State Archives: Finance accused IFSC firms of abusing rules

The Department of Finance accused several companies that had set up in the new Irish Financial Services Centre in Dublin in 1987 of abusing its rules for the benefit of foreign banks.

State papers show the country’s top civil servant, Pádraig Ó hUigínn was notified in November 1988 that recently certified IFSC companies were offering foreign banks a mechanism to gain access to the tax benefits of the IFSC without having an actual presence in the centre.

The Department of Finance warned Mr Ó hUigínn, the Government secretary, that some IFSC firms had been seeking approval for associated special purpose companies (SPCs) for the benefit of foreign banks instead of themselves.

Approval was normally sought and given for only one trading company for any financial institution seeking to set up in the IFSC.

The Department of Finance said that it was aware that seven IFSC firms had also sought approval for SPCs.

It said approval for an SPC would normally be given where the main company had needed one to secure finance from abroad for the purpose of its main business and where it was desired for risk-reduction purposes or other commercial reasons to segregate a particular deal from the rest of its business.

The Department of Finance said the profits of any SPC accordingly belonged to the main IFSC company.

However, Department of Finance official, Paddy Mullarkey, said it appeared that the abuse was allowing the profits of the SPC, which would enjoy the 10% tax rate afforded to IFSC companies, to accrue to the bank.

“Such abuse of the SPC structure could have serious consequences for the IFSC marketing effort,” said Mr Mullarkey.

The Department of Finance signalled it would take “a tough line” on any abuse of the SPC structure.

It said it was emphasising to all IFSC companies that it would withdraw SPC certificates where it found evidence of such abuse.

The Department of Finance said it had also notified the IDA about what was happening and the development agency had shared its concerns.

Other documents show that US bank, Chase Manhattan was applying pressure on the Department of Finance for a “significant relaxation” of the IFSC’s certification rules that would allow not only the bank but customers of its IFSC division to avail of the 10% tax rate by allowing them to establish SPCs.

The Department of Finance informed Chase Manhattan that the Taoiseach’s advisory committee on the IFSC and the Government had repeatedly stressed that there were to be no “brass plates” in the IFSC as companies enjoying tax incentives had to have a real presence in the centre.

The IFSC, which was the brainchild of Dermot Desmond, the founder of NCB stockbrokers and strongly supported by Taoiseach, Charles Haughey, was officially established in 1987, despite resistance from the Department of Finance which had concern about its impact on domestic tax revenues.