Allied Irish Banks intends to redeem $180 million (about £120 million) worth of preference shares, because of cuts in the tax credit attaching to dividend payments announced by the Minister for Finance in his Budget speech.
The news came as Mr McCreevy rejected requests from a number of companies, including Bank of Ireland, to exempt dividends declared but not paid before December 3rd from the tax changes announced in the Budget.
Mr McCreevy said he had carefully examined the case but had decided to stick to the Budget resolutions.
Publicly-quoted Irish companies and their shareholders will benefit from the reduced rates of corporation tax and capital gains tax announced in the Budget, Mr McCreevy said. He noted that this had been demonstrated by the post-budget increase in the Irish stock market.
The ISEQ index of Irish shares gained more than 3 per cent on the day after the Budget alone, as financial stocks in particular benefited from confirmation that the Government aimed to introduce a corporation tax rate of 12.5 per cent from 2006.
Mr McCreevy also pointed out that the abolition of tax credits is being phased over two years, affording companies a reasonable period of notice to adjust their affairs for the future.
AIB is the first company to announce it is redeeming certain shares as a result of the changes to dividend tax credits. It has received Central Bank approval for the redemption and plans to do it in early 1998.
The 7.2 million non-cumulative preference shares, which are quoted on the New York, London and Dublin stock exchanges, were issued mainly to US retail rather than institutional investors in 1989. The bank agreed at the time to compensate investors if the tax credit was reduced.
The preference shares, which are guaranteed a fixed dividend, cost AIB 8.9 per cent per annum when they were issued. But reductions in the tax credit in recent years have increased the cost to the bank as it has had to adjust the rate of dividend to compensate shareholders for the reduced tax credit.
Prior to Mr McCreevy's December 3rd Budget, the shares were costing the bank 9.5 per cent per annum. Since the Budget this has risen to 10.687 per cent and will increase further to 11.875 per cent per annum from April 6, 1999, when tax credits attaching to dividends are totally abolished.
"Basically, the preference shares have become too expensive and AIB would be able to refinance with a new preference share at a lower cost," said chief financial officer Mr Declan McSweeney. He said the bank was looking into the possibility of a new preference share issue.
As well as cutting the tax credit attaching to dividends, Mr McCreevy announced changes to the treatment of scrip dividends or shares taken in lieu of a dividend payment. This will now become taxable as income.
The changes have been criticised by the Irish Association of Investment Managers (IAIM), the Institute of Taxation and the Irish Association of Pension Funds (IAPF), which estimates it will cost the 200,000 members of occupational pension schemes about £25 million.
The industry believes Mr McCreevy should have phased out the dividend credits in tandem with the reduction in corporation tax rather than opting for a "Big Bang" approach.
Companies are likely to come under pressure to change their dividend strategy to better accommodate investors by using share buy-backs or other more tax-effective ways to return money to shareholders.
