## 1irlea2019002

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---

### Personal Income Tax Reform: past and present — key findings
- Personal income in Ireland is taxed under two distinct schemes: the Income Tax and the Universal Social Charge (USC).
- In 2017:
  - Income Tax yielded 9.5 percent of GNI*.
  - USC collected an additional 2 percent of GNI*.
- Procyclicality and interaction with corporate income tax (CIT):
  - Changes in personal income taxation have been procyclical and increased vulnerabilities to public finances through interaction with CIT receipts.
  - CIT receipts rose in upswings and were partly used to reduce personal income taxes; vice versa in slowdowns.
  - Much of corporate profits flow to non-residents, while changes in personal taxes feed directly into domestic demand.
- Distributional shifts and historical changes:
  - Between 2004 and 2007 effective tax rates were cut substantially for lower-income taxpayers; by 2007 the top 5 percent income earners paid 40 percent of total income tax revenue (up from 20 percent in 2004).
  - The USC was introduced in 2011 as a revenue-raising and tax-broadening crisis measure; subsequent changes have reduced its broadening effect.

### Income Tax — structure and recent evolution
- Structure:
  - Levied on total income according to four social circumstances.
  - Taxed in two bands: 20 percent (base rate) and 40 percent (higher rate).
  - Taxable income is subject to allowances and credits (Personal, Age, Home Carer’s, Rent credits) which determine final tax due.
- Key historical changes:
  - 2005–2009: thresholds for the higher tax rate increased by €7,000 uniformly across tax groups (about 20 percent); credits increased between €250 and €560 depending on social circumstances.
  - 2008: higher tax rate reduced from 42 percent to 41 percent (this decline was not reversed in 2011).
  - 2011: threshold reductions and credit reductions reverted to around 2006 levels.
  - 2014 onward: higher tax rate reduced to 40 percent in 2014; thresholds for the higher tax rate increased; Home Carer’s tax credit increased.

### Universal Social Charge (USC) — design, evolution, and yield
- Design and scope:
  - Introduced in 2011 replacing the Health Levy and Income Levy.
  - Individualized tax payable on total income if total income exceeds €13,000.
  - Total income includes employment income, taxable employer benefits, self-employed income, rental income, share option gains, and dividend income; certain welfare payments and deposit interest subject to DIRT are exempt.
  - No relief from USC for employee pension contributions.
- Evolution and effects:
  - Initial USC broadened the tax base with minimum exclusions and no tax credits.
  - Post-2014 changes (higher entry point, reduced rates, widened bands) reduced effective USC tax rates for low- and medium-income earners and narrowed the tax base.
- USC yield trajectory:
  - In 2012 USC collected more than a third of combined Income Tax and USC.
  - In 2016 USC accounted for 20 percent of combined yield.
  - By 2019 the share is estimated to decline to about 14 percent.
  - A figure caption elsewhere indicates an estimated 10 percent of overall income tax revenue in a simulation; both figures appear in the source material.

### Assessment of merging USC into a re-calibrated Income Tax
- Merger implications:
  - The USC increases effective tax rates and progressivity when combined with Income Tax; merging would require higher Income Tax rates to preserve yield and progressivity.
  - Re-calibration within the current two-rate Income Tax system to absorb the USC would require rates of:
    - 24.4 percent (base rate) and 48 percent (higher rate) to preserve current combined yield from USC and Income Tax.
- Benefits and trade-offs:
  - Major benefit: simplification and reduced administrative burden.
  - Cost: canceling some tax individualization and distributional changes, particularly for higher income groups.
- Caveats:
  - Analysis does not account for interactions with the welfare system or potential behavioral responses such as increased pension contributions.

### Options for more substantial reform — design principles and measures
- Objectives: broaden tax base, reduce disincentives to work, preserve overall yield and progressivity, and reduce public finance vulnerability to volatile CIT receipts.
- Potential design measures:
  - Introduce additional tax bands and rates (similar to USC) to smooth progressivity at lower incomes and improve vertical equity.
  - Recalibrate tax credits to smooth progressivity at the low-income mode and broaden the tax base, minimizing deadweight loss from steep marginal tax increases.
  - Individualize the system (as the USC does) to improve horizontal equity and incentivize female employment.
- Observed distributional and incentive issues:
  - Earnings up to €17,000 are practically free of income tax under current credits.
  - Beyond that threshold, income earners face an effective marginal rate of 24.4 cents on every additional euro earned, creating a steep increase in marginal effective tax rates that may disincentivize additional work.

