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DUBLIN, Ireland-Captive managers have welcomed the Irish government's decision to set a single corporation tax rate for Irish and non-Irish companies once European Union tax concessions expire for international financial services companies in 2006.
But they do so more because the uncertainty is over concerning what would happen at the end of the E.U. concessions, rather than the level set for the corporation tax.
In May, then-Prime Minister John Bruton announced that a single tax rate of 12.5% will be established for non-Irish financial services companies from the beginning of 2006 and for non-Irish manufacturing companies five years later. Both sectors now pay 10% in corporation tax, compared with the standard rate, applicable to Irish companies, of 36%. Irish companies also will pay 12.5% tax beginning in 2006, he said.
Although there has been a general election since Mr. Bruton's announcement, new Prime Minister Bertie Ahern has said he will support a lower tax rate for all companies operating in Ireland.
Dublin's International Financial Services Centre was set up 10 years ago to help boost Ireland's ailing economy and improve its massive unemployment. In return for committing to employ a certain number of people, overseas financial services companies got various concessions, including a beneficial 10% corporation tax rate until the year 2000.
Last year, the European Commission allowed Ireland a five-year extension on its tax rate, but captive managers and their clients remained uncertain what the position would be after 2005. In addition, the E.C. regulations prevented any new entrants to the IFSC after 1999.
"It is the certainty rather than the rate" that is important, said John Perham, managing director of UNISON Management (Dublin) Ltd., the largest captive management company in Dublin. For most companies setting up captive insurance or reinsurance operations in Dublin, if there were a list of six reasons to choose Dublin, the tax rate would be at No. 5, he added.
Andrew Halsall, director and general manager of International Risk Management (Dublin) Ltd., agreed.
"For so many parent companies, because of (controlled foreign corporation) type regulations, the effect of the concessionary tax rate is diluted or destroyed," he said. Under controlled foreign corporation regulations, companies with overseas operations are charged the difference between the overseas jurisdiction's tax rate and the parent company's local tax rate if profits are ceded back to the parent.
By having an official decision on the tax situation, companies now are better able to make long-term decisions, said Mr. Halsall.
Mr. Perham said he would not have expected an "exodus" if the post-2005 tax rate had been "quite a bit higher," but it would have made it much harder to bring in new captives.
Dublin authorities have asked the European Commission to clarify the position on companies setting up in the IFSC after the beginning of 2000, Mr. Perham added.
More details on the government's proposals are expected in the Finance Bill to be issued later this year.
Edwin Unsworth contributed to this report.