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

I thank colleagues for their contributions. As many colleagues have said, loss relief is a standard feature of corporation tax regimes worldwide. Under the Irish corporate tax regime, losses incurred in the course of a business are allowed to be taken into account in calculating the appropriate tax due by companies. Loss relief recognises the fact that business cycles run over a longer period than just a single year, and that it would be inequitable to tax profits in one year and not allow loss relief in the next.

Under existing loss relief provisions in the Tax Acts, any unrelieved trading losses of a company for an accounting period may be carried forward for offset against trading income of the same trade in future accounting periods. Alternatively, a company may claim to have the loss set off against profits of any description for the same accounting period in which the loss was incurred or of an immediately preceding accounting period of the same length. The provision of relief for such losses is a standard feature of our tax code and of all other OECD countries.

In regard to the more specific matter of bank losses, under the NAMA Act 2009, a new section, section 396C, was inserted into the Taxes Consolidation Act 1997. Section 396C was a provision which limited the amount of trading losses incurred by a NAMA participating bank that could be set off against future trading profits. The set-off was limited to 50% of the profit of the year. It did not disallow any tax losses from being utilised but instead lengthened the period over which they could be used.

It is important to highlight that the provision to allow the carry-forward of tax losses for set-off against future trading profits is available not only for banks but for all Irish corporates. Accordingly, the removal of section 396C put the covered banks in the same position as other corporates, including other banks operating in Ireland. It was, in effect, a levelling of the playing field. Section 396C was as a form of claw-back for the taxpayer. It was put in place at a time, however, when State involvement in the sector was far more limited and, critically, before equity stakes were acquired in AIB and Bank of Ireland.

In the lead up to the introduction of the new capital rules on 1 January 2014 under the EU Capital Requirements Directive, CRD, IV, and at a time when the State owned 99.8% of AIB and 14% of Bank of Ireland, section 396C no longer served its original purpose and, indeed, worked against the taxpayer. Accordingly, in the Finance Act 2014, I deemed it appropriate to remove the provision. To reintroduce a restriction on the banks' use of their losses would impact the capital requirements of the banks and the overall valuation of the banks.

In regard to the capital requirements, under the new capital rules of CRD IV, which were introduced in January 2014, deferred tax assets must now be deducted for the purposes of calculating a bank's regulatory capital ratios. Given the significant deferred tax assets at the Irish banks, the sooner these assets are fully utilised the better, as this would improve the quality of capital at the bank by eliminating the deferred tax deduction. This holds not only for ongoing reporting to the regulator and updates to the market, but also as part of any stress tests conducted by the regulatory authorities.

In regard to the valuation aspect, given the size of the deferred tax assets in the Irish banks, market analysts and investors, in valuing one of these banks, would typically allocate a discrete valuation to a deferred tax asset. Notwithstanding the removal of section 396C of the NAMA Act and the fact the three Irish banks have now returned to profitability, it is expected that deferred tax assets at the banks will take a considerable number of years to be utilised. If the section 396C restriction was still in place, the period of utilisation would be extended over a considerably longer timeframe, increasing the risk that a bank's auditors would put pressure on the bank to write down the deferred tax asset thereby generating an accounting loss. Even absent such a write down, investors using valuation models would be likely to increase the discount rate applied due to the increased risk to the deferred tax asset being fully utilised. This would significantly reduce the discounted cashflow of the deferred tax asset, likely to be in the hundreds of millions of euros, with a euro for euro impact on the valuation of the banks. However, to recognise the part the banks played in the financial crisis, in 2013 the Government also decided the banking sector should make an annual contribution of approximately €150 million to the Exchequer for the period from 2014 to 2016. The payment of this levy is now being extended until 2021. It is expected to raise €750 million in the next five years.

Although significant trading losses forward are reported on the corporation tax returns submitted by covered banks, the timing of when these losses will be utilised will be determined by future profitability. To restrict the use of the losses would have a significant negative impact on the capital requirements of the banks and on their valuations. Therefore, I do not accept the proposed amendments.

See this speech in context