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Ireland's Full Financial Services Potential

08 May | By Smart MBS
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Ireland's Full Financial Services PotentialDublin is one of Europe's top financial centres. It's no surprise that many insurance and financial services firms choose to make Dublin their home, with membership of the EU, use of the English language, and streamlined regulations helping Irish companies tap an EU market of 508 million people.

Ireland in particular is a domicile for alternative investment funds, and over the past 25 years, Ireland's international financial services (IFS) sector has seen explosive growth, underpinned by the 12.5% corporate tax rate.

According to a Government publication updated in February 2019, Ireland is home to over 200 foreign multinational IFS companies, including the world's largest companies in sub-sectors like banking, funds, asset management and investment, insurance and reinsurance, and aircraft leasing.

Unlocking Dublin's potential

While EU membership and the benign corporate tax environment have enhanced Ireland's appeal, other conditions of EU membership can have drawbacks – and Ireland often competes with non-EU finance centres around the world.

The EU has recently announced that it's launching a review of the EU's VAT law, which all member states must use as a basis for their value-added tax regimes. That review will focus on financial and insurance services.

By the time this review is completed, potentially by summer 2020, the EU will bring forward proposals that would make Ireland even more attractive for financial and insurance firms, by fixing elements of these VAT rules, which date back to 1977, that can place EU centres at a disadvantage to outside financial centres.

EU VAT on financial services — the basics

The rules on the financial and insurance sectors are relatively simple to digest.

Under VAT:

  • Most supplies of goods and services are subject to tax.
  • Businesses registered for VAT are typically charged VAT when they purchase goods and services used as inputs in making onward supplies.
  • They then charge VAT on these onward supplies of goods and services and can recover the amount of VAT that they have incurred.
  • Therefore, VAT is not a cost for them. When value-added taxes work effectively, only the ultimate consumer should foot the final and full bill for all the VAT charged along the supply chain.

However, the rules for financial and insurance services do not work this effectively. Financial and insurance services are not subject to VAT in the EU. They are instead "exempt without credit."

This means that while there is the positive that financial and insurance services providers need not charge VAT, firms are unable to recover the VAT they incur on purchases for exempt supplies.

That cost is then passed on to consumers, and this VAT cascades through the economy increasing operating costs for businesses.

It also creates an incentive for EU firms to acquire goods and services used as inputs from firms outside the EU.

Benefits of reform

If these shortcomings can be fixed, as the EU now intends, the negatives from the functioning of these rules can be eradicated. As a consequence:

  • Irish firms will be able to fully recover the VAT they incur;
  • They will become more internationally competitive, both inside and outside the financial sector, as their goods and services will not include unrecoverable VAT;
  • There will be a more level competitive playing field internationally; and
  • Businesses will be able to make effective decisions about where they source their inputs, without having to consider the distortions caused by sticking VAT.

This will potentially create opportunities also for Irish goods and services providers looking to secure contracts from financial and insurance industry players.

So why are financial and insurance services exempt?

When EU VAT law was first drafted in 1977, it was decided that financial and insurance services should be exempt from VAT purely due to the sheer complexity of applying VAT to these supplies.

The EU has now decided to revisit reform of the financial services sector, returning to efforts that were last launched in 2007. This is mainly due to tax rulings from Europe's top court, which have prevented the financial and insurance sector from creating cost-sharing groups — a structure that allows supplies between the same group to be outside the scope of VAT, nullifying the negative tax impact of the existing rules.

There has always been an agreement that the rules need fixing but until these rulings there wasn't the urgency.

Conclusion

Taxing financial and insurance services will enable Irish industry players to recover VAT and make more efficient choices about how they acquire goods and services. In particular, financial and insurance firms will be able to drop complex and costly cross-border structures and supply chains aimed at tax efficiencies for purely domestic solutions.

With firms able to make more decisions other than purely for tax reasons, and London expected to leave the EU, Ireland is poised to see a surge of activity and interest in the years to come.

why SMART MBS?

With a highly skilled workforce in the industry, Ireland offers the perfect destination to establish your European hub.   

SMART MBS, through our parent company Pearse Trust, has over 35 years’ experience helping overseas companies establish in Ireland and can provide a complete business solution to establishing your presence in Ireland.

If you are wishing to expand into Ireland, please complete the details below and we would be happy to arrange a free consultation with you.

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Topics: Expanding Overseas, Ireland, Tax, Brexit, tax services, Expand Your Business Into Ireland, VAT, Why Ireland

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