar manner to VAT.
Hand agrees. “If I was a betting man I’d suggest that it (FTT) won’t come in in Ireland, but who knows?”
In the meantime, the industry is pressing ahead with plans to revitalise the IFSC. In this regard, this month’s Finance Bill saw the introduction of 21 measures aimed at boosting the international sector. Most significant was the introduction of the special assignee relief programme (SARP), which is a tax incentive aimed at attracting more senior foreign executives to move to Ireland. It is expected that between 80 and 100 people might apply for it initially.
“SARP is helpful to us as it allows us to go and target a private equity fund in Geneva or London about clean-tech opportunities, for example. It makes it easier for us to have discussions with them and for them to bring a team to Dublin,” says Guest.
However, not all reactions have been as positive, with some indicating that the regime is still not as attractive as that in other jurisdictions such as the Netherlands.
“It’s a little done, more to do,” notes Hand, arguing that lobbying will continue on trying to get the regime improved.
Furthermore, claims last summer that the IFSC is in a position to create 10,000 new jobs over the coming years have been described as being "extremely ambitious", by academic Darius Wójcik of St Peter's College Oxford.
Nonetheless, as part of the Government's new jobs initiative, it has detailed 13 new action measures it has committed to undertake with regards to international financial services to try and achieve this. It is hoping that job losses in the domestic banking sector can be offset by growth among IFSC companies.
One of the goals is to consider the "effects of new regulation on the financial services sector", a welcome move given the fear that over-regulation of the domestic sector will seep into the international.
While Peter O'Dwyer, director of Hainault Capital, and an adviser on the fitness and probity regime, says that "as in other jurisdictions, inevitably there has been some element of over-reaction" when it comes to setting a regulatory agenda for the international sector, he says that the new fitness and probity regime, which requires directors of financial companies to meet certain standards, is in line with international requirements.
"It has to be looked at in the overall context of regulation internationally, and I don't think it's significantly different than rules that apply in other jurisdictions," he says.
And despite the challenges facing the IFSC, it might be apposite to remember that when the first pioneers went out to market the centre and its 10 per cent tax rate, they found themselves sitting in a trading room in Hong Kong on Black Monday 1987, when markets crashed around the world.
Twenty-five years on, as former taoiseach John Bruton, now chairman of the IFSC Ireland marketing group, prepares to bring the good news of the IFSC on forthcoming trips to New York, Boston, Frankfurt and London, global markets are facing even more serious challenges. But there are also opportunities. Yeandle, for one, expects Dublin to soon see a reversal of fortunes.
"Within a year or 18 months you should see it rising back up again," he says.
"I think if we can get it moving on, we have a pretty good chance of becoming a substantive first mover in this space," says Guest.
And given the economic outlook, whether it's one job or 10,000, all be welcome.
GREENING THE IFSC WHAT'S TAKING SO LONG?
IT STARTED OFF with plans to create 20,000 new jobs back in 2009. This was subsequently reduced to 7,000 and then 4,000, and now about 1,500. So, two years on from when it was first announced, what's holding back efforts to "green" the IFSC?
The initiative was first launched by former minister for the environment Eamon Ryan back in December 2009. Now he has berated recent efforts, arguing that "we have seen only inertia and drift" and is calling for swift implementation of the project.
David Guest, chairman of the Green IFSC Steering Group, which is charged with pushing the project forward, recognises that progress to date has been slower than had been hoped. "I would be happier if it was already up and running," he says, although adds that support is forthcoming. "It's very well understood in the Taoiseach's office that the IFSC is an asset to the country in terms of job creation," he says.
In part, the delay is due to ongoing economic turmoil.
"If we didn't have the ongoing financial crisis I suspect this sector would have grown much quicker over the last four to five years," he says.
But another issue is carbon trading. It has become a heavily politicised topic across the world, and it is likely that the Government is taking its time to examine all potential downsides before it pushes ahead.
However, without this vital strand, of establishing Dublin as a global centre for carbon trading, plans for a Green IFSC appear to have stalled.
The plan focuses on three areas: carbon trading; green finance – such as funds, project finance and so on; and sustainable finance skills. While some progress has been made with regards to education – a sustainability finance postgraduate course has been set up in Dublin City University, while University College Dublin has launched Ireland's first MSc Energy and Environmental Finance course – and the funds industry has grown its share of "green" funds, it has been slow in the other areas. And, while there have been some new business initiatives, such as the launch of an alternative energy investing group by global giant BlackRock in Dublin, these have largely come about independently of the Green IFSC project.
But the more time that passes, the more time that competing jurisdictions have to set up similar initiatives.
"The longer we leave it, the more likely somewhere like Singapore or Dubai will move. Dublin is just one of several centres worldwide trying to get a foothold," says Guest.
Earlier this month there was some welcome news in the Finance Bill, which introduced an amendment allowing Irish structured finance companies to invest in forest carbon credits.
But further progress will be dependent on the outcome of a Department of the Taoiseach review. It has assigned an international panel of industry experts to assess implementation plans and this panel is due to report on its findings shortly.
