The IFC Review speaks to Minister Harris about Ireland’s success as an international finance centre and looks at the challenges facing the small but robust European IFC going forward.
IFC: How important is Ireland’s international finance services sector to its economic growth?
Minister Harris: According to a recent Financial Services Ireland research, Ireland’s international financial services industry employs approximately 35,700 people, including some 10,000 people that are employed outside Dublin. The average salary within the international financial services sector in 2012 was €67,000. I think these statistics reflect just how important the financial services sector is to Ireland.
Between 2009 and 2012, 6,000 net new jobs were created within the industry – a 20 per cent increase - with strong growth in fund administration, insurance, aircraft leasing and other technology based companies.
The most up to date information available from the Revenue Commissioners regarding estimated Corporation Tax paid in 2012 and 2013 by companies previously licensed to operate in the International Financial Services Centre (IFSC) is €456 million and €497 million in 2012 and 2013 respectively. It should be noted that these figures relate only to those companies that were once licenced under the 10 per cent Corporation Tax rate for certified companies setting up in the IFSC, which expired in 2005, and for which registrations ceased in 2002. The tax yield from other companies based in the IFSC is not separately identifiable. However, it is estimated that the IFSC contributes over €1bn per annum to the Exchequer in payroll and corporate taxes combined.
On the 23rd September, I announced at an Enterprise Ireland event that I intend to revise the Strategy for the International Finance Services Sector, which will provide an opportunity for a centralised focus, across both the public and private sectors, to the future development and promotion of Ireland as a leading centre for international financial services. A revised strategy for the sector agreed with all stakeholders will lead to a shared understanding of Ireland’s offering and how it could be best marketed, promoted and supported.
IFC: Ireland has been described as one of this most important finance and business hubs in Europe, despite being one of its smallest member states – how has this come about?
SH: Despite Ireland being one of the smallest member states, it has developed many competitive advantages.
In 2014, Forbes named Ireland as “the best place in the world to do business” - not surprising given the level of skills and talent of the Irish workforce, with the share of the population aged 25 - 34 with third level qualifications higher in Ireland than in the US or UK, and above the OECD average. According to the FSI research, 86 per cent of staff employed in the industry hold at least a bachelor’s degree. The IMD World Competitiveness Yearbook 2014 ranked Ireland first in the world for the availability of skilled people and the flexibility and adaptability of the workforce.
It goes without saying that our membership of the EU and the Eurozone, being an English speaking business location and a favourable time zone for doing business with the US, Europe and Asia, have also given Ireland a competitive advantage.
From a tax perspective Ireland has a competitive corporation tax rate of 12.5 per cent, along with extensive double tax treaties. In the recent PWC/The World Bank/IFC report ‘Paying taxes 2014: The Global Picture’ Ireland was ranked sixth in the world and first in the EU for the ease with which a business can pay its taxes.
IFC: How important is Ireland within the international finance industry and global movement of wealth?
SH: Ireland has positioned itself as an important provider of services to the global financial sector. Ireland as a location, coupled with the need for increasing certainty of quality, cost-effective services, alongside a growing market for asset and wealth management as global populations age, have complemented the development of the sector.
IFC: How important is it for jurisdictions to be tax competitive in today’s global market place? And to what extent has the 12.5% corporate tax rate been fundamental to Ireland’s growth as a business centre?
SH: Countries are increasingly competing for mobile foreign direct investment. As Minister Noonan said in his 2013 Budget Day speech, he wants Ireland to play fair – as we have always done – and play to win. In that regard, the competitiveness of Ireland’s overall corporate tax regime is evaluated on an on-going basis.
Maintaining the standard 12.5 per cent rate of corporation tax is a significant factor in Ireland’s international competitive position. Ireland, like other smaller member states, is geographically and historically a peripheral country in Europe. A competitive corporate tax rate is a tool to address the economic limitations that come with being a peripheral country, as compared to larger core countries.
Ireland’s corporation tax rate plays an important role in attracting foreign direct investment to Ireland and thereby increasing employment here. Employment in IDA supported companies in Ireland exceeded 161,000 in 2013, and it is also notable that the revenue generated by corporation tax in Ireland is broadly in line with the EU average. In 2013 we collected just over €4.2bn, which is 11.3 per cent of overall Exchequer tax revenue and equivalent to 2.6 per cent of Gross Domestic Product (‘GDP’).
Further, it is worth saying that the certainty around the rate of Irish corporation tax is one of its biggest strengths. Therefore the Government remains committed to the 12.5 per cent rate of corporation tax.
