IRELAND 18 June 2018
Chapter 5 : Department of Finance
The investigation insofar as the Department of Finance and the Central Bank are concerned relates to the information known or which might reasonably be expected to have been known or available to them regarding the practice of using bogus non-resident accounts for the purpose of evading DIRT and the use they made of that information.
It is clear from the examination of the files of both organisations and from the evidence adduced from their principals that the information available was based on anecdotal and circumstantial evidence which it was exceedingly difficult, if not impossible, to substantiate. That said, the official files are liberally sprinkled with references like "half the non-resident accounts are thought to be bogus" and "at least ,1b of non-resident deposits are thought to be held by Irish residents".
Even before the introduction of DIRT in 1986 there was an acceptance that there was a significant problem with bogus non-resident accounts and this led to intermittent efforts to address the problem. These and later efforts had only very limited effect because they all fell short of implementing a regime of full disclosure to Revenue of interest payments by financial institutions and also because they did not provide for Revenue access to bank accounts except in very restrictive circumstances. Either or both of these measures would almost certainly have had a major impact on the incidence of bogus non-resident accounts.
But at what price? Both organisations were convinced that any moves in that direction would have led to a flight of capital from the country with all the attendant consequences for the economy particularly when it was vulnerable in the 1980s and in the first half of the 1990s. In that context, bogus non-resident accounts were seen as the lesser of two evils and for that reason any action taken could only be at the margins. The changed economic circumstances of the later 1990s and the greater focus in recent years on the imperative of having a compliance culture in our financial institutions, coupled with advances in financial regulation have all contributed to an environment where it was considered appropriate to introduce greater powers of access by Revenue to the records of financial institutions as enacted in the Finance Act 1999.
The key question which appears to arise in considering the Department of Finance=s performance (and, to a lesser extent, the Central Bank=s) with regard to the issue of bogus non-resident accounts is
Did the Executive at all times get the balance right between the competing demands of guarding against the potential flight of capital out of the country and creating an effective anti-evasion tax regime as far as DIRT was concerned?
The material in this and the next chapter is set out as a backdrop against which the performance can be considered in the light of the information that was known or might reasonably be expected to have been known or available.
The Department of Finance has responsibility under statute for the administration of the public finances of Ireland, as well as for the promotion and co-ordination of economic and social planning.
In relation to DIRT the Department has responsibility for the following
sponsoring of legislation
forecasting and monitoring of DIRT receipts
responding to representations including those from individual financial institutions and representative bodies such as the Irish Bankers Federation (IBF).
Policy formulation in relation to DIRT is the responsibility of the Capital Taxes Section of the Department=s Budget and Economic Division. In practice, policy was formulated in conjunction with the Monetary Policy Section of the Finance Division. At all times when changes in relation to DIRT were considered the primary, and, often conflicting policy considerations were to maximise tax revenue and to maintain the deposit base. Other policy considerations which arose in relation to non-resident accounts during the relevant period were disclosure to the Revenue of interest paid, the inspection of declarations under Section 37 of the Finance Act 1986 and the exchange of information with other tax authorities.
A review by me of the relevant files indicated that it was recognised by the Department that, ultimately, the only completely effective way to preclude evasion through the use of bogus non-resident accounts was to provide powers for full inspection by the tax authorities of non-resident accounts. The Department, however, feared that this would lead to the withdrawal of genuine non-resident accounts from the deposit base.
The issue of bogus non-resident accounts had arisen both prior to the introduction of DIRT and thereafter. The principal occasions on which it arose were
in the context of 1983 proposals to address evidencing of non-resident status
on the introduction of DIRT
on the abolition of exchange controls in 1992
at the time of the Tax Amnesty 1993.
The major portion of information known to the Department regarding the level of bogus non-resident deposits was subjective or generalised. At no time were studies or investigations undertaken to ascertain the level of bogus non-resident accounts. A major consideration was the fear that such a move would scare off genuine non-resident account holders. While the Department was aware that Revenue had discovered individual cases involving bogus non-resident accounts and that some high level discussions with Banks had occurred, no specific details of discussions with financial institutions appear to have been formally provided to the Department by the Revenue.
The two major issues involving non-residents which came to the attention of the Department from time to time were
taxation of deposits.
Non-resident funds and Exchange Controls
Non-resident deposits were a well established practice in banking both in Ireland and abroad. It was recognised, however, that the operation of offshore non-resident accounts was a common practice to avoid the taxation laws of the state of residence. Funds in non-resident accounts were considered to be highly mobile due to the absence of exchange controls and particularly sensitive to the effective rate of return.
Exchange controls were directed, in part, at controlling the extent to which Irish residents or resident companies could hold significant amounts of currency abroad. Foreign currency earnings were required to be converted into Irish pounds except where balances were allowed to be maintained for trade purposes. On the other hand, non-residents and foreign nationals were encouraged to direct funds into Ireland, which would also support the Irish currency. However, since these funds were originating from another state, in accordance with international practice, generally, there were no exchange controls imposed by the Irish authorities on these funds. The underlying reason for this policy was that non-resident funds would only be attracted into a country if investors were reasonably certain that they would have access to their funds when they wished and would not be prevented from recalling or redirecting their funds. This was a significant advantage of funds with non-resident status over resident funds.
