The requirement to apply international financial reporting
standards (IFRS) for any accounting period commencing on or
after January 1 2005 has raised questions relating to whether
the use of IFRS could result in accounting profits (and as a
result taxable profits) appearing in the accounts of Irish
structured finance special purpose vehicles (otherwise known as
Section 110 Taxes Consolidation Act 1997 companies) where
previously no such profits would have arisen.
In practice, before January 1 2005, the profit shown in a
set of accounts drawn up in accordance with Irish generally
accepted accounting principles (Gaap) was accepted as the
starting point for all tax computations. The accounts of Irish
structured finance SPVs drawn up in accordance with Gaap would
usually show a small profit. This profit was taxed at 25%.
The Irish Finance Bill 2005 (the Bill), which was first
published in early February 2005, contains provisions
confirming that profits calculated in accordance with IFRS will
be an acceptable starting point for tax computations. However,
although the Bill contains provisions intended to neutralize
the impact of IFRS in respect of various different items (such
as share options or bad debt provisions), no specific draft
legislation was included in the Bill to deal with the impact of
IFRS on Irish structured finance SPVs.
Industry representatives recently discussed this matter with
the Revenue Commissioners and the Department of Finance, and it
was agreed that changes would be proposed at the parliamentary
committee stage discussions on the Bill. The committee stage
amendments were published on March 1 2005. As a result of these
amendments, Irish structured finance SPVs will now be entitled
to continue to use profits as per a set of accounts drawn up in
accordance with Gaap (as they existed on December 31 2004) as
the starting point for calculating taxable trading income.
However, these SPVs may also use profits as per a set of
accounts drawn up in accordance with IFRS as the starting point
for calculating taxable trading income by making a specific
election to do so. Once an SPV elects to use IFRS accounting it
will not be entitled to revert to Gaap accounts.
The purpose of this approach is to permit a standstill
arrangement that will enable Irish structured finance SPVs to
continue to remain profit-neutral from a tax perspective. If it
becomes clear that applying IFRS will not result in unexpected
accounting profits then the SPVs will be entitled to elect to
use IFRS profits for tax purposes for future accounting
periods. The Bill incorporating the committee stage amendments
is expected within the next few weeks.