AIB / Corporate tax

James Brown

AIB won’t have to pay tax on profits for 20 years, CEO Bernard Byrne has told TDs and senators.
At current levels the bank won’t be liable for tax on profits for decades thanks to the huge losses it racked up during the financial crisis, Mr Byrne told the Oireachtas Finance Committee.
Responding to questions from Sinn Fein’s Pearse Doherty, the AIB chief said its could be 20 years before his bank starts to pay corporation on tax again.

That’s because the bank has a so called deferred tax asset (DTA) of €3bn, which under tax and accounting rules allows the lender to offset previous losses against future tax bills.
Rules changes in 2009 had initially prevented banks carrying massive historic losses into the future as assets, but in 2013 Michael Noonan reversed the rule changes to the benefit of lenders including AIB.

Bernard Byrne defended the deferred tax asset, saying without it AIB’s bailout could have been €3bn bigger – because it was able to count the loss as a tax asset at the time.
AIB’s profit for the first half of this year was €814m, effectively tax free. The bank remains just over 70pc State owned.
http://www.independent.ie/business/irish/aib-wont-pay-tax-on-its-profits-for-20-years-ceo-says-36171108.html

Is this to help the Irish economy? Genuinely don't see how that plays out. Surely their losses during the crash were our losses, after the bailouts, therefore if anyone is due a break, it's the tax payer not the remaining AIB shareholders, (after the state having sold ours)? Was this in the pipeline pre selling our shares? Are the two related? Is AIB the hard pressed middle class simply getting the promised break to help the economy breathe? How is this a positive for the economy outside of AIB?

Tayschren

Matt Barrett wrote: »

Is this to help the Irish economy? Genuinely don't see how that plays out. Surely their losses during the crash were our losses, after the bailouts, therefore if anyone is due a break, it's the tax payer not the remaining AIB shareholders, (after the state having sold ours)? Is AIB the hard pressed middle class simply getting the promised break to help the economy breathe? How is this a positive for the economy outside of AIB?

Its a strange one, FG have a very big hand in this. Considering this was the reason Varadker attacked that yoke from SF yesterday Im surprised it is not big news.
Not surprised its not big news on Boards given its proclivity for FG support(right to the top) and SF bashing(although they could do with a good bashing)

Chips Lovell

This is old news. Presumably Sinn Fein missed it three years ago or have resurrected it in the hope the public won’t realise its old news. Either way it doesn’t reflect well on them.

James Brown

Baron de Charlus wrote: »

This is old news. Presumably Sinn Fein missed it three years ago or have resurrected it in the hope the public won’t realise its old news. Either way it doesn’t reflect well on them.

This was published today.
The AIB CEO was telling Senators about this yesterday? In the pipeline three years, we should ignore? Either way, I'm curious what's in it for the tax payer.

Chips Lovell

No, I mean the whole thing was reported on three years ago yet Sinn Fein treated it as some kind of revelation because Pearse Doherty got the AIB chief executive to repeat it.

James Brown

Baron de Charlus wrote: »

No, I mean the whole thing was reported on three years ago yet Sinn Fein treated it as some kind of revelation because Pearse Doherty got the AIB chief executive to repeat it.

What Sinn Fein did or didn't do does not address, (or interest me) any of my questions. I'm wondering what's in it for us?

Joe Exotic

well this is pretty normal business practice, you can carry forward losses and use them to credit against profit based taxes.

Not an expert here but i think the below link explains (If I'm wrong please correct me)

http://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-02/02-02-01.pdf

section 12 loss relief

Trading losses, other than terminal loss relief, must be claimed within two
years of the end of the period in which the loss is made. A company incurring
a trading loss in an accounting period can:
utilise a loss carried forward from an earlier accounting period,
offset a loss against other trading profits of the company for the current
accounting period,

in the AIB case:
1. we own 71% so any taxes not paid on profits come to us in dividend (we get it any way)
2. this credit carried forward is going to inflate the sale price of our shares

As far as what exactly AIB are saying about the 20 years tax free basically they made a loss for X years and as that loss can be used to write off their profits until used up.

Of the top of my head it used to be somewhere around 50% but Michael Noonan Upped that to 100 (again happy to be corrected on this )

James Brown

murphk wrote: »

well this is pretty normal business practice, you can carry forward losses and use them to credit against profit based taxes.