### Policy recommendations and safeguards for personal income taxation
- Consider replacing the USC with a re-calibrated Income Tax to:
  - Simplify tax administration and reduce compliance costs while preserving overall personal income tax yield.
  - Potentially broaden the tax base and reduce disincentives to work for low-income earners.
- If smoothing progressivity or broadening the base reduces support for low-income households, accompany tax changes with means-tested cash transfers to preserve redistribution and protect low-income households.
- Ensure changes are neutral in terms of:
  - Progressivity: Ireland currently has one of the most progressive personal income tax systems among OECD countries.
  - Redistribution: the tax-benefit system is effective in redistributing income and alleviating poverty.
  - Tax yield: calibrate personal income tax share relative to GNI* using the 10 year-average of combined Income Tax and USC yield as a benchmark.
- Fiscal stabilization principle:
  - Future changes to the personal income tax system should be strictly disconnected from CIT or other cyclical revenues so the personal income tax system can fulfill its business cycle stabilization role, maintaining a steady yield as a share of GNI*.
  - Any future abundant CIT or other revenues during booms should be saved and eventually used during downturns to smooth the business cycle.

### Annex highlights — selected thresholds and USC evolution (preserved entries)
- Table A1: Selected years for Income Tax Thresholds for 20 Percent Tax Rate; balance taxed at 40 percent (selected entries preserved exactly):
  - 2005–2008 / 2010–2011 / 2014 / 2018–2019 thresholds for:
    - Single, widowed or a surviving civil partner without qualifying children: €29,400; €35,400; €36,400; €32,800; €32,800€34,550; €35,300
    - Single, widowed or a surviving civil partner qualifying, Single Person Child Carer Credit (2014): €33,400; €39,400; €40,400; €36,800; €36,800€38,550; €39,300
    - Married or in a civil partnership (one spouse or civil partner with income): €38,400€44,400; €45,400; €41,800€41,800; €43,550; €44,300
    - Increase for married or in a civil partnership (both spouses or civil partners with income) max: €20,400€26,400; €27,400€23,800; €23,800€25,550; €26,300
    - The higher tax rate (percent): 42 41 41 41 40 40 40
- Table A2: Evolution of the Universal Social Charge (preserved bands and rates as presented):
  - 2011–14 / 2015 / 2016 / 2017 / 2018 / 2019
  - First €10,036 2%
  - First €12,012 1.50% 1% 0.50% 0.50% 0.50%
  - Next €5,564 3.50%
  - Next €5,980 4%
  - Next €6,656 3%
  - Next €6,760 2.50%
  - Next €7,360 2%
  - Next €7,862 2%
  - Next €50,170 4.50%
  - Next €50,672 4.75%
  - Next €51,272 5%
  - Next €51,376 5.50%
  - Next €52,468 7%
  - Balance 7% 8% 8% 8% 8% 8%

---

### Non-bank financial sector in Ireland — overview and major messages
- Scale and growth:
  - Total assets of investment funds and other financial intermediaries grew from €1.4 trillion at end-2009 to €3.9 trillion (12 times annual GDP) in 2018:Q3.
  - Investment funds assets increased fivefold to €2.4 trillion over the same period.
  - Money market funds and other financial intermediaries grew by 58 and 43 percent, respectively.
  - Domestic and foreign (IFSC) banks’ balance sheets shrunk by 60 percent over the same period.
- Irish-domiciled investment funds comprise almost 20 percent of euro area funds; the funds sector has doubled its share in the euro area to almost 20 percent.
- Drivers of growth: full market access to the EU, English language, common law system, and a business friendly regulatory and tax regime.
- Supervisory and data developments:
  - ECB’s Financial Stability Review (2018) emphasizes growing risks and interconnectedness between non-bank financial sector entities and banks, including direct balance sheet exposures, increased risk-taking, liquidity and maturity transformation, and increased lower-rated bond holdings by non-banks.
  - The Central Bank of Ireland (CBI) and the Central Statistics Office (CSO) expanded data collection on funds and vehicles.
  - The CBI is implementing liquidity risk assessments, investor-base analysis, internal stress testing of funds, a heat map of risks, and international liquidity comparisons.
  - The CBI participated in IOSCO’s Investment Management Committee to develop a consistent measure of leverage.
  - Authorities regularly engage with ESRB, ECB, ESMA, FSB and IOSCO on regulatory, analytical and data-related issues.

