With its tax rate of 12.5% and a tax system that since 1997 has aimed to make securitization deals effectively tax-neutral, Ireland is already a popular onshore location for securitization. But changes announced in its Finance Bill in February 2003 should make the country even more attractive. The Bill announced changes to simplify and update the securitization rules to take into account a much wider range of transactions. It is due to be enacted by April 4 this year and changes are possible until then but it will be effective from February 6.
After lobbying from practitioners and consultations with industry, Finance minister Charlie McCreevy announced measures that will make it easier to carry out modern types of securitization transactions such as synthetic securitizations, collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs). Synthetic securities involve transferring risk in the underlying assets to the issuer of the securities rather than transferring the actual assets.
The problem with the existing legislation is that while Ireland is still an attractive location to run a security-issuing special purpose vehicle through, with tax relief available, securitization methods have changed since the 1997 taxes consolidation legislation and many of the newer transaction methods fail to qualify for tax relief.
"The previous legislation gave certainty of treatment to promoters and lenders but it was somewhat inflexible," said Colm Blaney, a senior tax manager at Ernst & Young in Dublin. "If a structure didn't fit it was hard to make it happen. So the aim was really to simplify the regime and cater for a broader range of transactions," he added.
Ken Murnaghan, a director in the asset finance business of AIB working on the bank's CDO programme is confident that the reform will bring big benefits for banks. "The changes were lobbied for quite some time by industry and I think we'll see significant uptake in the use of Irish securitization vehicles. In the context of the deals we're running at the moment though I think they're probably a bit too late. We'll see the impact from the end of this year."
Under the existing system, it is difficult for securities with multiple lenders - there is a minimum amount for each lender of ?12.7 million and they have to be held for a minimum of three months. Both of these requirements have been removed from the qualifying requirements and the minimum has been reduced to ?10 million from the entire group of lenders.
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Eleanor Maher: Qualifying criteria extended to transactions without asset acquisition |
Eleanor Maher, a tax adviser with McCann FitzGerald in Dublin, explained how the proposed qualifying criteria work. She said they: "ignore the concept of the originator of assets and eliminate the requirement for one; extend to transactions that do not involve the acquisition of assets; eliminate the requirement for a company to manage assets where assets are held by the company and provide that profit participating interest will not be treated as a distribution if the interest is not part of a tax avoidance scheme."
Cormac Kissane, partner at Arthur Cox, in Dublin explained that with the new rules Ireland should be a much more attractive location for CDOs and in particular, arbitrage CDOs. "A big problem before was that there was a risk payments of interest on the securities issued to purchase the collateral might not be tax deductible. Interest on debt is, in most cases, deductible but high-interest coupons or those linked to the performance of the company risk being re-classed as distributions which are not tax deductible."
The Irish Bankers' Federation is pleased that the range of assets that can be securitized has been widened. A spokesperson said that the changes are "a further important milestone in the development of the Irish Securitization industry and will allow for more sophisticated transactions to be undertaken."
Kissane agreed with this and thinks that it could draw certain types of securitization work away from countries such as Luxembourg and the Netherlands. "The changes are improving what was already a favourable tax system for securitization," he observed. "We've had a very positive response from clients. Before, Ireland really wasn't viable for these types of transactions."
McCreevy also used the Finance Bill as an opportunity to announce that the government is clamping down on tax avoidance. In addition to two anti-avoidance measures announced in the budget, and one released in January, McCreevy introduced a further nine measures designed to combat avoidance.
One of the more significant anti-avoidance measures affects interest relief for companies and removes the previously unrestricted relief given to companies for interest on loans used to purchase an interest in another company. The amended legislation will restrict that relief if there is a recovery of capital by the investing company from the company invested in. Another measure counters abuse involving the interest charge accrued but not paid on loans between connected companies.
As with the remaining anti-avoidance measures, which affect relief including mortgage interest, balancing charges for capital allowances, and the sale of rental income from buildings, the above measures will now be discussed and may be changed before the Finance Bill is formally enacted in April this year.
Enda Faughnan, the head of tax at PricewaterhouseCoopers in Ireland, believes that the restriction on interest relief is one measure that will be changed. "I think it's gone too far," said Faughnan. "I doubt the government understands fully what it's done. It doesn't just cover the borrower but any connected company of the borrower recovering capital so any offshore activity could be viewed as recovery of capital and the company would cease to qualify for interest relief on borrowings."
The Bill also implements budget changes including amendments to capital allowances schemes, capital gains tax reforms, value-added tax (VAT) increases and the controversial PAYE and PRSI (pay-related social insurance) levies on benefits-in-kind which will be both costly and time consuming for employers. Transfer pricing rules, which so far Ireland does not have, were rumoured to be introduced in this year's Bill but did not feature.
