Revenue reaches compromise with IFSC banks in wrangle over audits

The Office of the Revenue Commissioners has acknowledged the concerns of companies at Dublin's International Financial Services…

The Office of the Revenue Commissioners has acknowledged the concerns of companies at Dublin's International Financial Services (IFSC) about its tough stance on collecting Deposit Interest Retention Tax (DIRT).

Revenue chairman Mr Dermot Quigley met the Financial Services Industry Association yesterday and pledged that each IFSC-based company would have an opportunity to discuss the findings of audits with the Revenue before any conclusions were reached.

Banks at the IFSC are concerned that auditing difficulties arising out of the Revenue offensive on DIRT could damage the reputation of their parent companies, and some are currently reviewing their Irish operations.

In a joint statement issued after the meeting, both sides said there had been a "useful exchange of views" on the problem.

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Mr Quigley also asked IFSC companies to co-operate with the Revenue as it progressed with the DIRT audit of all the State's financial institutions.

Last year, the Revenue was granted the power to enter Irish financial institutions to audit DIRT returns and check whether all non-resident deposits should be exempt from the tax. It is also carrying out a "look back" audit at 37 financial institutions arising out of the Dail Committee of Public Accounts (PAC) inquiry into DIRT evasion in the 1980s and 1990s.

Meanwhile, documents obtained by The Irish Times under the Freedom of Information Act show that, when the Revenue began its DIRT audit in April 1999, it encountered some resistance from banks.

In a memo to the PAC, the Revenue states that some banks had been slow to accept the dismantling of the "legislative ring of steel" which had previously prevented the Revenue from checking DIRT compliance. Co-operation with the Revenue "was not immediate" and in some cases the audit was delayed while financial institutions took legal advice and adjusted to the new regime.

According to the Revenue, the number of DIRT-exempt deposit accounts which have been checked is now running into thousands. The audits are examining accounts held by charities, company pension funds and special savings accounts which have been classified as being DIRT exempt.

"Revenue must compute the amount of tax underpaid, if any, by each institution. If agreement on underpayments is not reached by negotiation with an institution, assessments will be raised which may then be appealed by those companies," the Revenue said.

It has set a target for completion of the computation of tax, interest and penalties by this summer. All institutions have been reminded that outstanding DIRT liabilities will bear interest at 1.25 per cent per month from the original due dates of payment and interest will continue to accrue in the absence of a payment. In addition, penalties will also be imposed where non-compliance with DIRT legislation is established.

The Financial Services Industry Association requested yesterday's meeting with the Revenue Commissioners to highlight instances where the Revenue is insisting on DIRT payments from IFSC companies in cases where full tax documentation is not complete, even though there is no underlying tax liability and the institutions involved would be able to reclaim any money paid at a later date.

The DIRT audit is causing problems for IFSC companies where documentation is not properly completed in relation to funds owned by international clients. The most damaging aspect of the audit for many IFSC companies is that Irish auditors are refusing to sign off annual accounts unless the companies make a provision for an unquantified DIRT exposure, which has knock-on effects for the international parent.

IFSC-based Depfa-Bank has stated its German parent is extremely concerned that it will be forced to indicate a potentially large tax liability in Ireland because of the heavy-handed approach of the Revenue.

It insists that such a qualification to its accounts would undermine investor confidence in the bank.