Revenue irks IFSC banks with stance on DIRT

The Revenue Commissioners approach to DIRT tax collection is now a major irritant for international banks with operations at Dublin's International Financial Services Centre (IFSC). The key decision makers at the banks' global headquarters are angry at what they claim is heavy-handed treatment being meted out to them by the Revenue Commissioners and, sources say, are beginning to wonder if a more reasonable regime might prevail elsewhere.

The nub of the current problem seems to be the strict approach which the Revenue is now adopting with all financial institutions in the Republic when it comes to applying Deposit Interest Retention Tax. Technically, DIRT does not apply to non-resident deposit accounts, whether they are held by individuals or companies, and it is this anomaly that is causing such anger at the IFSC.

The Dail Committee of Public Accounts (PAC) highlighted how the abuse of these accounts - which were in many cases knowingly opened for local customers of financial institutions throughout the Republic - facilitated the evasion of DIRT on a massive scale in the 1980s and 1990s.

The non-resident accounts held at 37 financial institutions, including eight IFSC companies, are now being audited by the Revenue as part of an exercise to recoup whatever tax, penalties and interest are now due to the State where the accounts were bogus. However, it is the general approach of the Revenue to DIRT collection in the wake of the PAC hearing which is causing the most angst at the IFSC.

There is a fundamental difference in the way Irish retail banks and IFSC companies conduct their day-to-day business. The Irish banks, such as AIB and Bank of Ireland, are primarily retail banks offering services to personal customers. IFSC banks, by comparison, are largely focussed on servicing the corporate world, facilitating transactions such as the transfer of funds between international companies.

While registered as deposit takers at the IFSC, these banks do not actively gather deposits but rather borrow money from corporates or on the inter-bank markets to fund their international business. But, as documentation may not always be completed at the time of those transactions, the tough stance being taken by the Revenue now means DIRT liabilities may be applied in such situations - even though the institutions would be able to reclaim the tax at a later date.

The issue has come to a head at the moment as IFSC companies are finalising their annual accounts. Given the stance of the Revenue, Irish auditors are refusing to sign off their accounts unless a provision is made for a potential DIRT liability.

In some situations where the liability is unquantifiable, but potentially large, the auditors will qualify the accounts.

Some industry sources are sympathetic to the Revenue in this situation. It was castigated for not using the powers it had to police bogus non-resident accounts in the 1980s and 1990s. Now it has decided to apply the letter of the law.

"The Revenue is looking for political direction at this juncture. It's up to the politicians to make common sense prevail," one source has suggested. "Some IFSC companies are particularly aggrieved that they are being examined with the same degree of intensity as AIB in relation to DIRT, even though they were never involved in the operation of bogus non-resident accounts."

Another source at the IFSC said the latest saga comes at a time when international head offices are already asking questions about the various tribunals being conducted here.