### Composition, scale, and domestic linkages of funds and vehicles
- Sector composition and scale:
  - Assets under management of investment funds constitute the largest part of the financial sector: three quarters UCITS and one quarter AIFs.
  - Money market funds constitute 10 percent of the total financial sector assets.
  - OFIs include financial leasing and other lending, securitization vehicles, derivative and security dealers, treasury companies, and other financial intermediaries.
  - CBI collects additional data on FVCs and non-securitization SPEs that together account for 50 percent of OFI assets.
- Number and size of funds (selected figures):
  - There are more than 7,200 investment funds in Ireland.
  - Equity funds: €741 billion in total assets in 2018:Q4.
  - Bond funds: €711 billion in assets in 2018:Q4.
  - MMFs assets: €502 billion.
  - Real estate funds: €27 billion.
- Special purpose vehicles (SPEs):
  - 60 percent of SPE assets are entities created to carry out securitization transactions.
  - Non-securitization SPEs engage in loan origination, operational leasing, external and intragroup financing; most issue debt securities or loan instruments.

### Linkages with the domestic economy and vulnerability channels
- Cross-holdings and exposures (flow-of-funds perspective):
  - Cross-holdings of IFs amount to 38 percent of GDP and of OFIs to 33 percent of GDP.
  - Investment funds hold claims on Irish OFIs of 24 percent of GDP; OFIs hold claims on IFs of 12 percent of GDP.
- Asset-side exposures of domestic financial institutions to funds and vehicles:
  - Domestic banks have 12 percent of their assets invested in OFIs.
  - Insurance companies and pension funds invest 9 and 8 percent of their assets, respectively, in OFIs and IFs.
  - Non-financial corporations have 19 percent of GDP or 3.6 percent of their assets invested in Irish MMFs, IFs and OFIs.
- Funding channels and household linkages:
  - Irish domestic banks receive 11 percent of their funding from the funds and vehicles sector.
  - More than a quarter of household financial liabilities are to OFIs, including securitization SPEs created by banks; retained securitization accounts for 70 percent of the total.
- Risk transmission mechanisms:
  - Valuation shocks in the funds and vehicles sector can have sizable repercussions for domestic banks, insurance and pension funds through asset exposures.
  - Large unexpected redemption requests can cause fire sales and runs, amplifying risk premia, reducing availability of credit, and launching macro-financial feedback loops.
  - Direct balance sheet exposures to other sectors, especially banks, can exacerbate spillovers.

### Value-added, employment, balance of payments, and global linkages
- Value-added and employment:
  - Disaggregated time series on employment and value-added for the funds and vehicles sector are unavailable.
  - Proxy analysis: rapid growth of funds’ assets accompanied by an increase in absolute value-added of the financial sector, but its share in GDP has declined (partly due to exceptional GDP growth from 2015).
  - Total employment in the financial sector has declined by 5 percent since 2009.
- Balance of payments and IIP:
  - Funds and vehicles activity has led to ballooning international investment asset and liabilities positions and poses challenges for compiling statistical aggregates; reclassifications within the OFI sector can cause large statistical revisions.
  - Extension of granular reporting to non-securitization SPEs undertaken in 2015, but a substantial portion of OFI sector is still collected on a more aggregated basis.
- Global geographic exposures:
  - Irish funds have assets (above €1 billion) in more than 60 countries and attract funding from more than 90 countries.
  - The U.S. is the main destination of portfolio investment from Ireland, accounting for 30 percent of total assets.
  - Approximately 40 percent of these claims is invested in non-financial corporations, 16 percent in banks and 10 percent in government debt.
  - The United States owns 26 percent of investment fund shares in the Irish funds and vehicles sector.
  - The U.K. is the second largest investment destination, accounting for 20 percent of Irish funds and vehicles assets; composition: 36 percent in U.K. government bonds and a similar amount in U.K. banks; non-financial corporations account for less than 10 percent.
  - On a first counterparty basis, CBI data show exposure to the U.K. at 40 percent of total; IMF CPIS data indicate funding exposures to the U.K. around 12 percent for fund shares and 11 percent for debt securities.
  - Irish investment funds and vehicles hold more than €120 billion of euro area bank debt.
  - Total IFs asset exposure to the euro area increased from €50 billion in 2009 to more than €250 billion.