Not an expert here but i think the below link explains (If I'm wrong please correct me)

http://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-02/02-02-01.pdf

section 12 loss relief


in the AIB case:
1. we own 71% so any taxes not paid on profits come to us in dividend (we get it any way)
2. this credit carried forward is going to inflate the sale price of our shares

As far as what exactly AIB are saying about the 20 years tax free basically they made a loss for X years and as that loss can be used to write off their profits until used up.

Of the top of my head it used to be somewhere around 50% but Michael Noonan Upped that to 100 (again happy to be corrected on this )

So we'll make more in the long run than we would have on corporate tax alone, over 20 years? How can that be calculated?
Also, their loss was our loss, aren't we merely rewarding shareholders for backing the wrong donkey, again?

smurgen

I'm not sure I understand the figures.
So at current profit levels of 814million over 20 years they would have earned 32.560 billion before paying corporation tax due to a deferred tax asset of 3 billion. Is the deferred tax asset of 3 billion not used after 3 billion in profit has been reached or is it that 32.560 billion in losses have been incurred and there the tax that would have been paid on this (3bn) will be set against 32.560 billion in profits?

Joe Exotic

Matt Barrett wrote: »

So we'll make more in the long run than we would have on corporate tax alone, over 20 years? How can that be calculated?
Also, their loss was our loss, aren't we merely rewarding shareholders for backing the wrong donkey, again?

This i don't know would take a more business minded person than me to calculate that.

I suppose what all im trying to say is that:
1. Its normal business tax practice, not just for AIB
2. Its not simply just "Lost" taxes

If this is bad for us in the long term is still to be discussed

smurgen

murphk wrote: »

This i don't know would take a more business minded person than me to calculate that.

I suppose what all im trying to say is that:
1. Its normal business tax practice, not just for AIB
2. Its not simply just "Lost" taxes

If this is bad for us in the long term is still to be discussed

I understand that it is normal business tax practice but to be fair , being nationalised is outside of normal business practice. They sould not be allowed take only the benefit of government protection when it suits them and start pointing towards the rule book when it doesn't.

Quin_Dub

smurgen wrote: »

I'm not sure I understand the figures.
So at current profit levels of 814million over 20 years they would have earned 32.560 billion before paying corporation tax due to a deferred tax asset of 3 billion. Is the deferred tax asset of 3 billion not used after 3 billion in profit has been reached or is it that 32.560 billion in losses have been incurred and there the tax that would have been paid on this (3bn) will be set against 32.560 billion in profits?

It's set against the tax on the profits , not the profits as a whole..

So as you say at current rates they'd make 32B over 20 years , so 12.5% tax on that would be about 4B , so the 20 years of no tax might be a bit ambitious - Maybe more like 15 if things stay as they are.

Joe Exotic

Quin_Dub wrote: »

It's set against the tax on the profits , not the profits as a whole..

So as you say at current rates they'd make 32B over 20 years , so 12.5% tax on that would be about 4B , so the 20 years of no tax might be a bit ambitious - Maybe more like 15 if things stay as they are.

yes this is how i understand it as well

In essence by granting AIB this ability we saved ourselves 3Bn on the bailout (which we would have had to borrow) as they now had a 3Bn "asset" which was a credit against future taxes

So every year they will get a tax bill on their profits which they will put their 3Bn tax credit against.

We are not getting taxes until its used up but are also not paying interest on the loan we would have had to take out to cover it.

We are however going to get dividends and eventually a better price per share when we sell.

Are we better off? hard to say but i can see the logic behind it

It important to also remember that we are expecting to get more out of AIB than we put in in the long run, however since we borrowed that money we are probably at a loss because of the interest.

I think the main thing is to understand that if a single part of this bailout is picked out it can be spun in anyway, we need to look at the whole package

Chips Lovell

murphk wrote: »

Are we better off? hard to say but i can see the logic behind it

This is it. You can see the logic for removing it from a bailed out bank but also the logic of reintroducing it. I suspect that what ever they did they’d be criticised. If they hadn’t reintroduced it Sinn Fein would probably be asking why we didn’t do the same thing as Portugal and Spain.

James Brown

murphk wrote: »

yes this is how i understand it as well

In essence by granting AIB this ability we saved ourselves 3Bn on the bailout (which we would have had to borrow) as they now had a 3Bn "asset" which was a credit against future taxes

So every year they will get a tax bill on their profits which they will put their 3Bn tax credit against.

We are not getting taxes until its used up but are also not paying interest on the loan we would have had to take out to cover it.

We are however going to get dividends and eventually a better price per share when we sell.

