Over the past 24 years, Ireland has become Europe’s main home for exchange-traded funds (ETFs), a type of fund that can hold a bunch of shares that track a stocks index such as London’s FTSE 100 or S&P 500 on Wall Street – or baskets of bonds, commodities and just about any exotic type of asset you can think of.
In the past decade alone, assets in Irish registered ETFs, which are sold to investors around the world, have grown from €162 billion to €1.45 trillion, according to the Central Bank.
Want exposure to global infrastructure, data centres or the debt of companies that have fallen out of favour and are now junk bonds? There are Irish ETFs, often listed on the Dublin stock exchange, available for investors to trade, often without commissions with online brokers.
And with it has grown a hub in this country employing thousands, across product development, administration, custody, legal, tax, accounting and auditing – making ETFs a standout success in Ireland’s €4.5 trillion international funds industry, which employs almost 20,000 directly.
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The problem is, ETFs – which offer investors diversification and more protection than investing in, say, an individual stock or bond – haven’t exactly caught the imagine of small investors in Ireland.
Less than 0.9 per cent of the net €781 billion of net wealth of Irish households was held in ETFs in 2019, according to the latest available data.
The fact that private assets can be difficult to trade – or be valued – during a crisis makes such vehicles particularly risky if not subject to regulatory oversight.
The lack of domestic retail investor interest in ETFs is probably best reflected in the fact the company behind an ETF tracking the Iseq 20 index – launched to some fanfare in 2005 – decided to wind it down four years ago.
While we Irish are better savers than investors (households had €178 billion on deposit in banks and credit unions at the end of last year, most of which was earning little or no interest and losing value as inflation topped 6 per cent), there has been a very good reason for those who do dabble in stocks to invest directly in individual names, rather than in ETFs and other funds.
That is largely down to the lunacy of the Irish system, where capital gains tax (CGT) on individual investments is levied at a rate of 33 per cent and those on funds and life assurance products are subject to a 41 per cent charge.
In addition, assets in funds and life products are subject to a so-called eight-year deemed disposal rule – meaning the 41 per cent tax applies after eight years, whether the funds have been sold or not.
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It often forces people to sell down their investments to pay the tax. To boot, investors can’t use losses on fund investments for tax relief against gains elsewhere.
Officials from the Department of Finance who were tasked 18 months ago by then minister Michael McGrath to review the future of Ireland’s international funds sector were surprised that almost three-quarters of the consultation submissions came from individuals, rather than firms or lobby groups.
Many raised concerns about the myriad of tax regimes that can apply to small-time investors, from the 33 per cent rate on deposit interest retention tax (Dirt) to the marginal income rate being applied to distributions from pension pots.
To their credit, the officials listened and have recommended – in a report published this week – that the funds tax rate should be cut to align with the 33 per cent CGT rate, the eight-year rule be abandoned, and a limited form of loss relief allowed.
“There is a need for individuals to build savings and investments, including pensions, for life events and for a proportion of those savings and investments to be used to support real economic activity,” the report said.
“The need is even greater given recent trends including longer average life expectancy, less secure retirement funding and the changing nature of work.”
The problem is, McGrath’s successor, Jack Chambers, has had a draft of the report since July and could have acted in the recent budget. Instead, it’s been left to gather dust in the hope the next government will be bothered to pick it up.
While some submissions called for the Government to introduce a tax-friendly retail investment plan along the lines of the popular individual savings accounts (ISAs) scheme launched in the UK 25 years ago, the review team said it would be better, for now, to simplify the tax landscape for punters, rather than add another type of scheme to the mix. It’s hard to argue against that.
Elsewhere, the officials were right to shoot down finance industry proposals to allow for the introduction of a new type of unauthorised and unsupervised fund to help Ireland compete with a type of structure in Luxembourg used to house private assets, such as private equity, private credit, infrastructure, venture capital and property.
They correctly resisted, noting that allowing this may affect Ireland’s reputation as a hub for regulated funds. The fact that private assets can be difficult to trade – or be valued – during a crisis makes such vehicles particularly risky if not subject to regulatory oversight.
But the review missed a big opportunity to bring Ireland’s €1.1 billion tax-neutral special purpose vehicle (SPV) sector – used largely for the important job of packaging assets and refinancing them on bond markets, to keep the wheels of global finance turning, but also for some more questionable practices – into the regulatory fold.
Instead, it calls for increased transparency, such as Revenue publishing a list of SPVs using the so-called Section 110 uber-tax-friendly regime, and the carrying-out of further work to better understand money laundering and terrorist financing risks in the sector. It’s not enough.
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