### Assessing resilience — vulnerabilities and trends
- Probability of distress:
  - Aggregate probability of distress estimated following Cortes et al (2014) methodology using distribution of asset returns adjusted by redemptions and subscriptions.
  - Financial stress level in the Irish funds industry is significantly lower than during the European sovereign debt crisis or the 2016 U.S. monetary policy normalization; there was a moderate increase in Q4-2018 reflecting the pullback in global equity markets.
- Liquidity mismatch:
  - Liquidity transformation increased across fund types, especially bond, real estate and mixed funds.
  - Bond funds account for 30 percent of total funds’ assets.
  - Three quarters of bond funds have a share of narrowly defined liquid assets at less than 10 percent of assets under management (declined from 15 percent in 2014).
  - Equity, mixed and money market funds have a relatively high level of liquidity transformation (not increasing).
- Maturity mismatch:
  - Bond funds and real estate funds have increased maturity transformation.
  - Bond funds: only 11 percent of their short-term liabilities are covered by short-term assets.
  - Real estate funds: coverage is 30 percent but has decreased rapidly in recent years.
  - Equity funds and MMFs do not engage in maturity transformation.
- Leverage risk:
  - Leverage of Irish funds is low with the notable exception of real estate funds.
  - Overall leverage ratios have come down in the last four years.
  - Real estate funds are small in share but have high leverage, are growing fast, and have strong links to the domestic economy.
  - Note: Leverage = Assets under management / net asset value.

### Policy recommendations for the non-bank financial sector
- Recommended actions for authorities:
  - (i) Continue to enhance macroprudential-based surveillance of the sector, including by closely monitoring liquidity and maturity mismatches, asset quality, and excessive leverage.
  - (ii) Pursue efforts to build internal risk analysis capacities, develop system-wide methodologies for liquidity stress-testing, while coordinating at the EU and international levels.
  - (iii) Provide guidance to the industry on liquidity stress-testing and the use of liquidity management tools.
  - (iv) Continue to contribute to the development of standardized cross border data sharing arrangements pertaining to fund management activities/entities (e.g. improving understanding of characteristics and concentration of the investor base), through relevant international fora and define clear deadlines for this work.

*Source: PERSONAL INCOME TAX REFORM: PAST AND PRESENT; Chapter 13 and related sections, 1irlea2019002.*

### References ____________________________________________________________________________________ 13

### PERSONAL INCOME TAX REFORM: PAST AND PRESENT

### Introduction and key context
- Personal income in Ireland is taxed under two distinct schemes: the Income Tax and the Universal Social Charge (USC).
- In 2017:
  - Income Tax yielded 9.5 percent of GNI*.
  - USC collected an additional 2 percent of GNI*.
- Changes in personal income taxation have been procyclical and increased vulnerabilities to public finances through interaction with corporate income tax (CIT) receipts:
  - CIT receipts rose in upswings and were partly used to reduce personal income taxes; vice versa in slowdowns.
  - Much of corporate profits flow to non-residents, while changes in personal taxes feed directly into domestic demand.
- Between 2004 and 2007 effective tax rates were cut substantially for lower-income taxpayers; by 2007 the top 5 percent income earners paid 40 percent of total income tax revenue (up from 20 percent in 2004).
- The USC was introduced in 2011 as a revenue-raising and tax-broadening crisis measure; subsequent changes have reduced its broadening effect.

### The Income Tax (structure and recent evolution)
- Income Tax:
  - Levied on total income according to four social circumstances.
  - Taxed in two bands: 20 percent (base rate) and 40 percent (higher rate).
  - Taxable income is subject to allowances and credits (Personal, Age, Home Carer’s, Rent credits) which determine final tax due.
- Key historical changes:
  - 2005–2009: thresholds for the higher tax rate increased by €7,000 uniformly across tax groups (about 20 percent); credits increased between €250 and €560 depending on social circumstances; higher-rate reductions and threshold rises reduced tax burden.
  - 2008: higher tax rate reduced from 42 percent to 41 percent (this decline was not reversed in 2011).
  - 2011: threshold reductions and credit reductions reverted to around 2006 levels.
  - 2014 onward: higher tax rate reduced to 40 percent in 2014; thresholds for the higher tax rate increased; Home Carer’s tax credit increased.

