The transformation of Dublin into an offshore centre has been one of the success stories of internati...
The special conditions under which the centre was formed are now being wound down as Ireland aligns itself with Europe. The challenge now is for the regulators to sustain the momentum that brought Dublin into the mainstream offshore world.
Ian Brown, senior associate director, tax at Deutsche Asset Management, has been tracking various developments in Ireland and their effects on the financial services industry in general and specifically the International Financial Services Centre (IFSC).
This special area of Dublin was set up to encourage international financial services companies to come to Ireland.
In this it has been singularly successful - the number of offshore mutual funds set up in Dublin has turned it into a major financial services centre in an exceptionally short space of time. Institutional funds in particular have flocked to set up in the IFSC.
However, Brown said: "There were some conditions attached, one of which was that it was impossible to admit Irish investors. This was probably done because the authorities did not want to erode the Irish tax base.
"However, there has been a general ground swell in the EU to get rid of privileges like this. The Spanish government especially has expressed irritation at this, as have some other member states in Europe." (See International Investment, May 2000)
Under this system, non-resident investors and Irish exemption holders, charities and the like were not taxed. Funds going through some recognised clearing systems such as Euroclear and Cedel could also get fast track exemptions. For an Irish retail investor or an investor that did not make this declaration, tax was imposed at various Irish rates.
Spanish authorities argued that if a fund was being sold into Spain under the Ucits banner, then it should be available to Irish domestic investors.
The tax implications for allowing domestic investors in the fund were harsh. Before 1 April this year, if a non-exempt investor was allowed to invest in a fund, the whole fund became potentially liable for 40% capital gains tax. Effectively, international funds and companies were given a raft of fiscal benefits so long as they only sold offshore.
The passage of the Finance Act 2000 has changed this situation significantly. There will no longer be the same distinction between domestic and offshore funds - all funds will be able to sell domestically. The tax regime is to be rapidly streamlined, for example, after the beginning of next year all dividends will be taxed at the standard rate of tax plus 3%.
One of the fund providers providing retail funds on an international basis is Norwich Union. Norwich set up an international arm in Dublin this year, selling a selection of mutual funds through an international bond.
The funds, which include but are not limited to Norwich Union funds, are sold into the UK, Italy and to the Spanish expatriate markets.
The Finance Act 2000 has provided some interest to the company. The most important change for Norwich Union International (NUI) is the ability for IFSC funds to be sold into the domestic market and the opportunities that presents.
Jon Herbert, CEO of NUI, said: "We want to sell into Ireland and these regulatory changes are likely to ease the way forward. It will give us access to a new market. Ireland has a population of three million and a booming economy, so it is an extremely interesting market to us. We will look to add some Dublin-based funds to our range, particularly with the CGU merger."
NUI sell mutual funds via a life wrapper and, as such, fall under under the third life directive rather than the Ucits directive. Due to this, they have not had the problems Irish funds have had selling into Europe.
Herbert is positive about the attitude of the Dublin authorities. Commenting on the reaction of some EU members to Dublin's low-tax regime, he said: "When some European countries complained, Dublin's reaction was very lateral in its thinking. It reduced the overall tax levels. That shows a rare kind of flexibility. The attitude is, if it is good for business, it is good for Ireland and we will accommodate it."
Ireland has a comprehensive set of tax treaties with the fiscal authorities in other countries. However, it has not always been easy gaining access to those treaties.
To some extent, the Finance Act 2000 could improve this situation. This is because foreign fiscal authorities tend to disapprove of funds that explicitly receive exclusive tax benefits. It should now be easier to persuade authorities that a fund is on a firm fiscal footing and is therefore deserving of treaty benefits.
Even so, activating these treaties is a laborious process - gaining the advantages of a tax treaty, each fund has to apply on a country-by-country basis.
One tax treaty of particular interest is that with the US. This was renegotiated at the start of 1999. Under the new treaty, the withholding tax on dividends from US equities is 30%, or 15% if a fund is granted an exemption, and this can obviously make a substantial difference to a fund, depending on the type of stocks it holds.
Unfortunately, it seems that potentially arduous conditions have been attached to the process of gaining exempt status.
Brown said: "I suspect the IRS negotiated long and hard with the Inland Revenue in Ireland. One thing that has emerged from the new treaty is a new class of holder specifically for collective investment schemes. But, as is commonly the case with IRS negotiations, there are severe limitations of benefits. Unless a fund applies for discretionary approval, it cannot qualify for this beneficial treatment."
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