Taxation of Deposits
In regard to the taxation of interest on non-resident deposits the concerns evident from the departmental files were that
any attempts to impose taxation on non-resident accounts would drive these highly mobile funds out of Ireland to other locations where interest could continue to be earned tax free
any attempts to impose taxation on deposit accounts, excluding non-resident accounts, could also have a similar effect. Non-resident investors might perceive such a policy as indicating a change in the taxation environment in Ireland which could at a later stage be extended to all deposit accounts and might, therefore, withdraw their funds as a precaution.
In general, the primary focus in addressing the preservation of the deposit base was on genuine non-resident accounts. The framing of policy sought to cater for the concerns of keeping such deposits within the system while, going some way towards removing the opportunities for evasion by bogus non-resident depositors.
Information available on Bogus Non-Resident Accounts before introduction of DIRT
The Department files record that information was made available to it on a number of occasions before 1986.
In 1976-77 the Revenue Commissioners held a number of meetings with banking institutions on the subject of tax evasion which included the use of bogus non-resident accounts. A final report on these meetings was submitted to the Department of Finance on 10 October 1977.
In March 1979 the Minister received a signed letter from a bank manager. In this letter the bank manager stated, among other allegations, that while staff had been instructed in writing not to assist customers in tax evasion, management had verbally condoned the old ways of hiding "hot"@ money. In particular the Manager identified certain institutions as the traditional homes of "hot"@ deposits.
Following the publication of the Finance Bill 1983 the Department of Finance received representations from the ACC. An internal memorandum responding to the representations stated "the figure the ACC quotes for its non-resident deposits represents one-third of total deposits, which seems rather high if the vast majority of the accounts in question are "known" to be genuine". It might also be mentioned that the IBOA, protesting against the measure proposed in the Budget, claimed that "there is a general conviction that semi-state bodies provide facilities of this kind [i.e. accepting certificates known to be false] on a far more generous basis"[than the Banks]."
In 1984 the Department of Finance was consulted by the Revenue Commissioners in relation to a draft code of practice for banks that was under discussion with the Bank of Ireland at the time. An internal memorandum dated 23 March 1984 stated that Revenue were satisfied that the improper use of non-resident accounts had Along since reached epidemic proportions".
In 1984, there was a focus within the Department on bogus non-resident accounts in the context of impending major revisions to the Balance of Payments statement - on foot of the investigation by the CSO of the large unexplained >net residual= outflow which came to be known as the "Black Hole".
Departmental papers pointed to some circumstantial evidence that could support the hypothesis of growth in bogus accounts. While it was recognised that attempting to quantify the amounts involved could be futile, an effort was made to indicate possible orders of magnitude - by applying some speculative assumptions to limited aggregate data. The ensuing figures did not, however, constitute estimates in the normal meaning of the term. Being conjectural, they were not seen as providing a basis in themselves for initiating tax proposals with a high probability of substantial economic downsides.
A letter from the Department to the Central Statistics Office dated 6 April 1984 in this regard stated that informed opinion in the Revenue Commissioners and the Department believed that as much as one-half of the interest earned on non-resident accounts could appertain to residents.
An internal memorandum on this subject stated
"Without access to the necessary detailed information, I am reluctant to put a figure on the possible error, but at the same time some general magnitudes need to be appreciated....On the basis that some two-thirds are Irish pound-denominated and that the bulk of these can be viewed with suspicion, the potential overstatement of the true average stock of non-resident deposits is of the order of ,1,000/1,200 million"
In June 1985 the Central Bank received a letter, which was passed to the Department of Finance, from the Midland and Western Building Society alleging breaches of exchange control regulations by the clearing banks. In particular, the letter alleged that the basis on which Form F was used bordered on the irresponsible. The letter alleged that substantial sums of money were being transferred into External Irish Pound accounts and that English addresses were literally being supplied to order.
The Department raised the matter with the Central Bank, which was the body responsible for the implementation of exchange controls, and also forwarded a copy of the letter to the Revenue Commissioners.
Attempts to address Bogus Non-resident Accounts - 1983
The Finance Bill of 1983, as initiated, contained a provision that all notices by non-residents requesting that interest not be returned to the tax authorities would have to be accompanied by a sworn affidavit attesting to the truth of the declaration.
The Committee Stage notes prepared by the Department for the Minister contained the following extract:
"As regards false declarations as to the residence of depositors it has been argued by the banks that they cannot be faulted for accepting declarations or instructions from customers. Notwithstanding that resident persons have been supplying foreign addresses for deposits maintained by them, the banks claim that it is not open to them to question the accompanying declarations which simply require a statement that the person beneficially entitled to the interest is not resident in the State"
In May 1983 a representative of the Department of Finance met representatives of the banks about the affidavit proposal. At this meeting the banks put forward a case for some modification of proposals. They saw the provision as it stood as an impediment to genuine business in the international field, where competition for deposits was very keen. Both the Department of Finance and the Central Bank agreed with this position.
Subsequently the section was amended during the passage of the Bill through the Dáil so that the bank was required to obtain a supporting affidavit only where it was not satisfied that the person who made the declaration was non-resident. The legislation (now section 891 (6)(b) of the Taxes Consolidation Act, 1997) is still on the statute books.
Interdepartmental Group on Interest Withholding Tax - 1983
In February 1983 the Government decided to establish an Inter-Departmental Group comprising representatives nominated by the Minister for Finance, the Taoiseach, the Tánaiste and the Central Bank to consider the question of a withholding tax, including reference to yield, effects on liquidity, capital flows and savings.