Are we better off? hard to say but i can see the logic behind it

It important to also remember that we are expecting to get more out of AIB than we put in in the long run, however since we borrowed that money we are probably at a loss because of the interest.

I think the main thing is to understand that if a single part of this bailout is picked out it can be spun in anyway, we need to look at the whole package

So broadly speaking, we 'saved' money on a bailout, the necessity of which was mainly of their own making, that, correct me if I'm wrong, AIB would have owed back to us anyway, by allowing them not to have to pay corporate tax for the next 20 years?
Basically, we didn't have to borrow as much to bail them out of their hole because we are letting them keep the next 20 years corporate taxes? That's like a 'heads I win, tails you lose' scenario.
By letting AIB off with corporation tax for the next 20 years we saved ourselves borrowing to give them more money, they'd owe us back anyway? Sorry, I don't see the sense.

smurgen

Matt Barrett wrote: »

So broadly speaking, we 'saved' money on a bailout, the necessity of which was mainly of their own making, that, correct me if I'm wrong, AIB would have owed back to us anyway, by allowing them not to have to pay corporate tax for the next 20 years?
Basically, we didn't have to borrow as much to bail them out of their hole because we are letting them keep the next 20 years corporate taxes? That's like a 'heads I win, tails you lose' scenario.
By letting AIB off with corporation tax for the next 20 years we saved ourselves borrowing to give them more money, they'd owe us back anyway? Sorry, I don't see the sense.

I can see this point also. I mean due to the bailout they now have greater capacity to self finance.we crystalised the losses and took them on the nose.now shouldn't the state maybe get a little more back than the selling of shares?

James Brown

smurgen wrote: »

I can see this point also. I mean due to the bailout they now have greater capacity to self finance.we crystalised the losses and took them on the nose.now shouldn't the state maybe get a little more back than the selling of shares?

Must be missing something. There's a whiff of Tom Sawyer getting the local kids to paint his fence about it.
'You don't have to borrow more money to give us, (which we'd have to pay back anyway) if you let us off paying corporation tax for the next 20 years.'

Sounds like borrowing more, if required, to bail them out/loan them, and having them pay it back, while also collecting corporate taxes ongoing, was the better deal for the tax payer.

Cookie_Monster

murphk wrote: »

in the AIB case:
1. we own 71% so any taxes not paid on profits come to us in dividend (we get it any way)
2. this credit carried forward is going to inflate the sale price of our shares

these are the only two points that matter here. The state gets (most of) the dividend anyway, doesn't matter if there is tax paid or not really, especially given the loop holes etc would mean a very low amount of tax would actually ever be received.

Chips Lovell

Matt Barrett wrote: »

By letting AIB off with corporation tax for the next 20 years we saved ourselves borrowing to give them more money, they'd owe us back anyway? Sorry, I don't see the sense.

If it were like that, yes it wouldn't make much difference, murphk's point was you'd be paying interest on the latter but not on the former.

murphk wrote: »

We are not getting taxes until its used up but are also not paying interest on the loan we would have had to take out to cover it.

I think one of the things to remember is that the limit on deferred tax assets was put in place in 2009, when we didn't have a stake in the banks and removed in 2013 when we did. As was pointed out at the time:

"Given the extensive burden imposed on the State from rescuing the banks, [the original cap] was a measure that provided a form of clawback for the taxpayer. However, it was put in place at a time when State involvement in the banking sector was far more limited and, critically, before equity stakes were acquired in AIB and Bank of Ireland," said the Department of Finance in response to a query from this newspaper.

With the state anxious to get the banks out of public hands, it seems that the rule chance was seen as something which would hasten this.

New EU rules governing banks actually treat deferred tax as a liability on their balance sheet, the Department added, meaning that the value of AIB and Bank of Ireland should go up if they can use up their deferred tax faster – which should benefit taxpayers, who own 99pc of the former and 15pc of the latter.

James Brown

As a major shareholder, how does letting essentially our bank, off with corporation tax sit with the EU?
If we sell off and remove ourselves from any link to AIB, they'll be a fully private entity, not paying corporate taxes for a number of years, because the state had to bail them out?

Robert McGrath

Matt Barrett wrote: »

As a major shareholder, how does letting essentially our bank, off with corporation tax sit with the EU?
If we sell off and remove ourselves from any link to AIB, they'll be a fully private entity, not paying corporate taxes for a number of years, because the state had to bail them out?