### The Universal Social Charge (USC): design and evolution
- USC introduced in 2011 replacing the Health Levy and Income Levy:
  - Individualized tax payable on total income if total income exceeds €13,000.
  - Total income includes employment income, taxable employer benefits, self-employed income, rental income, share option gains, and dividend income; certain welfare payments and deposit interest subject to DIRT are exempt.
  - No relief from USC for employee pension contributions.
- Initial USC benefits: broadened tax base with minimum exclusions and no tax credits.
- Post-2014 changes: increased entry point, reduced rates, and widened bands reduced effective USC tax rates for low- and medium-income earners and narrowed the tax base.
- USC yield trajectory:
  - In 2012 USC collected more than a third of combined Income Tax and USC.
  - In 2016 USC accounted for 20 percent of combined yield.
  - By 2019 the share is estimated to decline to about 14 percent.
  - (A figure caption elsewhere indicates an estimated 10 percent of overall income tax revenue in a simulation; both figures appear in the source material.)

### Assessment of merging USC into a re-calibrated Income Tax
- The USC increases effective tax rates and progressivity when combined with Income Tax; merging would require higher Income Tax rates to preserve yield and progressivity.
- Re-calibration within the current two-rate Income Tax system to absorb the USC would require rates of:
  - 24.4 percent (base rate) and 48 percent (higher rate) to preserve current combined yield from USC and Income Tax.
- Benefits and trade-offs of unification:
  - Major benefit: simplification and reduced administrative burden.
  - Cost: canceling some tax individualization and distributional changes, particularly for higher income groups.
- Distributional considerations noted: the analysis does not account for interactions with the welfare system or potential behavioral responses such as increased pension contributions.

### Options for a more substantial reform (design principles and measures)
- Objectives: broaden tax base, reduce disincentives to work, preserve overall yield and progressivity, and reduce public finance vulnerability to volatile CIT receipts.
- Design measures that could improve incentives and equity:
  - Introduce additional tax bands and rates (similar to USC) to smooth progressivity at lower incomes and improve vertical equity.
  - Recalibrate tax credits to smooth progressivity at the low-income mode and broaden the tax base, thereby minimizing deadweight loss from steep marginal tax increases.
  - Individualize the system (as the USC does) to improve horizontal equity and incentivize female employment.
- Observed distributional and incentive issues:
  - Earnings up to €17,000 are practically free of income tax under current credits.
  - Beyond that threshold, income earners face an effective marginal rate of 24.4 cents on every additional euro earned, creating a steep increase in marginal effective tax rates that may disincentivize additional work.

### Policy recommendations and safeguards
- Consider replacing the USC with a re-calibrated Income Tax to:
  - Simplify tax administration and reduce compliance costs while preserving overall personal income tax yield.
  - Potentially broaden the tax base and reduce disincentives to work for low-income earners.
- If smoothing progressivity or broadening the base reduces support for low-income households, accompany tax changes with means-tested cash transfers to preserve redistribution and protect low-income households.
- Ensure changes are neutral in terms of:
  - Progressivity: Ireland currently has one of the most progressive personal income tax systems among OECD countries.
  - Redistribution: the tax-benefit system is effective in redistributing income and alleviating poverty.
  - Tax yield: calibrate personal income tax share relative to GNI* using the 10 year-average of combined Income Tax and USC yield as a benchmark.

*Source: PERSONAL INCOME TAX REFORM: PAST AND PRESENT, Prepared by Jiří Podpiera, May 30, 2019.*

### 22.      And finally, future changes to the personal income tax system should be strictly

### 1irlea2019002 - 22.      And finally, future changes to the personal income tax system should be strictly

### F. Conclusions — Personal Income Tax System: findings and implications
- Ireland’s personal income tax system has undergone significant changes in the last decade and half, including lowering taxes during booms (especially for lower income earners) and introducing the USC during the crisis.  
- The described procyclicality appears connected in part to the performance of CIT revenues.  
- More recently, income taxes have been reduced again, making the current Income Tax-USC system:
  - less efficient, and
  - steeply progressive at low incomes with negative implications for incentives to work more for a large cohort of tax payers.  
- Despite these developments, the overall high progressivity of personal income taxation by international standards, combined with the benefits system, has been found efficient in income redistribution and alleviating poverty (Giustiniani, 2017), and is recommended to be preserved.

