Bank levy set to raise €150m

The Government has slapped a levy on the banking sector aimed at raising €150m each year.

The levy will apply to all banks offering retail services in Ireland. A banking source who did not want to be named said, “we will accept the levy, but that does not mean we are comfortable with it. We do not see the rationale for this at a time when banks are struggling to return to profitability. But we recognise that every sector in society face difficult challenges”.

The banks that will be affected include AIB, Bank of Ireland, PTSB, Ulster Bank, Danske Bank, Rabobank/ACC, KBC. It is unclear whether Nationwide UK will be subject to the levy.

The source points out the foreign-owned banks did not enjoy the benefits of the state guarantee of the banking system, nor did they have the opportunity of transferring bad assets to Nama.

The Government scrapped the Eligible Liabilities Guarantee (ELG) scheme last March.

Finance Minister Michael Noonan noted: “The Government has decided a specific contribution to the exchequer is to be obtained from the financial sector for the period 2014 to 2016. The contribution will be related to the amount of tax paid on deposit interest by the institution in the calendar year 2011. Full details will be contained in the Finance Bill.”

The Government also announced an increase to the deposit interest retention tax (Dirt). “The rate of retention tax that applies to deposit interest, together with the rates of exit tax that apply to life assurance policies and investment funds, is being increased and will now be 41% whether payments are made annually or more frequently (previously 33%) or are made less frequently than annually (previously 36%). The increased rates will apply to payments, including deemed payments, made on or after 1 Jan 2014.”

The move is an obvious attempt to drive down the high savings rate and increase investment in the economy. Commenting on the move, Peter Vale, partner at the consultancy firm Grant Thornton, said, “The Dirt tax on savings has now gone from 20% to 41% in a short period of time. Whilst the move may encourage people to stop hoarding cash and invest in more productive assets, it also increases the likelihood of greater non compliance in terms of returning details of interest income to Revenue.”

The Government also lifted the limit on the amount of losses banks can write off against future losses.

“The main Irish banks have substantial deferred tax assets, predominantly consisting of the potential value of their tax losses carried forward,” said Ray O’Connor, tax partner at Ernst & Young.

“The minister has abolished the special rule applicable to the tax losses of banks who participated in the Nama scheme.

“Under this rule, Nama participating institutions could only use tax losses carried forward against a maximum of 50% of future years’ profits, though that could include profits of other group companies.

“Unlike the other main banking measures announced in the budget, namely the bank levy and the increased Dirt rate, the abolition is relevant only, in practice, to the two main domestic banking groups, Bank of Ireland and Allied Irish Banks. The abolition of the rule should be of some assistance to these two groups when converting their deferred tax assets to actual tax savings.”