Successive Irish governments have implemented economic and tax policies aimed at encouraging foreign investment in Ireland and ensuring that it remains one of the pre-eminent countries from which to do business in Europe and indeed the rest of the world. The success of these policies, notwithstanding the recent global economic slowdown, is evident in the following:
– Ireland experienced a 10.5 per cent compound annual growth rate in real gross domestic product (GDP) from 1997-2000 and economic growth of 6 per cent is forecasted for 2001.
– Ireland benefited from inward investment of more than $12bn (£8.4bn) from 1997-2000.
– Intel, Xerox, Case New Holland, American Home Products Corp, Heinz, IBM, Microsoft, Hewlett Packard, Motorola, and Ericsson have made recent substantial investments in Ireland.
– Deutsche Bank, Bear Stearns, DePfa Bank Europe, Westdeutsche Landesbank, Citigroup, Invesco, Merrill Lynch, Bank of New York and Bank of Bermuda are among the financial services businesses which have an established presence in Ireland.
Creating a favourable tax climate has been a large part of this economic success story. Until recently, the principal tax incentive in Ireland was a special low rate of corporation tax of 10 per cent. A broad range of activities qualify for the 10 per cent tax rate: income from the sale of goods manufactured in Ireland or income which is effectively deemed by Irish law to be manufacturing income, for example income from computer services or international financial services activities conducted in the International Financial Services Centre (IFSC) in Dublin.
The financial services sector established within the special incentive framework of the IFSC also benefits from: a range of tax-exempt investment vehicles (resulting in Ireland's status as a leading funds domicile); gross roll-up life insurance products; and tax-neutral securitisation vehicles.
Replacement of 10 per cent rate
Mutterings were heard from other member states in the EU that Ireland's preferential or specific 10 per cent rate of corporation tax was in effect state aid.
In July 1998, the Irish government reached agreement with the European Commission (EC) that the 10 per cent rate of corporation tax would be phased out. Instead, a corporation tax rate of 12.5 per cent would be applied to all trading profits. Thus the issue was dealt with neatly. If the objection was to the specific nature of the corporation tax rate, a blanket (low) rate of corporation tax for trading profits should deal with the problem. By addressing the EC's concerns, and more recently those of the Organisation for Economic Cooperation and Development (OECD) (the 1998 OECD Report on Harmful Tax Competition and the 1997 EU Code of Conduct on Taxation are both directed at preferential or specific tax rates) the introduction of a blanket corporation tax rate of 12.5 per cent ensures certainty of tax treatment for existing and future taxpayers doing business in Ireland.
The 12.5 per cent rate of corporation tax comes into effect on 1 January 2003. There will be a phased reduction to 12.5 per cent (ie the rate is 20 per cent in 2001 and 16 per cent in 2002). Companies that currently qualify for the 10 per cent rate of corporation tax will continue to be taxed at 10 per cent until, generally speaking, 2010 in the case of manufacturing companies and 2005 in the case of IFSC or Shannon companies.
Non-trading income, which includes profits from dealing in development land and exploitation of oil, gas and mineral resources, is taxed at 25 per cent.
Jurisdiction of choice
The existence of such a competitive tax environment has created many opportunities for tax lawyers, and relationships with UK corporates and institutions have blossomed under the heady light of international tax planning.
Ireland has become a leading inward investment jurisdiction and advisers with experience in this area have reaped the benefits of the increasingly sophisticated transactions and products with which Ireland is involved. Given the lower level of M&A activity in the area (albeit quieter only in comparison with the frenetic pace of 2000), both institutional and corporate clients are looking to create value-adding products and reduce their costs of funding by examining Ireland as a jurisdiction in which to do business.
Deutsche Bank has recently completed the first rated real collateralised debt obligation (CDO) backed by private equity which involved issuing tranched debt. This deal was oversubscribed, which suggests that similar private equity structures may follow in the near future. Along with Merrill Lynch, Deutsche Bank was also involved as lead manager and arranger to the largest static CDO in Europe on behalf of three Portuguese banks. The structure utilised back-to-back deposits between Portugal, Germany and Ireland and three credit default swaps in order to meet various Portuguese and Irish requirements.
Two unusual aircraft finance securitisation-based transactions have also been completed. BAE Systems' $2bn (£1.4bn) Mothership deal, which was arranged by Salomon Smith Barney, securitised lease payments from BAE's vendor finance programme. The customised structure allowed BAE to free up credit capacity for use in other parts of its business. The Leonardo deal, arranged by Merrill Lynch on behalf of Banca Commerciale Italiana, was the first synthetic aircraft collateralised loan obligation (CLO) in the market. The structure that was implemented permitted BCI to transfer the first loss risk to Merrill Lynch by way of a credit default swap, thus producing regulatory capital benefits for BCI.
The Promise (Programme for Mittelstand) Scheme, set up by Kreditanstalt fur Wiederaufbau, was launched last year to securitise loans by German banks to small and medium-sized corporates. The original transactions, completed by HypoVereinsbank and IKB Deutsche Industriebank, have now been followed up by similarly structured CDOs from Dresdner Bank and DG Bank. Further Promise Scheme deals are planned.
Aside from the above transactions, Ireland has also witnessed a steady stream of traditional receivables securitisations of various asset classes, securitisations of more unusual assets (such as Turkish government debt and commercial intellectual property), an increasing number of debt repackaging structures and off-balance sheet warehousing arrangements, all of which have been implemented on a tax-efficient basis. Notwithstanding the current global slowdown, this type of activity has not diminished.
Ireland does not have thin capitalisation legislation, a transfer pricing code or anti-avoidance legislation relating to controlled foreign companies. It is likely that transfer pricing legislation, enshrining OECD arms-length principles, will be enacted at some stage in the future. Experience suggests, however, that multinationals which have invested in Ireland can expect the Irish Revenue Commissioners to defend robustly a sensible transfer pricing methodology under the auspices of Ireland's extensive network of double taxation treaties.
The expansion of Ireland's network of treaties (currently numbered at 38) will also result in the widening of certain safe harbours in respect of dividend-withholding tax, interest-withholding tax and capital gains tax, namely:
– No withholding taxes are imposed on the payment of dividends to EU countries, or to companies located outside the EU where they are ultimately controlled by residents of countries with which Ireland has a tax treaty, or by residents of member states of the EU, or where the dividend recipient is quoted on a recognised stock exchange in such a country.
– No capital gains tax exit charge is imposed on the migration of companies which are 90 per cent controlled by persons resident in a treaty country.
– No withholding tax is imposed on interest payments to companies in the EU or in treaty countries.
Emer Hunt is a partner at Matheson Ormsby Prentice
|Ireland – a tax overview|
| 12.5 per cent rate of corporation tax on trading income from 1 January 2003.
Wide exemptions from withholding taxes on interest and dividends.
A range of tax-exempt investment vehicles (resulting in Ireland's status as a leading funds domicile).
Gross roll-up life insurance products.
Tax-neutral securitisation vehicles.