The measurement and regulation of shadow banking in Ireland

Abstract

Purpose The purpose of this paper is to study financial vehicle corporations (FVCs) and other special purpose vehicles (SPVs) in Ireland. Design/methodology/approach The paper is based on a database of FVCs that are a central part of the shadow banking sector in Ireland. The database is derived from a European Central Bank (ECB) list of securities and from filings in Company Registration Office, Dublin. Findings Tax concessions are very valuable and has resulted in zero or close-to-zero effective tax rates. Although described as “bankruptcy remote”, FVCs/ SPVs in Ireland are associated with several banks that failed. Central Bank data are inconsistent with revenue data and have resulted in regulatory gaps. The main economic benefit to Ireland consists of payments to certain service providers. Research limitations/implications A complete population of FVCs/SPVs has not been used. Ownership of FVCs/SPVs has not been identified with consequent implications for identifying risk to the sponsoring firm or guarantor. Practical implications The study indicates data deficiencies in Central Bank data, with consequent implications for regulation and measuring the size of the shadow banking sector, and failure of FVCs/SPVs described as bankruptcy remote. Social implications The shadow banking sector has been a key source of instability and risk transference in the recent past. Research and understanding is vital to prevent a future occurrence. Originality/value There are no publicly available databases of individual FVCs/SPVs in Ireland. Hence, research on granular data is limited. The study develops a database derived from lists of securities published by the ECB. The study also relies on a database derived from company house records.

Financing Russian firms: Ireland and round tripping

“…These Irish Revenue reported numbers are substantially higher than those reported by the Central Bank of Ireland (CBI). This discrepancy has been attributed to under reporting to the CBI (Stewart and Doyle, 2017).…”

“…In effect profit distributions are treated as a tax deduction, rather than an after tax distribution of profits. This treatment has been described as “unique” in Irish tax legislation (Stewart and Doyle, 2017). There is no withholding tax and because interest payments may vary, interest payments abroad are deemed to be “distributions” which have already been subject to tax, thus giving rise to the possibility of double non-taxation [6].…”

“…Despite valuable tax concessions (Stewart and Doyle, 2017) IFSC conduits with “Section 110” status are “self-declared”. This means that a firm itself decides whether it fulfills requirements as a “Section 110” firm.…”

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“…6 It should be noted that the shift toward prioritizing a strong and transparent tax and regulatory framework as a reputational advantage is a legacy of the crisisThe hazards of light-touch regulation were brought home very clearly by the crisis, and root-andbranch reform of the Central Bank was a top Troika priority. But the scale of shadow banking appears to be significantly under-reported and the rapid development of a global Special Purpose Vehicle (SPV) hub in Dublin may conceal many hazards (Storey 2017a, Stewart andDoyle 2017) The Irish tax code still features a whole range of measures that enable creative tax-avoidance. The 'Big Four' accountancy firms play a significant role in designing and advising on these (Storey 2017b).…”