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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.

Turlough Galvin

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