The IFSC and the Shadow Banking System

For over a decade the IFSC stood at the core of the international “shadow banking system”. Many of the international banks who did most to fuel the international financial bubble had subsidiary banks in the IFSC and this area of Dublin dockland is also the nominal home of hedge funds handling €1.6 trillion of assets, writes Donagh Brennan

The attraction of the IFSC for managing hedge funds is that the regulatory requirement of these funds having a stock market quotation can be met. The Irish Stock Exchange claims it has “standards of regulation to stockbrokers and listed companies which are acknowledged to be among the highest in Europe.” However in reality it is the lack of regulation which has been used as a selling point to attract investment.

While the IFSC is not officially a ‘tax haven’ it still has many of the characteristics of one. This is particularly clear when you see how it allows companies to use the Irish regime in tandem with recognized tax havens. One example is Ireland’s treatment of holding companies.

Here’s how it works: foreign multinationals set up holding companies in Ireland with subsidiary companies located in a tax haven like the Cayman Islands. The intellectual property of these companies (pharmaceutical companies patents or the registered trademarks of major brands) is registered in the tax haven with royalty income then being paid by the holding companies to those subsidiary companies.

The tax revenue authorities in many countries are aware of this practice and argue that at least some of the income earned from these transactions with tax havens belongs to the country where the parent (or holding) company resides. In the UK and many other countries they have ‘controlled foreign company’ (CFC) legislation that lets them deem a tax haven subsidiary of a parent company to be resident for tax purposes in the country. Ireland doesn’t
have any such legislation, a fact that is widely advertised by the Irish branches of international accountancy firms that offer tax advice to foreign multinationals.

This is income that the Irish Revenue is simply not interested in collecting. Allowing companies to avoid tax has result- ed in the Irish legislator acting largely as if it is a branch of one of the four major accountancy firms that offer tax advice to clients who wish to set up business in Ireland.

The effect of such failure to regulate results in effective tax rates for many multinationals in Ireland being well below the nominal 12.5% with perhaps the most notorious being Google who through various mechanisms available in Ireland, in tandem with tax havens like Bermuda were able to reduce their overseas tax rate to 2.4%, according to Bloomberg. Anaylsis by Jim Stewart has unearthed many other examples such as Boston Scientific which had a reported effective tax rate of 0.54% for 2001 – 2003; Forest Laboratories had an effective tax rate of 6.2% for 2005-07, Jansen Pharmaceutical 8.2% for 2003-05 and between 2004-5 Semantic had an effective tax rate of zero.

Article published in LookLeft Vol.2 No.9

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