15 May 2011
By Kathleen Barrington
Dr Gerhard Schick is a German economist and Green MP who represents the state of Baden-Wurttemberg in the national parliament.
He was in Dublin recently to bone up on the causes of the Irish financial crisis. One of the places he told me he wanted to see was the office of Ormond Quay Funding, a special purpose vehicle (SPV) located in the International Financial Services Centre.
You probably don’t remember a whole lot about Ormond Quay Funding, an early casualty of the international credit crunch. But the SPV is of big interest to German taxpayers, who were forced to inject €17 billion in emergency liquidity after Ormond Quay lost access to short-term borrowing to fund long-term investments.
‘‘Lehman toxic debt advice led Leipzig bank to ruin via Dublin’’, was the headline on one story describing the impact that Ormond Quay had on the finances of the state of Saxony.
The story, published in 2008, recounted how teachers at the Clara Zetkin Middle School in Freiberg were counting on a budget surplus to ease staff shortages across the state.
But those hopes had faded because of bets made by state owned Sachsen Landesbank on structured investments backed by mortgages in the US.
The gambles were made using Ormond Quay and another Dublin-based SPV.
‘‘They gambled away money needed for Saxony’s teachers,” complained Wolfgang Renner, 55, a maths teacher.
The story began in 1999, when Sachsen decided to set up a Dublin operation, Sachsen LB Europe Plc, to take advantage of Ireland’s 12.5 per cent corporate tax rate, which compared very favourably with Germany’s 30 percent rate.
At first, the Dublin unit focused on low-risk, low-margin investments, such as European corporate and government bonds.
Then Sachsen LB Europe overreached. First, it created Ormond Quay Funding in early 2004. It later set up another Dublin vehicle - Sachsen Funding I - that invested in dodgy US subprime mortgages.
The risks taken in Dublin were technically off the balance sheets.
However, the Saxony state government was forced to pick up the tab when the market would no longer fund the Dublin vehicles, threatening the bank’s solvency.
‘‘The poison was the off-balance sheet vehicles that far outweighed the amount of risk the bank could shoulder,” one former Sachsen Landesbank board member told business news agency Bloomberg.
‘‘The bank might have survived, had it invested within the scope of its own capital.”
It is worth bearing all this in mind at a time when almost 1,700 foreign SPVs have established residency here with apparently relatively little oversight by the Irish authorities.
The numbers of SPVs locating here continues to be significant even since the credit crunch hit.
Section 110 of the relevant Irish tax legislation provides for specific tax treatment for qualifying SPVs.
Where these criteria are met, the cost of funding and other related expenditure is tax-deductible with the result that most securitisation and structured finance vehicles can cut their tax bills if they are resident in Ireland. This is big business for the IFSC - and for Ireland.
Irish accountants and lawyers make fortunes advising banks on how to avail of such tax breaks.
Financial institutions don’t quibble too much about the very high cost of professional services here if they can succeed in obtaining substantial reductions in their tax bills and can write off much of their accounting and legal expenses against tax.
Minister for Finance Michael Noonan told the Dáil earlier this month that the Revenue Commissioners had received 1,694 Section 110 notifications since 2003.
While the figures have fallen from 444 in 2007, they remain substantial.
There were 140 Section 110 notifications last year, and 50 in the first quarter of this year alone.
Noonan was unable to supply a figure for the value of the underlying assets held by qualifying companies. ‘‘This information is not available,” he said in response to a parliamentary question asked by Labour TD Eric Byrne.
This is worrying, given that tax sources have told The Insider that some of the 1,700vehicles may contain assets of up €1 billion each, though many contain far smaller amounts.
The sources are concerned that all this money is sloshing about ‘‘without any proper supervision.’’
Besides reducing tax liabilities, SPVs can be used to keep losses off the balance sheets of parent companies or to hide the ownership of assets. This means that SPVs can deliver nasty surprises if losses arise.
The Revenue Commissioners also freely admit, in their guidance notes on Section 110, that securitisations help financial institutions to get around the liquidity requirements set down by the regulatory authorities.
‘‘Without securitisation, the financial institution might be constrained in generating new business by the liquidity requirements laid down by the Central Bank,” the notes state.
Yet, despite the importance of bank liquidity and the importance of re-establishing Ireland’s reputation, the authorities don’t seem to know a whole lot about what is going on inside the SPVs.
Noonan could not provide a figure for the number of audits carried out on Section 110companies. ‘‘No specific statistical code exists for companies that avail of section 110. . . Consequently, it is not possible to separate audits of section 110 companies from other audits carried out by Revenue auditors,” he said.
Noonan was also unable to provide figures for the tax take from Section 110 companies. ‘‘It is not possible to provide this information. No specific statistical code exists for companies that avail of Section 110,” he said.
The minister also said that there had been no meetings between the Revenue Commissioners and the Financial Regulator specifically on the issue of policing compliance levels with Irish law by Section 110 companies.
The apparent lack of supervision suggests that the type of vehicles which played a role in causing the credit crunch continue to remain below the radar of the Irish authorities.
It is hardly a reassuring message to be sending the Germans and the other EU partners who are funding our bailout, even as we plead with them for better bailout terms and insist on retaining our 12.5 per cent corporation tax.
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2 comments:
You say that the SPVs have been able to cut their tax bills by using the section 110 provision. That isn't really the way it works. An arranger of a transaction decides that it needs to use a SPV, it then looks to where it will establish that SPV and examines a number of criteria. One of the principal ones is that that their will not be any significant tax payable by the SPV. A lot of jurisdictions have SPV legislation which facilitate this nominal tax position. In other words these SPVs would not be located in Ireland if there was any substantial tax liability: there isn't a loss of tax that would otherwise have arisen in Ireland. If Ireland imposed material levels of tax the SPV would be established elsewhere.
"It is hardly a reassuring message to be sending the Germans and the other EU partners who are funding our bailout".
No it's not "our bailout", it's a bailout for the bondholders whose bad loans were guaranteed by the Irish state after it became clear that they could not be repaid.
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