26 May 1998
The Irish government is wooing investors by offering attractive international securitisation programmes, report PAdraig o R'ordAin and Caroline Devlin. PAdraig o R'ordAin and Caroline Devlin are members of the Arthur Cox IFSC and corporate taxation groups.
The use of securitisation programmes in Europe has begun to develop significantly in recent years reflecting the long-standing use of the technique in US markets.
Ireland reacted to this development by, in 1996, designing and instituting a special tax regime for international securitisation programmes located in Dublin's International Financial Services Centre (IFSC).
In 1997 the Irish government also established a committee of industry specialists to examine international developments in the area and to advise on what further initiatives might be needed to adapt the IFSC securitisation product to international market conditions. The government's intention was to ensure that Ireland became an attractive domicile of choice for a wide range of securitisation programmes.
There are already early signs of success. HSBC Investment Bank has recently announced a US$5bn securitisation programme - one of the largest of its kind in Europe - domiciled in the IFSC.
To date, asset-backed IFSC securitisation programmes include corporate bonds, sovereign debt, commercial mortgages, trade receivables and credit card receivables.
Securitisation is simply a means of issuing securities backed by assets or cashflows. The technique was initially used by banks and other financial institutions to sell off loan portfolios to the capital markets.
As the technique matured, however, it became apparent that securitisation was also an effective tool for companies that wanted to raise funds in the international capital markets at a lower cost than would be achievable using traditional financing mechanisms.
Typically, the company which originates the assets is seeking to achieve off balance-sheet treatment for the assets and associated financing costs.
The securitisation process typically involves the transfer of the assets by the originating company to a special purpose vehicle (SPV). The SPV is normally an orphan entity because the originator cannot retain an interest in its share capital if an off balance-sheet securitisation is to be achieved.
The SPV funds the acquisition of the asset portfolio by issuing securities to investors. The securities are backed by the assets in the SPV and the cash flows which they generate. It is common for the originating company to provide liquidity support or credit enhancement to the SPV directly, through a third-party guarantee.
From a tax viewpoint the securitisation programme should be tax neutral and, accordingly, the aggregate tax payable by the SPV and the originating company should not be greater than the tax which would have been payable had the originator carried out the transaction itself.
There are a number of critical factors in achieving tax neutrality. These include:
the SPV should be taxable on its net profits (that is, its profits after deducting its cost of funds and other expenses);
there should be no tax on the transfer of the asset portfolio to the SPV or on the issue of securities to investors;
there should be a tax efficient means of extracting profits from the SPV;
tax on interest payments to investors should not be withheld and there should be no residual liability to domestic tax; and
the SPV should have access to double tax treaty benefits.
All of these requirements can be achieved by using an SPV established in the IFSC. The SPV is taxable on net profits at a 10 per cent rate of corporation tax. There is no minimum profit requirement, no withholding tax on interest payments, and the SPV benefits from Ireland's double tax treaties.
Typically, the SPV will be established in the IFSC under a management arrangement with a specialist IFSC-based service provider which has been licensed to service securitisation vehicles.
The service provider provides administrative services to the SPV for an annual fee and it is also responsible for assuming any employment commitment related to the establishment of the SPV. The SPV must be certified to carry on business in the IFSC by the Irish minister for finance. This process can usually be completed within four to six weeks.
The IFSC combines a special tax regime with a developed infrastructure of expert service providers, a responsive approach by the Irish authorities and Ireland's reputation as an offshore centre of quality.
The future of securitisation in the IFSC is bright.