Why one Irish bank won't have to pay tax until 2034
A little-known rule will allow Ireland's bailed out banks to write off millions of euro by offsetting previous losses against future tax bills
AIB won't pay corporation tax for 20 years, while Bank of Ireland can earn €10bn in profit tax-free, the Sunday Independent can reveal.
A little-known rule introduced late last year by the Department of Finance, designed to help bump up the banks' value and shore up their balance sheets, will cost hundreds of millions in tax receipts to the Exchequer.
The rule, rolled out with little explanation by Finance Minister Michael Noonan in October, stripped away tax restrictions on bailed-out banks – allowing them to write off millions in corporation taxes.
It will save Bank of Ireland and AIB around €250m over the next five years, according to financial adviser Merrion Capital – completely offsetting the cost of the levy introduced for banks with great fanfare by the same Finance Bill.
At the heart of the story is an accounting practice that allows companies to offset previous losses against future tax bills.
Ireland has a very liberal approach on this subject when compared to international norms. Every company in Ireland can use losses accrued in the past as a credit against current and future corporation taxes. This means that a company which lost €100m last year can use it to avoid paying corporation tax this year, even if it returned to profit in the meantime. The rule helps businesses to spread losses over a longer period – but denies the State valuable revenue in years when those companies are in profit. Unlike other countries, Ireland allows companies to spread the losses out over an indefinite period of time.
For a long time, Irish banks had no use for the rule. Their runaway success during the boom years made losses unthinkable. But then the crisis took hold, Ireland's banks swung into loss for the first time in decades and the government approved a bank guarantee that ultimately cost taxpayers €64bn.
The prospect of pouring taxpayer money into these failing institutions, only to see them avoid paying corporation tax once they returned to profitability, was too distasteful to bear. The government responded using the legislation that created Nama in 2009, by placing a limit on the use of deferred tax assets. The cap, thought to be spearheaded by Social Protection Minister Joan Burton, applied to banks that had transferred assets into Nama. It restricted their use of deferred tax assets to just 50pc of their corporation tax bill, meaning the other 50pc would still have to be paid every year.
The cap really only affected AIB and Bank of Ireland. Permanent TSB has been unable to defer tax assets until recently, since its auditors would not sign off on its long-term sustainability, a prerequisite for using the instrument. And Ulster Bank never transferred assets into Nama.
But the policy was entirely reverse in Budget 2014, which scrapped the cap in its entirety. In one stroke Finance Minister Michael Noonan gave AIB and Bank of Ireland back the ability to completely offset all corporation taxes.
"Given the extensive burden imposed on the State from rescuing the banks, [the original cap] was a measure that provided a form of clawback for the taxpayer. However, it was put in place at a time when State involvement in the banking sector was far more limited and, critically, before equity stakes were acquired in AIB and Bank of Ireland," said the Department of Finance in response to a query from this newspaper.
New EU rules governing banks actually treat deferred tax as a liability on their balance sheet, the Department added, meaning that the value of AIB and Bank of Ireland should go up if they can use up their deferred tax faster – which should benefit taxpayers, who own 99pc of the former and 15pc of the latter.
But there's no denying that the effects on these banks' immediate corporation tax bills are massive, analysts said.
The two pillar banks, which both recently returned to profit, are free once again to offset their corporation tax bill using historic losses for the foreseeable future. This could take decades. Bank of Ireland has a massive €1.3bn in deferred tax assets accumulated in Ireland, according to its 2013 annual report. Based on rough calculations it will be able to earn €10bn worth of profits before it starts paying corporation tax once again.
The situation is even more extreme at State-owned AIB, which has a massive €3.36bn of Irish deferred tax assets on its books since its losses were far more extreme than at Bank of Ireland. According to the bank's 2013 annual report, it will take in excess of 20 years before this will be run down.
This may not be the end of the story. Under the new EU rules governing bank capital highlighted by the Department of Finance, deferred tax assets can no longer be counted as assets on a bank's balance sheet – meaning lenders are keener than ever before to write them off quickly. Governments in Spain and Portugal have gone one step further and actually guaranteed the deferred tax credits, which allows them to be recognised as an asset after all.
Could Ireland follow suit – could we see a second bank guarantee before the inquiry into the first is completed? "The Department of Finance has said it will not do this," said one analyst. "But it's a possibility."
But banks aren't the only ones who have paid little or no corporation tax for years, thanks to the deferred tax asset rule. Some of Ireland's most successful companies have paid little or no corporation tax in recent years, thanks to the accounting practice.
Greencore's effective tax rate in 2013 was just 1pc, thanks to a "reassessment" of its deferred tax assets following the purchase of British food manufacturer Uniq in 2011.
Distribution giant DCC, meanwhile, paid just €4m in Irish corporation tax this year after deferring €2.8m of losses accumulated in this country. Its global revenues were €12bn.
International tax monitoring group the Tax Justice Network is highly critical of how companies around the world utilise deferred tax assets.
Sunday Indo Business