In a submission to the Group the Department stated
"Given the volatility of the reserves and the need to maintain an adequate level of official external reserves for monetary policy purposes this Department would be concerned at any proposal which could put the reserves at added risk. The adequacy of our external reserves is not only a central objective of monetary policy but is, perhaps, the single most important indicator of our creditworthiness internationally"
The above view was incorporated into the final report of the group and was one of the major reasons why the group did not recommend the introduction of a withholding tax.
The Central Bank also prepared a paper on 5 August 1983 on the exchange control aspects of a withholding tax which stated
"there is a suspicion that part, perhaps the major part, of the recorded non-resident Irish pound deposits [,1,198m at 31 December 1982] may, in fact, represent liabilities to residents using accommodation addresses abroad"
The Department commented on this on 29 September 1983 in the following terms
"The Exchange Control Department, while it has no evidence of specific abuses of external accounts agrees that abuse is taking place but would tone down the ....statement in the [Central] Bank's paper. It is not possible to quantify the extent to which illegal External Accounts exist. However, it would seem that there is a degree of laxity, if not collusion, on the part of banks and other financial institutions in opening bogus external accounts."
The final report of the group on 14 November 1983 stated that at end-December 1982, non-bank deposits in non-resident accounts at domestic banks were of the order of ,2,000 million of which ,1,200 million was denominated in Irish pounds, ,500 million in sterling and ,300 million in other foreign currencies.
The Memorandum to Government on the final report of the group dated 25 November 1983 did not recommend the introduction of a withholding tax on interest because of the risk of a substantial outflow of funds, the administrative problems which would arise and the fact that the tax would impose a charge on non-liable persons.
On 17 January 1984 the Government "noted the contents of the Report".
Introduction of DIRT - 1986
Prior to the introduction of DIRT, the taxation of building society deposits and those of banks differed in several important respects:
$ Building societies benefited from the non-disclosure of interest paid. However, the "Composite rate" system ensured that tax at 28% was paid on all deposit interest.
$ Bank interest qualified for a ,50 exemption under section 344 of the Income Tax Act, 1967 and interest was paid gross. There was no disclosure of interest paid to non-residents.
In November 1985 the Department of the Taoiseach submitted an aide memoire to the Government on harmonising the taxation of bank and building society interest. Such a system of taxation would eliminate the differences in tax treatment that then existed between the banks and building societies. In order to achieve this the aide memoire recommended the extension of the "composite rate" to all financial institutions. The aide memoire did not suggest how non-resident accounts should be handled in the new context.
In response to this proposal the Finance Division of the Department of Finance on 22 November 1985 expressed their concerns in relation to non-resident accounts in the following terms
"Given that the current and deposit accounts of non-residents are currently well over ,2,500 million it is clear that an effective tax on any non-resident deposits could lead to a serious outflow from the official external reserves, particularly since non-resident accounts in the UK are exempt from the composite rate on bank interest. Measures to tighten exchange controls could in themselves lead to capital outflows..
...The impact of any proposals in this area on domestic interest rates would come first from any loss of official external reserves. Such a loss of reserves would tighten bank liquidity (unless the loss were to be fully offset by Exchequer foreign borrowing) and this would put upward pressure on interest rates .......... A loss of deposits from domestic financial institutions would create difficulties for Exchequer financing. The loss would reduce the capacity of the domestic market to finance the EBR at a given yield and therefore either put additional upward pressure on domestic interest rates or give rise to an increase in foreign borrowing...
If the proposal is to extend the composite rate to all financial institutions without disclosure and if all non-resident deposits and interbank balances are excluded the impact on the official external reserves should be reduced. However, it would need to be clear from the outset that non-disclosure would apply and that all non-resident deposits and interbank balances would be excluded because uncertainty could of itself lead to significant capital outflows... "
The Department of Finance and the Revenue Commissioners met on 26 November 1985 to discuss the outline of a possible scheme to extend the "composite rate" arrangement. The conclusion of this meeting as outlined in a memorandum to the Secretary of the Department was that there were fundamental problems of administration and equity and that there was a decided risk of substantial outflow of funds. In relation to disclosure the memorandum stated
"there are different ways of dealing with disclosure. It is no use having full scale returns on all deposits to Revenue because Revenue could not cope. The main concern is to break the line of total confidentiality. It is proposed to introduce an effective periodic survey. Depending on the measures introduced there could be a significant movement of funds between institutions and other outlets for funds. As to verification of non-resident accounts, there are also a number of options. If we are to avoid the possibility of significant outflows and a tax loss an effective system of controlling bogus non-resident accounts will have to be found. This could prove very difficult."
The Department of Finance prepared an aide memoire on this issue for the Government dated 19 December 1985. In the Minister=s opinion harmonisation as envisaged in the aide-memoire submitted by the Taoiseach on 22 November 1985 was not a practical option in 1986. The risks of capital outflows were too great, the tax yield would be small and the administrative problems would be insurmountable. This aide memoire also stated that unless strict control measures were introduced, there would be an increase in bogus non-resident accounts which "the evidence suggests, are already numerous".
At a Government meeting on 19 December 1985 the Government favoured the introduction of a composite rate of taxation for banks, on the lines set out in the Taoiseach=s aide-memoire dated 22 November 1985, on the basis that they would decide finally on the matter when they had considered a memorandum from the Minister for Finance on the full implications, administrative details and possible yield of such a tax.