As I understand it:

I would say it's fine because restoring AIB's ability to claim loss relief is treating AIB in exactly the same way as every other company, big or small, in Ireland.

The 2009 legislation changed the tax treatment of losses forward for banks alone. The 2013 reversal essentially re-introduced the previous status quo and allows AIB etc to use losses like every other company.

No special treatment, therefore no State Aid

PeadarCo

Matt Barrett wrote:

As a major shareholder, how does letting essentially our bank, off with corporation tax sit with the EU? If we sell off and remove ourselves from any link to AIB, they'll be a fully private entity, not paying corporate taxes for a number of years, because the state had to bail them out?

What's happening with AIB is nothing unusual in general. In principle all sole traders and private companies can reclaim losses subject to certain conditions. The unusual thing about AIB is how large their losses are when compared to future profits. The EU and anyone familiar with taxation laws would have been aware of this the minute the decision to bail the bank out.

James Brown

It's special treatment and unusual in the sense that we bailed them out?

I thank you for the input as I was decidedly in the dark on this. As with the bail outs, it seems there are different rules for business depending on who or what you are. I don't think writing off corporate tax was the way to go, nor fair to any sole trader or private company who weathered the melt down or had to close the doors. It seems the only people not to fare too badly from it all were the ones in the thick of it.

PeadarCo

Matt Barrett wrote:

It's special treatment and unusual in the sense that we bailed them out?

Strictly in terms of being able to carry over losses no. As others have mentioned anyone company could have and can do and do do the same. Its open to both sole traders and private companies subject to various rules.

Any business can make large losses and continue in business providing they have enough cash. However very few people or organisations will fund losses for such an extended period of time that it takes 20 odd years to see a return in terms of profit. But that's more a question of the bailout itself not the tax law.

James Brown

Personally, I wouldn't separate the two. We have the tax law and we had/have the bailouts. The state plays a roll in both and is conscious of both and can amend any tax law, if it chooses.

PeadarCo

Matt Barrett wrote:

Personally, I wouldn't separate the two. We have the tax law and we had/have the bailouts. The state plays a roll in both and is conscious of both and can amend any tax law, if it chooses.

They are legally two separate things. The reason AIB is ok is because there's nothing stopping another company/person ending up in the same situation with making very large losses over a year/number of years relative to future profits that they go 10/15/20 years without paying tax.

What is unusual is that it would extremely rare for anyone/any company to be any to sustain those losses with going into bust/getting out of business. Which brings us back to the decision of the government to bail the company out.
I agree that the government could change the law and there are limitations in relation to carrying forward losses. There are already limitations but while I understand the principles I'd only have an understanding at a high level. You could limit the time period for carrying forward losses but there could be unintended consequences. I'd listen to a tax expert first before making any decision. The fact that people are surprised by this situation says how little the average person/politician/journalist knows about taxation in the first place. As I said this situation should have been obvious the minute the decision was made to bail AIB out.

James Brown

Not suggesting there's anything illegal. We could have put provisions into any bailout re tax write offs/using losses or other monies owing to the state etc; 'a company bailed out, cannot avail of...' and so on.
It still reads as though a company failed, was bailed out by the state and is now exempt from corporate tax for the next two decades. The only people untouched, if not seen to profit, from the financial crash are the AIB share holders, which is a strange state of affairs.

PeadarCo

Matt Barrett wrote:

Not suggesting there's anything illegal. We could have put provisions into any bailout re tax write offs/using losses or other monies owing to the state etc; 'a company bailed out, cannot avail of...' and so on. It still reads as though a company failed, was bailed out by the state and is now exempt from corporate tax for the next two decades. The only people untouched, if not seen to profit, from the financial crash are the AIB share holders, which is a strange state of affairs.

The AIB and bank shareholders in general got all but wiped out. Grand the company still exists but its not worth anything like it was before the crash. The government's own 71% stake just didn't grow out of no where. By getting how of company that automatically reduced the value of the existing share. That before you factor in the reduction in value as people realised they had shares in a bust bank.

James Brown

PeadarCo wrote: »

The AIB and bank shareholders in general got all but wiped out. Grand the company still exists but its not worth anything like it was before the crash. The government's own 71% stake just didn't grow out of no where. By getting how of company that automatically reduced the value of the existing share. That before you factor in the reduction in value as people realised they had shares in a bust bank.

Are private individuals, (including those at the helm when the bailout was required) going to profit from this 20 year corporate tax exemption and is the state going to lose potential income?