BANKS AND financial institutions may be able to use massive losses they accumulated to write off up to €4 billion in tax liabilities over the coming years, according to unpublished official figures.
Under tax legislation, corporations can write off losses against tax liabilities on trading profits for an indefinite period of time.
Internal documents show the Comptroller and Auditor General (CAG) has estimated the scale of losses in the banking sector is likely to significantly affect future tax revenues.
It estimates accumulated losses of €34 billion carried forward between 2007 and 2009 in the banking sector alone could reduce our corporation tax receipts by just over €4 billion.
In response to these estimates, the Revenue Commissioners has told CAG officials it is too difficult to accurately estimate the impact of these losses as it depends on the capacity of banks to generate profits to absorb losses into the future.
It also said it was unlikely that all losses would be fully utilised by banks to reduce tax bills.
For example, it says just five financial institutions are responsible for some €28 billion out of the total losses of €34 billion carried forward since 2009.
“It is questionable as to whether these losses will be fully utilised during that period,” Revenue said.
The records do not name these companies. However, the Revenue says two – most likely Anglo Irish Bank and Irish Nationwide – are being wound down over the next decade and are not allowed to take on any new business. They account for about €15 billion of losses.
The remaining three institutions include another bank whose toxic property loans have been taken over by the National Asset Management Agency, a foreign-owned bank and a treasury company.
In addition, Revenue says institutions participating in Nama are limited in the amount they can write off against tax in a given year.
The legislation that set up Nama sets out that for those financial institutions that return to profitability, only 50 per cent of profits in any year may be offset against losses.
This means at least half of a bank’s trading profits would be taxable in a given year, if it was profitable. At present, all the main banks are continuing to lose money.
Income from corporation tax has fallen significantly over recent years. It peaked at €6.7 billion in 2007, falling to €5.1 billion in 2008, €3.9 billion in 2009 and held up at €3.9 billion in 2010. The estimated yield for 2011 is about €4 billion.
In 2010, the utilisation of losses as well as capital allowances cut the tax take by an estimated €2.5 billion.
The writing off of tax liabilities is not just an Irish phenomenon. An OECD report this year estimated that banks internationally were likely to use their losses to trim their tax liabilities for up to eight years.
Overall, corporate losses across all sectors in the period between 2007 and 2009 that were carried forward into 2010 amounted to just under €50 billion. Of this, the financial sector accounted for €34 billion.
If all these losses were used, the CAG estimates corporation tax receipts could be cut by up to €6.2 billion.
Revenue documents released under the Freedom of Information Act state the capacity of companies to generate profits to absorb losses varies significantly from sector to sector. It says, for example, that almost two-thirds of the corporation tax take is from 50 companies.
The provision in Irish tax laws that allows companies to carry forward losses for an indefinite period of time was one of the most generous in the EU. However, many other countries such as France and Germany have since introduced similar provisions.