This Memorandum was finalised on 8 January 1986. In summary, the Memorandum proposed the wider application of a composite rate system of tax. It also incorporated provisions for
more stringent requirements for verification of non-residence
disclosure of building society interest
abolition of exemption limits.
In relation to non-residents and disclosure the Memorandum stated
A...Non-residents - It is envisaged that the scheme will not apply to interest paid to non-residents whether on Irish pound or foreign currency accounts. It might be possible to apply a low rate of tax to non-resident deposits without an unduly adverse impact on the official reserves from any consequential outflows. This could bring in significant additional amounts of tax, would reduce the incentive to open bogus non-resident accounts and would remove the pressure to introduce exempt status for non-resident accounts with building societies. On balance, however, it is not a risk that should be undertaken at this stage. As things stand the proposed scheme may cause some outflow from non-resident accounts to forestall any such eventual extension. The main problem is the potential outflow from resident assets to bogus non-resident accounts. The key factor here is, however, disclosure of interest paid by building societies and this is discussed in paragraphs 15-16.
15. Disclosure This is the fundamental issue for the banks, the building societies and the official reserves. At present the banks provide the Revenue Commissioners with details of accounts generating annual interest over ,50. Building societies provide no details of account holders. Termination of non-disclosure by building societies would be very difficult to achieve. It would have to apply to interest paid by the societies in respect of the year ended 31 December, 1985. Even that change could provoke a significant withdrawal of funds with potentially serious financial implications for the societies and for activity in the construction industry, particularly in the short term. It could also have an adverse effect on the yield from the composite rate system currently applying to the societies. The official reserves would be likely to be affected at a time when they are already under some pressure as a result of speculation about a realignment of exchange rates within the EMS. This would necessitate, as a safeguard, the introduction of tighter conditions for the opening of non-resident accounts. Interest rates (particularly those charged by the societies) would be likely to rise. It is possible that the societies would themselves initiate legal proceedings to maintain the status quo. On the other hand the extension of the composite rate system to the banks, but with the maintenance of the present imbalance in disclosure arrangements, would be totally unacceptable to them and make it difficult, if not impossible, to achieve the co-operation necessary for the successful introduction of the new system.
16. As an alternative to full disclosure and in the interests of administrative efficiency, the disclosure requirement might apply only above a certain level of deposit or interest payment and the scheme has been prepared on this basis. A higher threshold carries the serious risk, however, of abuse through the use of multiple accounts. The disclosure requirements might also apply to all non-resident accounts - or to increased balances on such existing accounts and to new accounts. Extension of disclosure to non-resident accounts could stimulate outflows from such accounts but depending on the method of application the risk could be reduced and partly balanced by the increased difficulties which residents would face in trying to open or fund such accounts. On balance it has not been included in the scheme."
Following the finalisation of this Memorandum there were further discussions within the Department of Finance and with the Revenue Commissioners on the terms of the scheme. These discussions culminated in a memorandum to the Minister on 22 January 1986 which stated that under the scheme now proposed the relevant institutions would be required to deduct, from 6 April 1986, tax at source at the rate of 35% from "relevant deposits". This memorandum also stated that there would be Anon-disclosure all round".
The memorandum also stated A..Deposits beneficially owned by non-residents will be excluded from the tax. At present non-resident status can be obtained fairly easily by a simple declaration in most cases. It will be necessary to apply a much more effective procedure to new accounts, and perhaps to increased balances on existing accounts, in the case of banks"
In a letter to the Department of Finance dated 20 January 1986 the Revenue Commissioners stated that the "abolition of the disclosure arrangements for banks would deal a crippling blow to the Revenue=s efforts to combat evasion..... Revenue experience in relation to the existing disclosure requirements (active encouragement of bogus non-resident claims and of account splitting to avoid the reporting threshold) does not inspire any confidence in the proposed arrangements for monitoring, solely by the banks, of the accounts which are to be excluded from the arrangement. In fact, the proposed abolition of the existing disclosure requirements is tantamount to providing a charter for evasion by the banks and their more wealthy customers"
A Government decision of 23 January 1986 approved a scheme of taxation at source of bank and building society interest with non-disclosure of individual accounts.
Budget Statement and Introduction of DIRT
In his Budget statement on 29 January 1986 the Minister for Finance made the following statement:
"To obtain exclusion from the retention tax a new form of declaration, which must be held available for inspection by the Revenue Commissioners, will be required in respect of non-resident accounts with building societies and banks. To deal with bogus non-resident accounts, I propose to introduce legislation in the Finance Bill to empower the Revenue Commissioners to require details of existing non-resident deposits in certain cases. The requirements will operate only in respect of deposit accounts, the balances on which at 29 January 1986 are reduced by more than 25 per cent at any time between that date and 5 April 1987."
The Financial Resolution No. 12 announced in the Budget dealt with the detailed provisions of DIRT. This resolution set out the form of the new declarations and provided that they would not, in general, be required in respect of existing non-resident accounts until 6 April 1987.
Representations received following the Budget Statement
Following the 1986 Budget the Department received a number of representations.
The TSB stated that it was generally believed that there were a large number of non-resident accounts held in certain commercial banks which were not genuine. It also understood that some depositors of large funds in some banks were being informed that there would be no change under the new system and that the new arrangements proposed could be avoided.