IFC: To what do you attribute Ireland’s successful funds sector?
SH: The industry has two main constituent parts: investment manufacturing and investment fund servicing.
The development of regulated investment product structures that can be distributed across markets (passported) is one successful attribute. The best example of this are UCITS (Undertakings for Collective Investments in Transferable Securities), which were created and developed via successive EU directives and have allowed collective investment schemes authorised and regulated in one member state of the EU to be distributed and made available to investors across the EU and beyond. The development of a regulated product construct, which has clear rules, disclosures and protections, has encouraged investors to participate and product providers to supply an increasing range of investment strategies.
Furthermore, the globalisation of the investment manufacturing (or investment management) industry, whereby firms located in a particular part of the world have sought to offer their expertise outside of their home market has also benefitted the industry. It is not uncommon for a manager physically based in one country to sell or distribute their investment capabilities into dozens of markets around the world.
To develop the industry in Ireland a strong, sustained and collective effort by both the public and private sectors over 20 years has promoted Ireland as a location for both investment manufacturing and investment funds.
By all measures, the industry has been a great success with almost €1.5 trillion of investment funds domiciled in Ireland (€1.473 trillion as at 31 May 2014 as sourced from the Irish Funds Industry Association), in excess of 13,000 people employed and a client base which serves investment managers from over 50 countries and reaching investors all over the world.
IFC: Which areas of the financial services sector are seeing growth and which are not?
SH: As mentioned previously, we have seen growth in the insurance, corporate treasury and aircraft leasing sectors with some decline in the banking sector.
Part of this trend can be attributed to the global cycles in these markets - banking has contracted. However, another key element is the cluster effects of an Irish location – Ireland is one of the major centres for global aircraft leasing based on the breadth and depth of expertise developed over the past 30 years in this sector.
The Government is developing a focus on the next wave of key drivers influencing the global international financial services sector – skills and expertise in risk, compliance and regulatory disciplines, opportunities afforded by new regimes in areas such as insurance and the increasing importance and alignment of technology with the finance sector.
International operations based in Ireland have developed skills and expertise across a range of global regulatory regimes in order to support their global platforms based in Ireland. Further supporting that experience and honing those skills develops the middle office functions that are increasingly vital to global companies in a cost competitive and qualification rich location.
We have seen in other sectors the advent of ‘Industry 4.0’ and its effects on, for example, the US and Japanese auto industry replacing workers with robotics. In Toyota’s Motomachi plant in Japan, robots are involved in 96 per cent of the production processes. Likewise, in the servicing and management of financial transactions, the backbone activities are being centralised through securities and derivatives depositories as global financial institutions attempt to contain and centrally manage their operational, financial, credit and, in some cases, strategic risks. A recent article in The Economist highlighted research which forecast there was a 94 per cent probability that services provided by accountants and auditors could, within the next 20 years, be computerised and result in jobs losses. The underlying trends that the financial sector, itself, is facing are challenges that need to be monitored and understood, with tactics developed to address them.
In Ireland’s case, we are seeking to address all of these challenges directly - in a comprehensive manner.
The Government’s Action Plan for Jobs 2014 outlines the five areas of focus namely marketing and promotion, developing Ireland as an insurance hub under Solvency 2, developing the FinTech sector, creating a global competence centre for risk and compliance and a review of the regulatory and legislative framework from a competitive perspective. We are seeing this across the whole swathe of businesses based in Ireland in banking, insurance and reinsurance, leasing, fund and asset management and servicing.
We want to move the sector into a position where domestic and international companies can develop together and the recent incubator project with Enterprise Ireland in the FinTech sector is both a welcome and timely development. This could form the template for future cooperation as we use domestic skills with international companies to embed Irish operations, and start to future proof the IFS business in Ireland.
IFC: What is the Irish government’s policy towards international tax regulation - does it support the move towards automatic exchange of information?
SH: The Irish Government has been a strong supporter of the Automatic Exchange of Information (AEOI) and has given its full support to the European Commission’s proposal in this area. As a practical example of our commitment to AEOI, we were one of the first countries to join the ‘Early Adopters’ group – a group of countries that have committed to implement the OECD’s Common Reporting Standard in advance of the deadline to ensure a coherent timeline with implementation of the rules for FATCA.
This follows from Ireland’s early participation in the US FATCA initiative - Ireland was the fourth country in the world to conclude such an agreement with the US. The agreement provides that Irish financial institutions will report to the Irish Revenue Commissioners in respect of US account-holders and, in exchange, US financial institutions will be required to report to the US Internal Revenue Service in respect of any Irish-resident account-holders. The two tax authorities will then automatically exchange this information on an annual basis.
