Why do Irish banks pay no tax on their profits?

Brendan Burgess

Brendan Burgess

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This has come up in the election and the Irish Times did a Fact Check on it today.

www.irishtimes.com

Election 2020 fact check: Do banks in Ireland pay no tax?

Mary Lou McDonald claimed in debate that zero corporate tax paid on profits of €2.5bn
www.irishtimes.com www.irishtimes.com

But they all miss the point completely.

Irish banks have all paid Corporation Tax on imaginary profits in the past.

In simple terms

Reported profit (loss)Corporation Tax @ 12.5%
Year 1€100,000€12,500
Year 2Nil0
Year 3(€200,000)0
Accumulated(€100,000)€12,500

So Irish banks have paid taxes on losses!

At present companies can only go back one year in setting losses against previous profits to get a refund of Corporation Tax. For example, if a company makes a profit of €100k in one year and a loss of €200k the following year, they can recover the total Corporation Tax in respect of the previous year.

If we allowed companies to set their losses against all previous profits and get a refund of all Corporation Tax paid, then today Irish banks would have used up their losses and would be paying Corporation Tax again on this year's profits.

Brendan
 
Look at it another way. If a company makes losses first, and then profits, they can use their losses in full.

Reported profit (loss)Corporation Tax @ 12.5%
Year 1(€200,000)0
Year 2Nil0
Year 3€100,0000 – due to loses forward
Accumulated(€100,000)

So this company pays no Corporation Tax while the company in the first post, which has the same accumulated losses, paid €12,500 Corporation Tax.

Brendan
 
It might be worth it from a perceived fairness point of view to let companies set back their losses indefinitely.

The country would have to refund an awful lot of Corporation Tax but we wouldn't have this silly debate with people claiming "The banks are paying no taxes".

Brendan
 
There's an interesting, often overlooked point in the IT article:
"Finally, the DTAs were counted as bank capital during the bailout years, meaning they stood in for cash which the State may have otherwise been called on to pay to stabilise the banks."
 
I don't agree with allowing companies to set back losses indefinitely. Presently we do allow companies to carr forward losses indefinitely - other countries have a miniumum CIT even where losses are incurred, and some only allow a certain % to be used in a particular year, and others restrict the years forward number to (say) 7 years (as opposed to an indefinite carry-forward).

And yet other countries opt for a mix of all the above.

'Fairness' should never come into it. Ours is fine. Don't change it.
 
Another point worth noting (and apologies if it already has been but I haven’t read the article), is that carry forward of losses is also available to individuals for Income Tax purposes (and CGT purposes) in much the same way as CT losses.
 
Good topic to have raised for discussion.

I'm also good with the current system and don't want to see it changed.

Sadly, it's often people who don't understand finance or tax, who make these statements and try as you might, they'll never give you a chance to explain it to them, if it doesn't suit their own agenda.
 
While the carry forward of losses is not unusual, without these bailout funds the banks would have went bust and the losses would have been "lost". therefore I feel that the bailout funds should have reduced the ability for the banks to carry forward these losses. The bank now use these losses forward as a selling point for future profitability! Its a very unusual situation which in the middle of the mess probably wasn't considered.

It is also interesting to note that for individuals CGT legislation was updated in recent years for people who made losses, where debt forgiveness was given to the individual by the bank. This had the effect of reducing the loss on the investment by the amount of the debt written off. You could call the debt forgiveness as the individuals "bailout". This was happening a lot to individuals who bought Celtic tiger properties so they updated the law.

They could easily update the law if they wanted to for the banks!
 
The question here is how bad of a hit do you want to take. Ultimately what we are talking about is a timing issue.

Year Profit/loss Tax (Option 1)Tax (Option 2)
2017200k25,00025,000 (refunded in 2019)
2018200k25,000 (refunded in 2019)25,000 (refunded in 2019)
2019(500k)(62,500) 37,500 loss C/F)(62,500) (12,500 loss C/F)
2020200KNil (12,500 losses C/F)12,500 (no losses to C/F)

Option 1 above is how the law apply at the moment. They set back against 1 year and forward after that. The impact to the state is spread over 3 years.

Option 2 is we allowed them to carry back indefinately. When filing the 2019 return they would be refunded €50,000 rather then the €25,000 in option 1. The comapny will also have to pay some taxes in 2020. The above is a simple case but with larger companies such as the banks would the state be able to afford to pay out a lot of money in the year of the loss being made.
 
Why would we allow losses to be carried back for companies when we wouldn't allow it for individuals.

Can you imagine all the developers in their bankruptcy proceedings having assets of personal income tax refunds from the few years before ? The optics would have been terrible - the State helping developers avoid bankruptcy.

There is also an argument that if a company is loss-making, it could be the first year of a trend where the State is helping non-viable companies eke out a few more years with a failing business plan.
 
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But individuals can carry forward losses for CGT purposes. So companies and individuals treated the same.
 
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