Banking federation proposes corporate equity allowance

A capital gap needs to be addressed in recognition of the relative weakness of the balance sheets of some businesses, due to the erosion of retained earnings or the build-up of legacy debt, Banking & Payments Federation (BPFI) president Bernard Byrne has said.

Speaking at BPFI’s Financing Growth and Entrepreneurship conference in Dublin, he said the federation has proposed the introduction of an allowance for corporate equity as one possible way of addressing the capital gap.

He noted how the tax treatment of equity investment and debt financing differs in Ireland: debt financing benefits from the tax deductibility of interest payments.

“By combining the tax deductibility of actual interest costs with a deduction of a notional return on equity, the allowance for corporate equity proposal could be a useful tool in helping SMEs in particular to invest equity in, or attract equity into, their businesses.”

He said this approach appears to be working with some success in Portugal, Italy and Belgium, adding there’s thus reason to believe it could also work in Ireland.