In a recent article published in Finance Dublin, I advised on a multilateral approach which tries ‘to create value for everyone’ and also suggested the Irish industry bodies such as the IDSA and the IFIA have a vital role to play in ensuring that unintended damage is not done.
The Irish ‘brand’ has always put tax at its centre. Therefore, the OECD’s intensive and accelerated Project on Base Erosion and Profit Shifting (BEPS), coupled with the EU Commission opening State Aid investigations into Irish ‘tax rulings’ is always going to cause a certain amount of stress. Ireland is not isolated – there is considerable alignment with other countries. However, one aspect of the debate here is both mistaken and could result in unfortunate developments – in a sort of self-fulfilling prophecy.
In May the ECB, with the Bank of England, issued a discussion paper on securitisations*. The ECB is concerned that the securitisation market in the EU is not working properly, due to range of market issues, uncertainty and pricing (including tax) problems. This, they think, has fairly severe knock-on consequences for the ‘real economy’, for investment, for lending to SMEs, for diversifying funding and investor bases and ultimately for employment.
At the same time, two senior US senators issued a Statement on the OECD’s BEPS Project** noting two concerns: firstly, that the process will result in increased foreign taxes for US taxpayers and, secondly, that with the aggressive time-frame for the Project that ‘far-reaching and negative consequences for the competitiveness of US workers’ will be missed.
These European and US concerns are central to Ireland’s financial services industry’s attitude to BEPS. The BEPS Project was not triggered by the financial services per se but there is concern that two key pillars of the Irish industry, funds and securitisations, could be affected.
For example, BEPS Action 6 is around access to tax treaties. It is possible that proposed actions could, possibly inadvertently, deny investment funds access to double tax treaties – this could result in Irish, or any, funds suffering much increased withholding tax on returns and, for example, cutting against the EU supported cross-border efficient pooling of investments in UCITS and AIFs .
Another of the Actions (2) on hybrid instruments may deny tax deductions for securitisation vehicles where a return is paid on particular types of instruments to a ‘related party’. But EU rules may now require originators of the underlying assets to have ‘skin in the game’ by holding such notes. If the ‘related party’ rules are set too wide then BEPS will result in additional tax costs in securitisations and one more barrier to the issuances the ECB, investors and borrowers want.
Therefore, at its heart, the interests of investors, investees, central bankers, taxpayers and governments are aligned. And they are aligned with the interests of the financial services industry in Ireland that also wants to see vibrant and successful funds and securitisation activities.
The Irish industry bodies, such as IDSA and the IFIA, as they have done and will do further, have a vital role to play in these processes by giving their unique insights into how these global industries function and ensuring that unintended damage is not done. However, there is one additional danger. The US senators identified this problem explicitly. And that is that during this discussion period individual countries may use the process to act unilaterally and fill fiscal shortfalls by ‘taxing the foreigner’.
Here the internal debate in Ireland is sometimes not helpful. It is a very serious error to talk about ‘winners’ and ‘losers’ in any context when discussing international trade. Free markets are never a zero sum game, It is always about creating or trying to create value for everyone. But much of the debate in Ireland is about where we might ‘lose’. If BEPS results in bad rules, everyone loses.
This particular Irish focus on Ireland’s position, encourages everywhere a mercantilist view that unilateral action by investee countries to tax the foreigner will turn them into ‘winners’ merely by making someone else a loser.
*The Case for a Better Functioning Securitisation Market in the European Union. ECB, Eurosystem, Bank of England. May 2014.
**Hatch, Camp Statement on the 2014 OECD Tax Conference. 2 June 2014