Blue-sky tax thoughts for a greener IFSC
Published in Business & Finance
A new and innovative tax framework is the bedrock on which a green IFSC will flourish, writes Eleanor MacDonagh.
A number of groups have been working to devise a framework for a business hub in Ireland, incorporating green finance and investment vehicles, carbon trading and related service providers, in order to establish a green IFSC. There are a number of tax initiatives that, when combined with Ireland’s current tax offering, could incentivise the key players in these industries to locate their business in Ireland.
In considering any suite of reliefs (which could include broader green tax reliefs applicable outside the financial arena) we must give due regard to EU state aid rules and ensure that the reliefs fall within established European Commission guidelines to ensure rapid state aid approval by the European Commission or alternatively, the Treaty on the Functioning of the European Union rules on state aid for the development of certain economic activities.
Subject to obtaining any necessary authorisations, to manage and monitor access to the reliefs, there could be a type of “green certification” as to the business (or particular segregated business activities) of the applicant in the green economy. Although application would ultimately be made to the Minister for Environment, it could be considered by a new certification advisory committee, which would make a formal recommendation on the project to the minister.
In assessing the required tax reliefs we first look to the historic tax drivers of the former IFSC regime, which saw low corporation tax and the former remittance basis of income taxation for non-Irish domiciled individuals.
Instead of the former remittance basis of taxation, an inferior Special Assignment Relief Programme (SARP) is currently available only for certain non-Irish domiciled employees coming to Ireland from certain countries provided certain conditions are met. This relief operates on a repayment basis and does not generally provide a competitive, effective income tax rate.
A significantly enhanced green SARP is vital for the success of any green IFSC initiative. Any such green SARP (G-SARP) must reduce PAYE and apply where any non-Irish domiciled person takes up residence in Ireland for the purpose of working for a certified green business. The relief should apply to all employment income to attract a mainstream specialist workforce for start-up purposes. Also, to attract the high value employees required to achieve a sophisticated green financial hub, income tax payable in any tax year in respect of employment under G-SARP would need to be capped.
Separately, when examining corporation tax or any business level tax, we must examine its operation in the context of the different businesses.
An Irish investment fund authorised by the Irish Financial Regulator enjoys a gross roll-up regime whereby income and gains accumulate within the fund free from Irish tax. Also, subject to procedures being observed, foreign investors will not be subject to Irish tax on their investment in such an Irish fund. Where tax applies for Irish investors, generally a maximum rate of 28% is levied with no further obligation for that investor. All such Irish funds, including green funds and other socially responsible investment vehicles authorised in Ireland, enjoy these tax benefits, so Ireland’s tax offering to funds is second to none. Nonetheless, the key to attracting these funds to Ireland is to also attract their required service providers.
The service providers of investment vehicles, including funds and finance companies, (most notably asset managers), typically have a number of very highly paid employees. Accordingly, Ireland’s 12.5% corporation tax rate is not in itself enough of an incentive from a tax perspective – the income tax to be paid by their key employees is a major consideration in choosing a domicile for their business. Therefore, it is important to reiterate that an effective G-SARP is vital to Ireland’s green economy initiative; attracting green asset managers to Ireland would be the bedrock on which a green IFSC would flourish.
Currently Ireland’s securitisation and structured finance regime facilitates the financing, holding and management of greenhouse gas emission allowances and other financial assets on a tax-neutral basis. Assets that are not financial assets are not permitted. Separately, accelerated capital allowances on the cost of certain energy-efficient equipment are available only on a very limited basis. Also, in relation to leased assets generally, ringfencing provisions mean that the present value of a capital allowance can be significantly eroded. All of these facts point towards the need for an enhanced green finance company regime.
The regime could be two pronged. Green certified companies conducting a trade could enjoy accelerated capital allowances on green assets in use in their trade (even if that trade is a leasing trade) while no ring-fencing would apply to these green allowances. In addition, certified green investment companies holding and/or managing green assets could enjoy a new tax-neutral regime akin to the securitisation and structured finance regime currently available for qualifying companies. We eagerly await a fecund green tax offering.
Eleanor MacDonagh is a consultant specialising in taxation law and practice at McCann FitzGerald. She leads the banking and financial services tax team and is a member of McCann FitzGerald’s Green Economy Group.