Ultra tax-efficient corporate vehicles in Dublin's IFSC, used in recent years by so-called vulture funds to hold billions of euro of distressed Irish property loans, are of greater threat to the tax systems of other countries than Ireland, according to an Irish academic who studies tax avoidance practices.
Prof James Stewart, associate professor in finance at TCD, also said in a presentation to Tasc, a think tank for action on social change, this week that the "light touch regulation" of this part of financial activity in Ireland, occurring outside the banking sector, or what is known as "shadow banking", carries a number of risks.
Special purpose vehicles (SPVs), established under 1997 tax legislation designed to make the IFSC an attractive place for "tax neutral" international debt securitisation, came under the spotlight last year amid political controversy over how overseas funds have used them to house loans bought after the property crash. This prompted Minister for Finance Michael Noonan to move in September to tax Irish property holdings in SPVs, also known as Section 110 firms, after a measure in the 1997 laws.
“The vast bulk of assets [in Section 110 companies] are owned outside Ireland,” Prof Stewart said in the presentation. “They thus pose a substantial risk of tax losses to other jurisdictions.”
The Central Bank moved in late 2015 to increase its understanding of SPVs as it joined a global hunt by regulators for risks in shadow banking, a rapidly growing area of global finance as the traditional banking sector shrinks under the burden of rising regulatory oversight. The Financial Stability Board (FSB) and International Monetary Fund, both based in Washington, have been pressing regulators internationally to collect and share data on non-bank financing activities following the financial crisis.
More than €700 billion of assets are held in Irish SPVs and closely-related financial vehicle corporations (FVCs), both of which qualify as Section 110 companies, according to data from the Central Bank and FSB. The types of assets include distressed debt, leased plant and machinery, loans between various arms of international companies and catastrophe bonds.
As unregulated structures, they are viewed by some commentators, including Prof Stewart, as housing the greatest unknown risks within Ireland’s total €2.3 trillion shadow banking industry, one of the four largest hubs in the world.
“They deserve a great deal more attention and research,” said Prof Stewart.
A Central Bank paper in October showed that just 18 per cent of SPVs’ assets were based in Ireland, 20 per cent in the US, almost 17 per cent in Russia and 23 per cent for which there is “no geographic information”. It suggested that the Irish figure was vastly overstated, as assets linked to an Irish-resident fund are likely to be owned, in turn, by a foreign entity.
Irish SPVs typically have no employees and pay only a nominal amount of tax in the hundreds of euro, while the Central Bank estimates they pay €100 million in legal, tax and other professional advice and services.
The Central Bank said in the paper that given how SPVs are part of a complex web of financial structures that span a number of jurisdictions, more international data sharing is needed to understand the sector.