### Reform direction and policy recommendations for Income Tax and USC
- Reforming the Income Tax and canceling the USC appears potentially beneficial to:
  - reduce the administrative burden, and
  - align work incentives.
- A reform should preserve:
  - overall income tax progressivity, and
  - tax yield.
- Possible design elements to achieve preservation of progressivity and yield:
  - a broader tax base,
  - more tax bands, and
  - higher tax rates.
- Mitigation for undesired impacts on low income households:
  - means-tested cash transfers targeted to low income households.
- Fiscal stabilization principle:
  - Future changes to the personal income tax system should be strictly disconnected from CIT or other cyclical revenues so the personal income tax system can fulfill its business cycle stabilization role, maintaining a steady yield as a share of GNI*.
  - Any future abundant CIT or other revenues during booms should be saved and eventually used during downturns to smooth the business cycle.
- The reformed Income Tax should aim at providing a stable source of tax revenues throughout the business cycle and avoid procyclicality.

### Annex 1 — Personal Income Tax changes: selected thresholds and USC evolution (highlights)
- Table A1: Selected years for Income Tax Thresholds for 20 Percent Tax Rate; balance taxed at 40 percent (selected entries preserved exactly as presented):
  - 2005–2008 / 2010–2011 / 2014 / 2018–2019 thresholds for:
    - Single, widowed or a surviving civil partner without qualifying children: €29,400; €35,400; €36,400; €32,800; €32,800€34,550; €35,300
    - Single, widowed or a surviving civil partner qualifying, Single Person Child Carer Credit (2014): €33,400; €39,400; €40,400; €36,800; €36,800€38,550; €39,300
    - Married or in a civil partnership (one spouse or civil partner with income): €38,400€44,400; €45,400; €41,800€41,800; €43,550; €44,300
    - Increase for married or in a civil partnership (both spouses or civil partners with income) max: €20,400€26,400; €27,400€23,800; €23,800€25,550; €26,300
    - The higher tax rate (percent): 42 41 41 41 40 40 40
  - Source: Office of the Revenue Commissioners.
- Table A2: Evolution of the Universal Social Charge (preserved bands and rates as presented):
  - 2011–14 / 2015 / 2016 / 2017 / 2018 / 2019
  - First €10,036 2%
  - First €12,012 1.50% 1% 0.50% 0.50% 0.50%
  - Next €5,564 3.50%
  - Next €5,980 4%
  - Next €6,656 3%
  - Next €6,760 2.50%
  - Next €7,360 2%
  - Next €7,862 2%
  - Next €50,170 4.50%
  - Next €50,672 4.75%
  - Next €51,272 5%
  - Next €51,376 5.50%
  - Next €52,468 7%
  - Balance 7% 8% 8% 8% 8% 8%
  - Source: Office of the Revenue Commissioners.

### Non-bank financial sector in Ireland — overview and major messages
- The non-bank financial sector in Ireland is large and growing fast:
  - Total assets of investment funds and other financial intermediaries grew from €1.4 trillion at end-2009 to €3.9 trillion (12 times annual GDP) in 2018:Q3.
  - Investment funds assets increased fivefold to €2.4 trillion over the same period.
  - Money market funds and other financial intermediaries grew by 58 and 43 percent, respectively.
  - Domestic and foreign (IFSC) banks’ balance sheets shrunk by 60 percent over the same period.
- Irish-domiciled investment funds comprise almost 20 percent of euro area funds; the funds sector has doubled its share in the euro area to almost 20 percent.
- Drivers of the sector’s growth include:
  - full market access to the EU,
  - English language,
  - common law system, and
  - a business friendly regulatory and tax regime (including tax and VAT exemptions described by the source).
- Risks identified and supervisory developments:
  - ECB’s Financial Stability Review (2018) emphasizes growing risks and interconnectedness between non-bank financial sector entities and banks, including direct balance sheet exposures, increased risk-taking, liquidity and maturity transformation, and increased lower-rated bond holdings by non-banks.
  - The Central Bank of Ireland (CBI) and the Central Statistics Office (CSO) expanded data collection on funds and vehicles.
  - The CBI is implementing liquidity risk assessments, investor-base analysis, internal stress testing of funds, a heat map of risks, and international liquidity comparisons.
  - The CBI participated in IOSCO’s Investment Management Committee to develop a consistent measure of leverage.
  - Authorities regularly engage with ESRB, ECB, ESMA, FSB and IOSCO on regulatory, analytical and data-related issues.

