Banks set for huge windfall under plans to reverse profit ruling
BANKS look set to get a big boost from the taxpayer, which will add hundreds of millions of euro to the lenders' bottom lines.
Under plans being considered by the Government, bailed-out banks may be allowed to use more of the financial losses run up in the crash to reduce their tax bills in future.
The Department of Finance is considering reversing a 2009 law that limits banks that transferred loans to NAMA from using so-called deferred tax assets (DTAs) to cut their future tax bill.
The rule may be reversed in the Finance Bill due to be published in February.
Under normal tax rules, any company can cut its tax bill in a good year by off-setting the year's profits against losses in previous bad years.
As part of the condition for getting state rescues, however, AIB, Bank of Ireland and Permanent TSB must pay tax on at least half their future Irish profits, no matter how big their historic losses, under the 2009 rule. In practice it means the banks will be taxed at 6.25pc on their profits for the foreseeable future. If the rule is reversed, it falls to zero.
Analysts say AIB and Bank of Ireland have around €5bn of DTAs between them.
The bigger issue for the banks themselves are changes to the global rules for valuing lenders, known as the Basel III rules.
DTAs are currently regarded as assets under global banking rules, and count towards banks capital in regulatory terms. That treatment is due to be phased out from 2019, potentially leaving a €5bn hole in the Irish banks capital structures.
That hole could be filled either with fresh external capital or from retained profits.
Italy and Spain have introduced changes to their tax rules to allow their banks to plug similar holes by swapping DTAs for tax credits, which will count as capital under the new banking regulations.
Reversing the NAMA tax conditions could boost AIB and Bank of Ireland by around €250m, according to research from Merrion Capital.
Even if the rules are changed, profits at the main banks are likely to remain low, and the State's ownership of all of AIB and 15pc of Bank of Ireland means some of the lost tax revenue could return to taxpayers by boosting the value of the banks.