John Bruton
Question:3 Mr. J. Bruton asked the Taoiseach the strategies, if any, under consideration in his Department for the International Financial Services Centre in view of the turbulence in world financial markets. [21044/98]
Ceisteanna—Questions. - International Financial Services Centre.
At my request, the IFSC Clearing House Group is preparing a strategy for the development of the international financial services industry in Ireland, building on the success of the IFSC. This strategy will primarily focus on the need to maximise the level of sustainable economic activity and employment in international financial services in Ireland, building upon the existing activity in the IFSC. This should encompass not only the number of jobs, but also the quality of employment and activity, and the possibility of enhancing sustainability through links to related sectors such as shared services and electronic commerce. The strategy will outline a clear vision for the Government to adopt and implement.
The strategy will address issues concerning: the future location of the industry and the provision of infrastructure for the continued growth of the IFSC; the future marketing and promotion of the sector; how to ensure a continued supply of skilled employees for IFSC companies; the need for a tax regime supportive of competitiveness, while recognising EU and domestic constraints; measures to enhance the competitiveness of the centre through company law legislation; the need to maintain the existing high standard of regulation of the industry; the implications of the introduction of the euro; new business opportunities based around the existing level of financial services activity in the centre; and the structures necessary to implement the strategy. There have been recent discussions at international and EU level on the international community's response to the crisis in financial markets. The Government has participated in these discussions and the crisis remains a matter of serious concern to Ireland given the open nature of our economy.
The impact of recent turbulence on world financial markets will also be taken into account in the strategy being prepared by the IFSC Clearing House Group. This strategy will recognise the need for a flexible response to emerging international problems. The centre is still highly competitive and has limited exposure to the countries most affected. In my view, the most effective response to these events is to enhance the already strong competitive position of the IFSC and that will be a key objective of the strategy.
When will the 10 per cent rate of corporation profits tax currently applied to the International Financial Services Centre be increased to 12.5 per cent under the agreement made with the European Union? On what date will the new rate come into effect for all corporations.
The changes will come into effect at the end of 1999.
Is there absolute certainty that this will involve no difficulties from EU interests from the point of view of competitiveness or competition policy? Will the agreement reached between the Government and the Commission hold in all circumstances, regardless of the views of other member states?
The agreement should hold in all circumstances unless changes take place in the future.
Indefinitely?
Yes. With regard to competitiveness, the IFSC companies have welcomed the introduction of the 12.5 per cent rate on traded income which has much to offer in terms of the industry's long-term development. Work is ongoing with regard to developing the detailed steps necessary to implement the agreement in terms of legislation. We have agreed the new regime with the Commission and further progress on the overall issue will be made in the budget.
It is perhaps a coincidence of history that three of the four party leaders in this Chamber are former Ministers for Finance. On foot of what the Leader of the Fine Gael party has put to the Taoiseach, will the agreement hold in all circumstances? Is the Taoiseach satisfied that there is a formal written undertaking from the Commission confirming precisely what he has just said, and that the Commission, not this or any commission but the institution, the European Commission, has formally signed off on the 12.5 per cent and the 25 per cent?
I am so satisfied. One can never be sure what will happen in the future but negotiations on the agreement were conducted with a number of commissioners, the cumulative effect of the negotiations went before the full Commission and the agreement was ratified by it.
I am referring to the termination date in the year 2025 which was always part of the strategy. If the Taoiseach is in a position to do so, will he lay the relevant documentation in the Oireachtas Library?
The documentation is within the remit of the Minister for Finance, but I will raise the issue with him.
Is the Taoiseach aware that during my time as Minister of State in the Department a review was carried out of the IFSC and the international group that carried out the review did not recommend a separate financial services regulatory body but rather recommended that a new approach be made by the Central Bank? Given that recommendation, does the Taoiseach intend to ensure that the independent status of the Central Bank and its status as a financial institution is not weakened by the creation of a separate regulatory body? Does he see that regulatory body reporting to the Central Bank, or to whom would it report?
The Deputy is moving away from the IFSC and into the area of regulations. However, I will answer the question, since I have answered practically everything else that had no bearing on the other question.
The Taoiseach wanted the job. Now he has to answer the questions.
I am not nearly as restrictive in answering questions as the Deputy was.
The Taoiseach should not complain. He is delighted to have the job and should enjoy it while it lasts.
I am not objecting, a Cheann Comhairle, but your predecessor used not allow me open my mouth when I tried to ask anything that was not in line with the question. That happened to me every day. It happens to Deputy Bruton only once in a blue moon.
On the question of the regulation, what happens in relation to it should not in any way take away from the regulatory powers of the Central Bank.
(Dublin West): Does the Taoiseach believe it is moral that highly profitable financial institutions operating from the IFSC, some of which regard the world's currency market as a casino where they are always the winners, should be on a 10 per cent tax rate while PAYE workers are on three or four times that? Is that something the Government should continue to encourage?
The attraction of the IFSC from the outset was the 10 per cent rate which will now move to 12.5 per cent. This country now has a strongly structured financial services industry employing 4,500 people who would otherwise have emigrated. It is projected that it will employ 6,000 in the next number of years. It has enormously assisted not only direct employment but many indirect jobs as well and has added enormously to our competitiveness in attracting other investments and other jobs.
One third of all corporation tax.
Apart from that, as we have done away with things like section 84 loans, streamlined the system and increased activity, the tax yield has been dramatically increased. The old concept of high taxes with all kinds of limitations actually brought in less revenue. In those circumstances there was far less revenue for the country to pay for other services.
There is a great deal more business.
One can have all the high and mighty ideas one likes but without generating revenue one cannot pay for services.
More than £200 million a year.
Corporation taxes and other taxes give the State revenue to pay for services. The IFSC has been dramatically valuable to the State in helping to get that revenue.
(Dublin West): It is a fraction of what it should be.
It is an issue raised regularly. If Deputy Higgins wants to remove what is certainly 30 per cent of the top rate tax yield in the State which is used to fund services, 4,500 jobs and these incentives would be lost. It is wrong to look at it in the abstract.
Does the Taoiseach think there would be value in implementing some international standards of supervision of highly levered hedge funds in view of the destructive role that some of these funds have played in putting short-term finance into certain currencies and then withdrawing it overnight in a way which makes any form of coherent exchange rate policy by developing countries virtually impossible? Does he agree that all players in a market should recognise that the market only exists because of a social consensus to allow the market to function and that people should not abuse that market power in a way which can bring countries to their knees, as we have seen as a result of the activities of some hedge funds recently?
Yes, I agree. The operation of the hedge fund system in the past decade has resulted in enormous economic damage on at least three occasions in different parts of the world. I attended a number of meetings on this in 1992-3. European leaders and finance ministers have been looking at the ways in which they can establish a regulated system which will stand the test. As yet that has not happened. The European Central Bank and ECOFIN have been looking at the establishment of a regulatory system which can deal with enormous flows of money which are an abuse of how the system works.
Is anything practical being done?
The European Central Bank and the Council have asked their officials to look at a system which would be regulated by the European Central Bank. In their discussions it was decided that the system would not do any good if it was only operated in Europe. President Clinton inaugurated the same system which is also in use in Hong Kong. An effort is being made to include all the main players and central banks in one internationally recognised regulated system. Any one of them doing it on their own will not work. Nothing final has been decided, but everyone realises this matter must be dealt with.