The Minister for Finance met representatives of AIB and Bank of Ireland and a representative of the IBF on 7 February 1986. At this meeting the bank representatives stated that they were worried about the possible impact on genuine non-resident depositors of the requirement that the Revenue Commissioners would have access to the new declaration forms for non-residents. They suggested that the text of the Finance Bill on this aspect of the Retention Tax should be so drafted as to make it clear that this right of access would be solely for the purpose of weeding out bogus non-residents and that, otherwise, any information available to the Commissioners would be treated in strictest confidence.
At this time the financial institutions= representative body, the IBF expressed concern over the fear that details of non-resident deposits would be furnished to foreign tax authorities. The IBF wrote to the Minister on 11 February 1986. This letter requested that the issue of non-resident declarations should be dealt with in a sensitive and flexible manner.
The Department of Finance and the Revenue Commissioners met representatives of the IBF on 26 February 1986. No minutes are available but the meeting was referred to in later correspondence with the Revenue Commissioners.
Following the meeting the IBF wrote to the Department of Finance. This letter requested amendments to the budget provisions relating to non-resident accounts in existence on 29 January 1986 and obligations on bank branch managers in relation to non-resident declarations. In response the Department outlined what provisions would apply where balances were reduced by more than 25% and stated that "a normal degree of care" would be required of a bank in assessing whether a deposit was a relevant deposit or not.
The IBF again wrote to the Department on 22 April 1986 following the publication of the Finance Bill. This letter raised a number of objections including the powers of inspection for Revenue and disclosure of information. In relation to powers of inspection the letter stated
"Our members strongly believe that the provisions of the Bill give the Revenue Commissioners powers of inspection which are excessive, having regard to the Department's objectives. Accordingly, they request that there should be an exemption from the powers of general inspection by the Revenue Authorities of declarations, under section 33 of the Bill, served by persons who are non-residents for Exchange Control purposes."
In relation to disclosure of information the letter stated
"You will recall that assurances were sought at the February meeting that global exchanges of information between the Revenue Authorities in this country and their counterparts elsewhere would not be entertained. It is still the conviction of our members that your Department should provide a formal expression of intent in this regard".
In a letter of 16 June 1986 in response to these representations the Revenue stated that they would be opposed to the suggestion in relation to powers of inspection. In relation to disclosure, the letter stated
"On balance, we would suggest that the IBF should content themselves with our current limited scale of disclosure to foreign tax authorities and with the verbal assurance given by Maurice O'Connell in February last that there would be no "en bloc" disclosure."
The Department of Finance has pointed out the fundamental conditions laid down by the Minister at the introduction of DIRT legislation in response to representations from the banks for a relaxation of certain measures. These conditions were:
that there were solid assurances about the prevention of abuse
that any revised arrangements did not offend against our international tax obligations.
It was also reasonable, at all times, to expect that the requirements for deposit-takers to satisfy themselves as to the bona fides of non-resident account holders would be applied by the banks and others concerned and that a standard of reasonable care in policing the system would be followed by the financial sector. The various statements by the representatives of the banking sector gave no reason to believe that this expectation was unfounded.
Finance Act 1986
In his budget statement 29 January 1986 relating to DIRT, the Minister for Finance stated that to deal with bogus non-resident accounts he proposed to introduce legislation in the Finance Bill to empower the Revenue Commissioners to require details of existing non-resident deposits in certain cases. The intention was to discourage the withdrawal of funds by persons who might wish to avoid the wider scrutiny which non-resident deposits would now be subject to. Following representations from the IBF and discussions with the Revenue Commissioners, these proposals in a modified form, were enacted as Sections 37 (3) and 37 (4) of the Finance Act, 1986. In short, if a Form F holder on 29 January 1986 was a bogus non-resident, the provision encouraged him to revert to his proper treatment as a resident and suffer deduction of DIRT. However, if he was a genuine non-resident, all he had to do was complete a declaration to that effect. If a non-resident closed his account before 6 April 1987 then he had to complete a new declaration. If he did not do so then the Form F was deemed to be a declaration under Section 37 and so was therefore subject to scrutiny by Revenue in any general trawl of non-resident declarations.
The IBF made a number of representations requesting the repeal of Section 37 (4). This was not agreed to by the Department.
DIRT and Non-resident Accounts after 1986
In his 1987 Budget Speech, the Minister for Finance included the following reassurance to non-resident depositors
"there appears to be some misconception about the tax status of non-resident deposits. Let me make the position clear. Such deposits are entirely free of retention tax in our jurisdiction. I can give assurances that we have no intention of changing this arrangement. Non-residents can lodge deposits here in complete confidence"
Examination of Section 37 Declarations
The Minister for Finance met representatives of the IBF on 20 May 1987 to discuss a number of issues, including DIRT. The minutes of this meeting stated
"The bank representatives also raised the question of the right of inspection of forms by the Revenue Commissioners in respect of non-resident deposits. They feared further leakage of deposits because of this right of inspection. The Minister indicated that he was sympathetic in this area and intended looking at it thoroughly before next year's budget, but he was unable to make any changes at present. In response to his query as to whether any inspectors had yet looked for the documents, the bank representatives indicated that they were not aware of this happening but that the perceived danger of it happening would cause outflows. Mr Tutty [Department of Finance] indicated that the new disclosure requirements had been brought in to avoid abuse of the non-resident deposit system by residents. Mr Crowley (Chairman AIB) responded that the banks would be willing to take more action to determine the bona fides of customers opening non-resident accounts. They would be willing to discuss this at any time."
