During Monday's leaders' debate on RTÉ, Sinn Féin leader Mary Lou McDonald asked "where is all your outrage at the fact that banks that all of you folks bailed out turned profits of €2.5 billion last year, and do you know how much corporate tax they paid? Zero".
Later in the debate, People Before Profit’s Richard Boyd-Barrett claimed that banks were “racketeering” and that a mortgage with an Irish bank would cost €56,000 more on average than a 30-year loan in comparable European countries.
What is this claim based on?
The three banks which received taxpayer funds (and are still trading) are Bank of Ireland, AIB and Permanent TSB. Their accumulated profits for 2018, the most recent year for which full accounts are available for all three, come to €2.443 billion, which appears to be the basis for Ms McDonald's claim.
Meanwhile, Irish companies are able to use historic losses to offset current profits using what are known as Deferred Tax Assets (DTAs). These are available to Irish banks as well. AIB has €2.6 billion, there's €1.1 billion at Bank of Ireland, and PTSB has €350 million.
So did they pay no tax?
Ireland’s banks, unsurprisingly, recorded enormous losses during the financial crisis. This has given them the ability to shield their future profits (or as the case may be, current profits) from paying corporation tax at the standard rate of 12.5 per cent. This is not unique to Irish banks – the Comptroller and Auditor General (C&AG) has estimated that the cost in future of foregone tax revenue from DTAs could be as much as €29 billion, with €12 billion related to the financial and insurance sector.
So, the use of these historic losses is not unusual in Irish corporate life. What is unusual is the scale of losses that Irish banks were able to sustain without collapsing. This would not have been possible for any “ordinary” business, which would have buckled under the cost of their accumulated losses.
If we look at 2016, 60,000 companies used losses to shield profit. However, 26 companies accounted for more than half the losses carried forward, an average of €4.7 billion each. Around 48,000 smaller companies had collective losses of €5 billion, or an average of €100,000 each. So clearly this is common, but much more common at a much lower level.
The key difference is that the Irish banks weren’t normal – they were kept afloat due to the extraordinary cash injections provided by the government to safeguard the banking system. This has resulted in the accumulation of enormous DTAs in the Irish banks. PTSB estimates it won’t pay tax until 2038, AIB 2037.
Inevitably, this bizarre situation, which couldn’t have been imagined when the rules around the use of DTAs were being drawn up, has led to charges of unfairness, with taxpayers – not unreasonably – anxious to recoup some of the billions they sunk into their errant banks.
So the State gets nothing back from the sector?
There are a couple of other factors to examine.
The State takes €150 million per year from deposit-taking institutions (AIB, Bank of Ireland, Ulster Bank, PTSB and KBC Bank Ireland) in the shape of a banking levy. So in the lifetime of the last Dáil, that would add up to about €600 million, much of it from the bailed-out banks.
Secondly, since the State is still a significant shareholder in the three banks, it generated around €5.1 billion in income from these investments to the end of 2018. The State has also generated income when it sells down parts of its stake in the banks, for example it sold 28.75 per cent of its shares in AIB for €3.4 billion in 2017.
These are big figures, but they must be set against the totality (some €64 billion) of the cost of saving the banks.
Secondly, would it be possible – or wise – to change the law and force the banks to pay tax? It’s unclear whether this could be done in a targeted way that carved the banks out from all the other, smaller companies that use deferred tax assets. Also, the consensus among bank analysts is that any move to tax the banks would impact their value on the open market, and therefore the value that might be achieved in any further sale of the State’s (still significant) stake in the three banks.
Finally, the DTAs were counted as bank capital during the bailout years, meaning they stood in for cash which the State may have otherwise been called on to pay to stabilise the banks.
What about the mortgage claims?
Figures published last October by the Central Bank show that Irish mortgage holders continue to pay the second highest interest rates in the eurozone. The average interest rate on mortgages issued in November was 2.9 per cent in Ireland and 1.37 per cent in the EU.
Daragh Cassidy, of consumer switching site Bonkers.ie, said the cost of servicing an Irish mortgage was considerably higher than elsewhere in Europe.
“The average first-time buyer mortgage is around €225,000. So someone borrowing this amount would pay €936.52 a month here and €762.56 a month on average in the EU. This is around an extra €63,000 in interest over the lifetime of the loan.”
However, Mr Boyd-Barrett’s claim that the banks are racketeering is harder to prove. Higher interest rates in Ireland are generally seen to be a product of several factors, ranging from low rates of repossession through to the relative lack of competition in the market, as well as the tough post-crisis rules imposed on banks to hold certain levels of capital.
The verdict:
The Sinn Féin leader’s statement that the banks pay no corporate tax is accurate, but there is a wider picture concerning the full level of payments from the banks to the State, and an open question over whether it could be easily reformed.
It should be noted that the banks do pay some tax under other tax heads as well, just not corporate tax. Some subsidiaries of the banks do pay corporate tax, but the main corporate entities do not.
Therefore, the verdict is that Ms McDonald’s claim is true but missing some important information.
Mr Boyd-Barrett’s first claim, that Irish loans are more expensive than in Europe, is true. He offered no evidence to support his allegation of racketeering, and there is evidence to suggest that many other factors feed into high mortgage rates, so that claim is found to be unproven.
