Irish banks to cash in their losses against tax bills
Ireland is facing a major drag on current and future tax revenue as banks are failing to post any profits, depriving the Exchequer of precious corporation tax, new OECD data shows.
The report shows that Irish banks contributed 21pc of corporation tax receipts in 2008 and 18pc last year, although it is possible that the figures are inflated somewhat by banks located in the IFSC.
The survey reveals that Irish banks can carry forward losses from previous years and write them off against future tax on their profits.
Unlike some other countries, this right extends for an indefinite period in Ireland, although there are restrictions if the bank is taken over or if it changes the kind of activity it is involved in. NAMA also placed some restrictions on the amount of losses that could be utilised for write-offs.
Anglo, Bank of Ireland, AIB and Irish Nationwide are now sitting on more than €2.8bn of tax write-offs that they can use to reduce their future tax bills.
When the banks return to profitability, the write-offs can be utilised to slash their liability for corporation tax at 12.5pc.
However, it is understood the EU Commission is probing whether Anglo should be allowed to use such a large sum (it has about €1.6bn of "tax assets'') -- to lower its tax bill.
While the combined amount of write-offs available could seriously dent the tax base if utilised in any one year, banks said privately that some of the €2.8bn would be written off against tax bills in other jurisdictions.
For instance, Bank of Ireland said a few weeks ago it has deferred tax assets of €475m, but not all of this applied to Ireland. The bank does not provide a geographical breakdown of where the tax write-offs originate. AIB has €381m of tax write-offs available for use in Ireland.
Irish Nationwide is also putting together an EU restructuring plan and again the issue of tax write-offs is likely to be closely scrutinised.
The building society, now effectively nationalised, said it had a potential deferred taxation asset of €319.8m. This has not yet been recognised on its balance sheet due to "uncertainty over its recoverability''.
The issue of how tax write-offs are treated on balance sheets is common, with Japanese banks in particular using the assets to pad out their capital.
The OECD pointed out that banks globally are major contributors to national tax revenues. Income tax on bonuses to senior bankers also provides big returns for tax authorities via income tax.
Ireland and the UK have more liberal regimes than many other countries. This is because trading losses can be offset against corporate profits generally, whereas in many other jurisdictions the losses can only be offset against precisely the same activity where they first arose.