### Composition, scale, and domestic linkages of funds and vehicles
- Sector composition and scale:
  - Assets under management of investment funds constitute the largest part of the financial sector: three quarters UCITS and one quarter AIFs.
  - Money market funds constitute 10 percent of the total financial sector assets.
  - OFIs include financial leasing and other lending, securitization vehicles, derivative and security dealers, treasury companies, and other financial intermediaries.
  - CBI collects additional data on FVCs and non-securitization SPEs that together account for 50 percent of OFI assets.
- Number and size of funds (selected figures):
  - There are more than 7,200 investment funds in Ireland.
  - Equity funds: €741 billion in total assets in 2018:Q4.
  - Bond funds: €711 billion in assets in 2018:Q4.
  - MMFs assets: €502 billion.
  - Real estate funds: €27 billion.
- Special purpose vehicles (SPEs):
  - 60 percent of SPE assets are entities created to carry out securitization transactions.
  - Non-securitization SPEs engage in loan origination, operational leasing, external and intragroup financing; most issue debt securities or loan instruments.

### Linkages with the domestic economy and vulnerability channels
- Cross-holdings and exposures (flow-of-funds perspective):
  - Domestic exposures are mostly within IFs and OFIs, with cross-holdings of IFs amounting to 38 percent of GDP and of OFIs to 33 percent of GDP.
  - Investment funds hold claims on Irish OFIs of 24 percent of GDP; OFIs hold claims on IFs of 12 percent of GDP.
- Asset-side exposures of domestic financial institutions to funds and vehicles:
  - Domestic banks have 12 percent of their assets invested in OFIs.
  - Insurance companies and pension funds invest 9 and 8 percent of their assets, respectively, in OFIs and IFs.
  - Non-financial corporations have 19 percent of GDP or 3.6 percent of their assets invested in Irish MMFs, IFs and OFIs.
- Funding channels and household linkages:
  - Irish domestic banks receive 11 percent of their funding from the funds and vehicles sector.
  - More than a quarter of household financial liabilities are to OFIs, including securitization SPEs created by banks; retained securitization accounts for 70 percent of the total.
- Risk transmission mechanisms highlighted:
  - Valuation shocks in the funds and vehicles sector can have sizable repercussions for domestic banks, insurance and pension funds through asset exposures.
  - Triggers such as large unexpected redemption requests can cause fire sales and runs, amplifying risk premia, reducing availability of credit, and launching macro-financial feedback loops that could feed into a financial crisis.
  - Direct balance sheet exposures to other sectors, especially banks, can exacerbate spillovers.

*Prepared by Anna Shabunina; chapter structure: description of funds and vehicles sector, domestic linkages, financial interlinkages with euro area/U.K./rest of world, assessment of risks and vulnerabilities, and policy recommendations.*

*Source: 1irlea2019002 - 22.      And finally, future changes to the personal income tax system should be strictly*

### 13.      Value-added and employment linkages with the domestic economy  are difficult to

### 13.      Value-added and employment linkages with the domestic economy are difficult to determine

### Value-added and employment linkages
- Unavailability of disaggregated time series on employment and value-added for the funds and vehicles sector limits the analysis.
- As a proxy, developments in the total financial sector are examined, noting that its growth was exclusively driven by the funds and vehicles sector.
- Findings:
  - The rapid growth of funds’ assets was accompanied by an increase in the absolute value-added of the financial sector, but its share in GDP has declined, partly due to the exceptional GDP growth from 2015.
  - Total employment in the financial sector has declined by 5 percent since 2009.

### Balance of payments and international investment positions
- Funds and vehicles activity has a large impact on Ireland’s balance of payments and the international investment gross positions.
- The strong growth of the IF and OFI sector is reflected in ballooning international investment asset and liabilities positions.
- The size and complexity of the sector pose challenges for the compilation of statistical aggregates; reclassifications and revisions within the OFI sector can cause large statistical revisions in the IIP, and the financial and current accounts of the balance of payments.
- Data collection progress:
  - Extension of granular reporting, already applying to MMFs, IFs and FVCs, to non-securitization SPEs in 2015.
  - Nevertheless, a substantial portion of the OFI sector is collected on a more aggregated basis.

