Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

Section 396(1) of the Taxes Consolidation Act 1997 entitles companies to carry forward losses incurred in a trade for an accounting period for offset against income of the same trade for succeeding accounting periods. A restriction on losses was previously in place which limited the amount of prior-year losses that a NAMA-participating institution could offset against trading profits to 50% of trading profit for each accounting period. This restriction was introduced under the NAMA Act 2009, whereby a new section, section 396C, was inserted into the Taxes Consolidation Act 1997.

In the lead-up to the introduction of the new capital rules on 1 January 2014 under the capital requirements directive known as CRD IV, and at a time when the State owned 99.8% of AIB and 15% of Bank of Ireland, section 396C no longer served its original purpose and, indeed, was actually working against the State’s investment in the banks. Accordingly, in section 33 of the Finance (No. 2) Bill 2013, I decided it was appropriate to remove the restriction on relief for losses in participating institutions with effect from accounting periods beginning on or after 1 January 2014. The Deputy will recall that we had a lengthy debate on the issue during Committee Stage of the Bill. While the profitability position of the banks may have changed since then, the merits of allowing the banks to utilise their losses still stand. The benefits to the State of allowing banks to utilise their losses include improvement in capital ratios under the new capital standards. Under the new rules, deferred tax assets are to be fully deducted from capital over a phased ten-year horizon. The utilisation of deferred tax assets reduces their value on the banks’ balance sheets and hence the deduction from capital becomes less important. The carrying value of deferred tax assets at AIB and BOI represent approximately 27% and 15% of shareholders’ funds respectively. This is a much larger percentage than most other European banks. As such, our banks are more affected by the new capital rules than others.

Improving the existing value of the State’s equity and debt investments is another advantage. With many investors valuing banks off the new more stringent capital rules, or what the markets call a fully loaded basis - that is, capital calculated with all the new CRD IV rules taken on board today rather than phased in over time - it stands to reason that if their capital levels benefit from the ability to utilise losses then the value of the bank’s equity and debt instruments will too.

A third benefit is that the risk to the State, as backstop provider of capital, is also reduced. While the utilisation of losses may result in some banks not paying corporation tax, I introduced a financial institutions levy in 2013 which brings in approximately €150 million per annum for the period 2014 to 2016. As part of budget 2016, I announced my proposals to extend this levy to 2021, subject to a review of the methodology used to calculate the levy. This measure will bring in an additional €750 million over the period, which is a very significant additional contribution to the Exchequer.

As a consequence of those points, I will not be accepting the proposed amendment.