The Department of Finance obtained the agreement of the Revenue Commissioners that the Department were to be consulted prior to any examination of non-resident declarations. A Department of Finance memorandum dated 23 August 1987 stated
"Revenue have been looking at how the bona fides of new non-resident declarations might be checked but have not taken any decisions on the matter. They confirm that, in view of the sensitive nature of the issue, this Department will be consulted before any action is taken. The occasional examination of pre-retention tax declarations, or 'forms F', is still continuing on a case by case basis as part of the ongoing work of special enquiry units in Revenue. These examinations use information turned up through the interest returns made by banks before confidentiality was extended to them in April 1986. This anti-evasion work is an important source of revenue.
On balance, I think the report by Revenue is satisfactory. The retention tax yield is such a key part of income tax receipts (,283 million this year) it is unavoidable that careful thought must be given to ensuring that any potential leaks are plugged. The Revenue undertaking to consult the Department before any new kind of action is taken will allow the whole question of the best balance between confidentiality and maintenance of the retention tax yield to be determined at the appropriate time."
The Department points out that there is no record of any such consultations taking place before any such inspections by Revenue at any time up to the present and in particular, in 1991 when Revenue was pursuing enquiries with the banks. In the event, inspections of non-resident declarations only started in 1998.
The Minister for Finance held a pre-budget discussion with a delegation from the IBF on 15 December 1987. Prior to this meeting the IBF proposed that non-resident deposits should be completely exempt from inspection by the Revenue Commissioners in order to allay fears that information on such deposits would be passed to foreign tax authorities. Alternatively the IBF proposed that the Revenue Commissioners should be barred by law from exchanging information with their foreign counterparts. This proposal was opposed by the Department as it believed that a complete reliance on the system of self-regulation would be very unlikely to prevent large-scale abuse and hence substantial loss of DIRT revenue.
Tax Amnesty 1988
An amnesty of 1988 allowed taxpayers to avoid interest and penalties if they put their tax affairs in order. According to a fax dated 27 January 1988, sent to the Department of Finance as briefing material from the Revenue, the incentive amnesty of 1988 provided a unique opportunity for tax payers who may not have disclosed monies held with Irish deposit takers under non-resident names and addresses. It is unclear in what context the fax was sent. The number of bogus non-resident account holders who availed of the amnesty is unknown.
Reported use of Bogus Non-Resident Accounts
A letter dated 21 December 1990 from the Revenue Commissioners to the Department discussed the question of abuse of non-resident status.
"In relation to reporting arrangements by financial institutions, the general perception of Revenue field staff is that the non-resident procedures are being abused to a significant extent and that there are considerable funds held in non-resident accounts by people resident in the State. The Investigation Branch are however applying pressure on various financial institutions in an attempt to minimise the problem. About 20 cases of abuse were identified in the past year and were the subject of high level negotiations with the financial institutions involved. It was clear in those instances that senior management in the financial institutions were seriously worried about the implications of spurious non-resident accounts being discovered by Revenue in the course of Audit or Investigation Branch work. However, casework of this kind will not make a significant impact on the problem.
The obligation under section 175 to make returns to the Revenue still exists. However, it only relates, as it has always done, to interest paid without deduction of tax, other than interest paid to or for the benefit of declared non-residents. Abuses of the non-resident procedure could only be countered at this stage by requiring returns of all interest whether paid gross or net and whether to residents or non-residents. Any proposal for such a move would clearly have to be examined in a wider context. It seems likely that any proposal to require returns of interest paid to non-residents will raise far stronger opposition than the affidavit proposal in 1983 did. Revenue would have no objections to receiving such returns on computer tape, provided the financial institutions were in a position to do so."
Abolition of Exchange Controls
Under EU legislation exchange controls were required to be dismantled by the end of 1992. Because of the implications for DIRT a review group was set up in July 1991. The focus of the group was how, in the changed circumstances of the absence of exchange controls, to both minimise the risk of a transfer of funds abroad and to preserve the yield from taxation of deposit interest to the fullest extent possible.
The minutes of a meeting of the review group on 2 October 1991 stated "with ,4 billion in non-resident accounts the perception is that a lot of them are being used as vehicles for tax evasion. There may be grounds for stricter requirements for opening such accounts although any such move could cause existing ones to move abroad. Ann Nolan [Department of Finance] pointed out that the worst scenario was if both the tax was lost and the money moved abroad. However, it was accepted that the issue of bogus non-resident accounts would have to be addressed. This may be an issue that is not of immediate concern and could be looked into after the question of reporting requirements had been settled.
John Shine [Office of the Revenue Commissioners] stated that placing reporting requirements on non-residents would give the Revenue information that could then be sought by the country of residence under the mutual assistance provisions of the double tax agreements. This would reduce the attractiveness of Ireland as a place to put money."
A key task for the group was to examine possible reporting measures which would discourage the movement of funds abroad and so protect the tax base in Ireland. A Department of Finance paper of 9 October 1991 prepared for the group stated
"It is not envisaged that the reporting arrangements will apply to non-resident accounts. This exemption might act as an extra incentive for opening bogus non-resident accounts. While this would have the effect of eroding the DIRT base it would not affect the flows of money out of the country, so it could be considered the lesser of two evils. However if the money in non-resident accounts were suddenly to increase dramatically some action would have to be taken. The rules for opening new non-resident accounts could be strengthened, perhaps by requiring sworn affidavits on residence to be provided to the banks in cases where the correspondence is to be sent to an Irish resident. The danger of the approach is that in a growing international market for non-resident accounts, it is important that the Irish authorities do not do anything that will discourage genuine non-residents from opening accounts here. Overall it would probably be more prudent to await developments before any action is taken on non-resident accounts."