### Global linkages and geographic exposures
- Irish IFs’ and MMFs’ assets and liabilities are well-diversified geographically, with the largest single country exposure to the U.S.
- Findings on exposures and investor origins:
  - Irish funds have assets (above €1 billion) in more than 60 countries and attract funding from more than 90 countries.
  - The U.S. is the main destination of portfolio investment from Ireland, accounting for 30 percent of total assets.
  - Approximately 40 percent of these claims is invested in non-financial corporations, 16 percent in banks and 10 percent in government debt, with the rest invested in the U.S. funds and vehicles sector.
  - The United States is also the largest investor in the Irish funds and vehicles sector, owning 26 percent of investment fund shares.
  - The U.K. is the second largest investment destination, accounting for 20 percent of Irish funds and vehicles assets.
    - Composition of U.K. investment: 36 percent in U.K. government bonds and a similar amount in U.K. banks; non-financial corporations account for less than 10 percent of total investment.
  - On the liabilities side, data compiled by the CBI on a first counterparty basis show a very large exposure to the U.K. — at 40 percent of total. These are largely claims of U.K. investment funds and their ultimate investors are from different countries.
  - IMF Coordinated Portfolio Investment Survey data indicate funding exposures to the U.K. are smaller — at around 12 percent for fund shares and 11 percent for debt securities.
- Euro area funding:
  - Irish investment funds and vehicles hold more than €120 billion of euro area bank debt.
  - Total IFs asset exposure to the euro area has increased fivefold from €50 billion in 2009 to more than €250 billion.

### Assessing the resilience of the funds and vehicles sector — summary of vulnerabilities
- Approach:
  - Aggregate probability of distress in the investment fund industry estimated following the methodology described in Cortes et al (2014), using distribution of asset returns and a threshold related to periods of significant outflows; returns adjusted by redemptions and subscriptions.
- Probability of distress and recent trends:
  - The financial stress level in the Irish funds industry is significantly lower than it was during the European sovereign debt crisis or the normalization of U.S. monetary policy in 2016.
  - There was a moderate increase in Q4-2018, largely reflecting the pullback in global equity markets.

- Liquidity mismatch (liquidity transformation):
  - Liquidity transformation has increased somewhat across all fund types, especially in bond, real estate and mixed funds.
  - Bond funds account for 30 percent of total funds’ assets.
  - Liquidity mismatch for bond funds has increased by both narrow and broad definitions; e.g., three quarters of bond funds have a share of narrowly defined liquid assets (i.e. deposits, AAA and AA rated government bonds) at less than 10 percent of assets under management (the measure has declined from 15 percent in 2014).
  - Equity, mixed and money market funds have a relatively high level of liquidity transformation (not increasing).

- Maturity mismatch (maturity transformation):
  - Bond funds and real estate funds have increased their maturity transformation.
  - Bond funds have significantly increased the share of long-term asset holdings: only 11 percent of their short-term liabilities are covered by short-term assets.
  - For real estate funds this coverage is 30 percent, but it has decreased rapidly in recent years (i.e., maturity transformation has increased).
  - Equity funds and MMFs do not engage in maturity transformation.

- Leverage risk:
  - Leverage of the Irish funds is low with the notable exception of real estate funds.
  - Overall leverage ratios have come down in the last four years.
  - Real estate funds, despite being a small share of the funds sector, have high leverage, are growing fast, and have strong links to the domestic economy.
  - Note: Leverage = Assets under management / net asset value.

### Conclusion and policy recommendations
- The large size of the Irish non-bank financial sector, its global interconnectedness, growing domestic linkages and emerging vulnerabilities call for additional policy actions.
- Recommended actions for the authorities:
  - (i) Continue to enhance macroprudential-based surveillance of the sector, including by closely monitoring liquidity and maturity mismatches, asset quality, and excessive leverage.
  - (ii) Pursue efforts to build internal risk analysis capacities, develop system-wide methodologies for liquidity stress-testing, while coordinating at the EU and international levels.
  - (iii) Provide guidance to the industry on liquidity stress-testing and the use of liquidity management tools.
  - (iv) Continue to contribute to the development of standardized cross border data sharing arrangements pertaining to fund management activities/entities (e.g. improving understanding of characteristics and concentration of the investor base), through relevant international fora and define clear deadlines for this work.

*Source: 1irlea2019002 - Chapter 13, IMF publication (PDF).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1irlea2019002.pdf_