Procrastination on tax decisions could hurt IFSC

Business Opinion: The timing was a little unfortunate. In the same week that IDA Ireland unveiled its grand plan for the development of the international financial services industry, a report appears in the international press citing the Republic as corporate America's favourite tax haven.

This coincidence summarises the two opposing views of what the international financial services industry in the State is all about. One side puts the success of the IFSC down to its constant ability to adapt to the needs of the international financial industry and the other sees it as a well marketed, low-cost, offshore tax haven.

The truth, as usual, is somewhere in the middle and this is probably the real secret of the IFSC's success.

The headline-grabbing tax haven story has its origins in a study, by former US treasury official Mr Martin Sullivan, in the influential Tax Notes journal. He found that US companies had doubled the profits they were booking in the State between 1999 and 2001. It is impossible, according to Mr Sullivan, to asses how much of the $26.8 billion (€22 billion) related to genuine economic activity and how much was placed here to avoid US taxes. The suspicion is that a significant portion related to the latter.

The IDA study, carried out by Deloitte, does not seek to minimise the significance played by the low rates of Irish corporation tax in the success of the IFSC. It cites the tax rate as a key driver of the competitive advantage the State enjoys in three of the five areas that it earmarked for future expansion. But it also cites a range of other factors, including Dublin's proximity to major markets, the availability of skilled staff and a supportive regulatory and political environment.

It is not surprising then that the Deloitte study contains a wish list of changes to the tax laws, which it says will open up further opportunities in international financial services. They relate to issues such as withholding tax, stamp duty and capital taxes.

Taken in isolation none of them seems particularly radical and it can be argued many of them just bring the situation here into line with norms elsewhere. Taken together they might amount to something more substantial.

The Government will now have to decide whether or not to make these changes. In doing so they will have to weigh up a number of factors.

As with any change in the tax laws, there will be revenue implications and they are probably negative in the first instance.

Although the changes may be made to stimulate a specific international financial services activity, they will also apply to the generality of Irish tax payers. The changes will potentially open up a whole new universe of legal tax loopholes, which it will take years to close down.

Against this, however, the Government will have to look at the potential benefits in terms of the continued development of the sector. International financial services has been credited with creating more than 10,000 jobs and, not withstanding the low tax rates, has generated millions in taxes for the Irish Exchequer.

Making a decision will be made all the more difficult by the climate created by the collapse of Enron and the corporate scandals that followed.

One of them - the implosion of Italian food group Parmalat - involved IFSC-based company Eurofood IFSC. The full extent of Eurofood's involvement in the scandal will not become clear until the Italian authorities have completed their inquiries, but it is axiomatic that the changes in the tax laws being sought by the IDA may serve to encourage the wrong sort of activity at the IFSC.

Ultimately, it is a judgment call and the Government may well take the view that the trade-offs involved are not sufficiently attractive. So be it. At least the IDA and other interested parties will know where they stand.

The worst possible outcome would be that the report gets long-fingered in time honoured fashion.

It is currently in the hands of the IFSC Clearing House Group - the body set up to advise the Department of the Taoiseach on the development of the financial services centre.

The report is due to be finalised in the coming weeks and where is goes from here is unclear. It is unlikely that anything of significance will happen until Mr McCreevy's replacement at the Department of Finance gets his feet under the desk.

The temptation must be for further debate given the complex nature of the issues involved, but there is a real danger that the initiative will be lost if the deliberations drift on.

The best possible news for all the other financial centres that are competing with the IFSC for business would be to hear that a working group has been set up to consider the report.