This view was further confirmed in a memorandum from the Finance Division of the 20 December 1991 which stated that the current tax arrangements for non-resident accounts should remain unchanged. Even any hint of a change could cause a significant outflow of funds.
A further memorandum dated March 1992 stated
"Even without a new policing provision, the system of self-declaration will be largely workable. At present, ,13 billion remains in DIRT liable accounts although anyone can move their account to a bogus non-resident account on signing a simple, false, declaration. Even if you assume that all the money in non-resident accounts belongs to residents, this gives a compliance rate of over 75%."
Material relating to non-resident accounts and current levels of evasion was supplied by the Central Bank to the group.
The minutes of the meetings of the group contained no specific references to evidence at that time of the incidence of bogus non-resident accounts or to any discussions which might have been held with financial institutions on this problem.
The conclusions of the group were contained in a memorandum dated 1 April 1992 to Government on changes in taxation of deposit interest in response to capital liberalisation which stated
"the institutions have some ,4 billion in accounts in the name of non-residents, which are not liable to DIRT; a significant proportion of these funds are thought to be beneficially owned by residents"...
The Memorandum also stated:
A.......the Government is faced with conflicting policy objectives. To support the exchange rate and to keep interest rates down, an adequate level of external reserves must be maintained. This clearly infers that if the taxation regime in force were to encourage outflows of capital (in the circumstances prevailing), it must be changed. At the same time, budgetary considerations dictate that the overall loss of tax revenue be minimised, particularly in 1993 when the budgetary difficulties are likely to be significant. Together these point to pursuing a policy of minimal taxation on volatile savings, while retaining the existing regime for dormant funds."
Special Savings Accounts
The unwinding of exchange controls was seen by the Department as relevant to bogus non-resident accounts in two respects
it was going to be easier to put money offshore
some form of incentive low tax regime for account holders was needed in order to persuade them to keep their money at home.
This was the basis for the introduction of the Special Savings Accounts which provided for a 10% retention tax on interest. The hope was that at least some of the bogus non-resident account holders would be tempted to switch the underlying deposits into Special Savings Accounts.
The Department did not perform any post factum analysis of the impact of Special Savings Accounts on non-resident accounts.
Administrative concessions were granted in 1993 to deposit takers in relation to non-resident deposits in response to requests from the banks for a simplification of the system and the elimination of practical difficulties.
The non-resident declaration (where made) was deemed sufficient to remove from the Irish banks the obligation to deduct DIRT on the one hand, and to exclude such payments from the Section 175 return. Hitherto, a declaration and a Form F Notice were required.
It was agreed that one declaration would cover all accounts held by an individual company. Strictly speaking one declaration per account was required.
In the particular circumstances of the wholesale money market, non-resident bona fide banks were not required to complete a declaration of non-residence in order to ensure gross payments of interest. Details of payments would be included in the Section 175 return.
Following discussions with the IBF it was agreed that companies (and their affiliates) quoted on recognised stock markets would be treated in the same manner as non-resident banks.
Following further discussions in 1994 it was agreed that the Banks and the Revenue Commissioners would agree concessionary lists of companies which would also be treated in the same manner as non-resident banks.
1993 Tax Amnesty
In early 1993 consideration was given to the question of an amnesty for funds abroad on which tax had not been paid. One of the issues to be considered was whether the amnesty could be confined to funds held abroad or would apply to funds held in "illicit" accounts in Ireland. A number of possibilities for dealing with bogus non-resident accounts were discussed but were not included in the memorandum for Government from the Minister for Finance dated 21 May 1993. The only reference in the memorandum was that the "Minister believes that it would not be possible to confine the scheme to funds held abroad, and that it would be seen to be futile to attempt to do so."
The Department=s files on the 1993 Amnesty contain a number of memoranda referring to the scale of bogus non-resident accounts. The first memorandum stated:"there is currently approx ,4bn on deposit in accounts designated Anon-resident". It is likely that a very high proportion of these accounts have been fraudulently designated and that the depositors are resident. They may account for 50% or more of the total amount on deposit. In the run up to the introduction of DIRT the number of non-resident accounts trebled.
The Revenue have been aware of this problem and have investigated some bank branches when information has come to light....
In one recent investigation a team from Special Enquiry Branch left Miltown Malbay having collected in excess of ,22m..."
In response to the above another official stated "While we are aware that there are bogus non-resident accounts the main problems we have are lack of hard information and the likely repercussion of any major moves against the banks in this area."
In another memorandum to the Minister it is stated
"As to the volume of funds in the Irish financial system (in bogus non-resident accounts and in ordinary deposit accounts under false names) which represents the proceeds of tax evasion or relates to efforts to avoid DIRT, it is possible that there could be about ,1 billion."