The Government published ‘Ireland’s International Tax Strategy’ as part of Budget 2014. This document set out Ireland’s strategy in relation to a wide variety of international tax issues. It also includes an International Tax Charter, which sets out Ireland’s policy objectives and commitments on these international tax issues.
IFC: With the creation of legislation such as FATCA, financial privacy is being increasingly eroded – do you think complete transparency in international tax matters is a necessary step in the regulation of financial transactions?
SH: There is a need to consider this issue in the context of getting the balance right. FATCA and AOEI do not involve the publication of taxpayer information as the information is shared between the relevant competent authorities. Going beyond this type of exchange would lead to higher costs for administrations, financial institutions and companies themselves. I believe that at this point in time the current arrangements strike just about the right balance and taxpayer privacy remains protected. In Ireland we have specific provisions in legislation to protect taxpayer privacy.
IFC: Do you feel that the smaller IFCs, such as Ireland, come under unequal levels of regulatory scrutiny when compared to their larger onshore counterparts?
SH: Ireland plays a full role in developing the EU regulatory framework, we have rebuilt our domestic regulatory framework over the past number of years and transformed the domestic banking system.
The development of EU-wide and global standards has continued to develop apace and we also see an increasing standardisation of the application of those rules - such as the ECB stress tests – which increasingly ensures a level playing field for regulation.
IFC: What are your thoughts on the EU probe into corporate tax regimes in Ireland?
SH: The state aid investigation initiated by the European Commission earlier this year is part of a much wider investigation looking at tax rulings and patent boxes in different Member States of the European Union. This investigation has been on-going for some time, and formal state aid investigations have been opened into a number of companies in a number of Member States.
We are confident that there is no state aid rule breach in this case and we will defend all aspects vigorously. However, we understand that the European Commission has a responsibility to investigate potential breaches of state aid rules, so we will continue to do everything we can to ensure that they have the full information they require.
It is also important to emphasise the single focus of this investigation. The Commission have been clear that they are not investigating the 12.5 per cent rate of corporation tax, or the Irish tax system.
IFC: Do you believe corporations have a moral as well as a legal obligation regarding taxes?
SH: It is not just governments who are striving to be competitive as regards taxation. It is also a competitiveness issue that affects companies, and the ‘fiduciary duty’ of company directors is often cited in this regard.
Certainty in the area of taxation is a key consideration, not just for corporations, but also for government Budget arithmetic and for Revenue authorities for the purposes of collection and enforcement. Accordingly, I think that continuing engagement in international initiatives aimed at developing a consistent global approach to the taxation of large multi-national corporations, such as the OECD BEPS project, is the most effective way for Ireland to address these concerns.
IFC: How can Ireland protect its international reputation particularly with regard to the OECD’s Base Erosion and Profit Shifting debate?
SH: Ireland already enjoys a high international reputation. We are one of only 18 countries from around the world to have achieved the highest ranking of fully compliant from the Global Forum on the Transparency and Exchange of Information for Tax purposes. This is a considerable achievement which other, much larger, jurisdictions are striving to emulate. It is well documented that the OECD’s BEPS project is aimed at tackling issues which arise due to the interaction of the tax rules of different jurisdictions. Companies have been able to develop strategies which allow them to legally reduce their tax bill – BEPS is aiming for a consistent global approach to limit the possibilities of tax arbitrage.
At its heart BEPS is a simple concept. It is about trying to better align taxing rights with real economic substance. In other words companies should be taxed where they have their substantive operations. This is very much in line with Ireland's overall strategy for attracting foreign direct investment. Ireland has, and continues to strive for, real substantive foreign direct investment - the kind that brings real jobs. That's why I believe that BEPS offers more opportunities for Ireland than risks.
 As above.
Simon Harris TD Simon Harris TD is Minister of State at the Departments of Finance, Public Expenditure & Reform, and the Department of the Taoiseach (Prime Minister). Across this broad brief he has special responsibility for International Banking (including the Irish Financial Services Centre), Public Procurement and the Office of Public Works. First elected to Dáil Éireann at the last election of 2011, he has served on the Oireachtas Committee on Finance, Public Expenditure & Reform, the Public Accounts Committee, and was Convenor of the Cross-Party Group on Mental Health. A graduate of journalism, Minister Harris became involved in politics through his advocacy and lobbying work on Autism. Prior to his election to Parliament, he served as a Councillor in his native country of Wicklow.