Following the Government decision of 25 May 1993 to proceed with the amnesty, it was felt by the Budget Division that the amnesty would raise questions on current disclosure arrangements and that they would need to do something to ensure that those who availed of the amnesty stayed "onside". In response to a query from the Budget Division in June 1993, the Finance Division stated
"This Division has not sought in the past, or is not seeking now, to support bank confidentiality for its own sake. What we have been concerned about, and continue to be concerned about, is the danger that depositors will take fright at measures to tighten up on disclosure and that the outflow of funds would put strong upward pressure on interest rates. Given that Ireland has not had automatic access by the Revenue Commissioners to bank accounts up to now the introduction of such a measure just after exchange controls have been abolished would be a high risk move.
I know of no way of detecting bogus non-residents which would not involve checking on genuine non-residents. Given the size of non-resident deposits, ,4,100 million, we remain opposed to measures which could put this volume of money at risk."
Following further discussion within the Department the final memorandum for Government on the Tax Amnesty dated 23 June 1993 included a provision that if, in future, the Revenue Commissioners wished to require a financial institution to provide particulars of (or other relevant information in relation to) accounts maintained by a resident person, they could do so by satisfying the Appeals Commissioners (rather than the High Court). This did not apply to non-resident account holders.
The memorandum also stated
"The Minister recognises that these provisions of themselves do not fully address the question of the illicit use of accounts with domestic financial institutions in the context of tax evasion. In relation to accounts already in existence, he is not disposed to take any action beyond that allowed for above, because of the likely adverse implications for capital flows. However, he is actively considering initiatives in relation to the opening of new accounts such that the use of accounts in false names, parallel accounts and bogus non-resident accounts will be more difficult in future."
In the event no new initiatives were introduced.
Monitoring of Interest 1986 - 98
Interest Liable to DIRT
Forecasting and monitoring of DIRT is carried out by Capital Taxes Section, Budget Division which is also the section primarily responsible for DIRT policy. Forecasting and monitoring of other taxes are the responsibility of the Central Budget Section.
The primary aim of monitoring was to compare the Budget estimate as calculated by a financial model against actual outturn.
Since 1986 various spreadsheet models have been used to forecast the level of DIRT. Information and advice on the deposit base was obtained from Central Bank Bulletins. Additional information in the form of splitting the monetary base up into its component parts was also obtained on a confidential basis from the Central Bank. Information on a monthly basis relating to the level of the net deposit base liable to retention tax was then monitored. By applying an average rate of interest to this amount it was possible to generate an estimate of the likely interest payable. The appropriate rate of DIRT was then applied to this forecast in order to arrive at an estimate of the likely DIRT yield. From this figure, estimates of the amount of recoupments to individuals, corporates and others, was deducted thus arriving at an estimated yield.
Periodic reviews were carried out during the 1980s on this methodology. In December 1991 an analysis of how the model had performed in relation to the years 1987 to 1991 inclusive was conducted and it was found that the model was, in the later years under-predicting the amount of DIRT.
In 1993 because of deficiencies in the DIRT model and also because of the changes made to the DIRT regime, it was decided to make direct contact with various financial institutions so that a more up to-date picture with regard to the range and spread of deposits in the various interest rate categories. In addition, a distinction was drawn between demand and term deposits. Various financial institutions were asked to supply the Department with the following information
$ an estimate of the total interest paid/credited in respect of both the standard rate and also the special rate applying to special savings accounts (SSAs) in respect of both the 20 April and 20 October payment dates.
$ a breakdown of the present level of DIRT liable deposits between the various interest rate categories, e.g. between SSA and non-SSA, demand and term accounts.
It was noted in 1996 that the model was not picking up the changes in interest rates and that this was leading to certain errors in the forecasting of the overall DIRT yield.
The 1998 forecast (completed in November 1997) departed from the previous model for a number of reasons
$ information on Irish resident pound deposits was no longer available in the required manner from the Central Bank
$ the previous model had tended to constantly over-predict the yield and was not considered reliable.
For these reasons, a simple and transparent new method of forecasting was developed. The deposit base was broken down into three categories, SSA, non-SSA term and demand deposits. The relevant interest and DIRT rates are applied to these deposit categories to arrive at a forecast tax take. This forecast yield is reduced by an estimate of company savings based on the discrepancy between the forecast (as per this methodology) and the actual yield in previous years. This is the current methodology used by the Department.
The forecast is then submitted to the Central Budget Section for input to the budgetary calculations. At that stage the Central Budget Section transmits this forecast to Revenue.
In all the reviews of the methodology no reference was made to the effect on the model of any "uplifts" or any DIRT settlements.
Interest exempt from DIRT
Figures for non-resident deposits were not obtained by Capital Taxes Section of the Department of Finance from the Central Bank on a regular basis. This can be attributed to fact that non-residents deposits were exempt from DIRT so therefore were not a variable in any of the various models used.
Analysis of non-resident balances was undertaken on an ad-hoc basis in response to issues/events, particularly in the period immediately following the introduction of DIRT.
In response to a press article on 19 May 1986 the Department of Finance requested details of the level of non-resident deposits. This estimated an outflow of ,200m in the period January to April 1986.
In December 1986 Finance Division obtained a breakdown of resident and non-resident current and deposit accounts between Irish pound and foreign currency from the Central Bank. This showed a reduction in non-resident deposit accounts of 12% between December 1985 and December 1986 and a reduction of 3% in resident deposits. It also showed a 41% increase in foreign currency resident deposit accounts.
A briefing note prepared for the Minister in connection with a meeting with the IBF on 15 December 1987 stated that the "impact of the declaration requirement on non-resident deposit levels appears to be wearing off and they are stable at about ,2,500 million during the year."
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