487 Corporation tax: credit for bank levy

Summary

This section provides for the set-off of all or part of the bank levy paid by a bank against the corporation tax liability of the bank where certain conditions are met. The bank levy may be set off against corporation tax to the extent that the corporation tax liability exceeds a certain threshold. The threshold is based on the average corporation tax liability of a bank in the 2 year period ending 31 March, 1991. That base is indexed in line with the bank’s profitability over the years since then. Thus, if a bank has increased its profits since that time, its corporation tax liability must increase to a corresponding level. Where the corporation tax liability increases above that level, the bank is entitled to set off a part of the bank levy equal to the excess. It is possible for banks to increase their corporation tax liability by refraining from the use of tax shelters, by the expansion of their activities in the State and by remitting higher amounts of dividends from their overseas subsidiaries. If the advance corporation tax liability of a bank in an accounting period exceeds the threshold, then the advance corporation tax liability is substituted in place of the threshold.

The arrangements apply on a group basis with the results of all companies which are owned to the extent of 75 per cent by the banking group being taken into account. Life assurance companies, however, are excluded. The bank levy ceased to apply in 1997. However, the provisions which allow the off-setting of the levy against corporation tax still apply in certain circumstances.

Overview of the scheme

A banking group is entitled to set off a part of its levy payment where its corporation tax liability for the period concerned exceeds a threshold (referred to as the “adjusted group base tax”). The adjusted group base tax is the higher of —

• the advance corporation tax for the period concerned, and
• the group base tax, indexed in line with the rise or fall in accountancy profits.

The group base tax is the average of the banking group’s liability to corporation tax in the 2 years ended 31 March, 1991. The rise or fall in accountancy profits is determined by comparing the group profit with the group base profit (that is, the average profit of the 2 years ended 31 March, 1991). Both “profit” and “base profit” are a measure of accountancy profits. As all of the items are on a group basis, it is necessary for company figures to be defined and then aggregated to give group figures. In determining group profit and group base profits, profits and losses of companies which are members of the group are taken into account. If the group as a whole has incurred a loss, the group profit or group base profit will be taken to be nil.

Details

Definitions

(1)(a) “accounting profit” is the amount of profit, after taxation and before extraordinary items shown in the accounts of the company. Extraordinary items are excluded from the measure of profits so as to give an even base for indexation purposes. The amount of a loss incurred by a company is calculated in the same way as a profit would be.

Profit means the profit shown in the profit and loss account of the company. In the case of an Irish company, the profit and loss accounts are those to be laid before the AGM of the company. Under the Companies Act, 1963 a company which is the parent company of a group is not required to present separate accounts of its own activities provided that its results are included in the group consolidated accounts. That company is required to take the profits which would have been shown in separate accounts if its results were not shown in the group’s consolidated accounts.

Where the bank is not resident in the State but is trading here through a branch or agency, the profits to be taken into account are those shown in the branch profit and loss account which is certified by the auditor to the company as presenting a true and fair view of the profit or loss attributable to the Irish branch.

Certain adjustments have to be made to the accounting profits as so shown to give the accounting profit within the meaning of that term for the purposes of this section.

The accounting profits are reduced by the amount of those profits as is attributable to —

• dividends received from Irish resident group members (this ensures that there is not a double count of the income, in the hands of the company which earned the income and in the hands of the company which received the dividend),
• capital gains,
• income from foreign branches which is also subject to tax outside of the State,
• dividends received from overseas.

The accounting profits are increased by the income from overseas branches and for dividends received from overseas as so excluded. If the full amount of profit from these activities were taken into account and the base tax indexed on that basis, it would inflate the adjusted base tax which would reflect the relevant corporation tax rate. By adjusting these amounts to reflect their expected real contribution a target adjusted base tax which could be expected to be achieved is set.

A formula is provided for determining the amount by which accounting profits are to be increased for this purpose, namely —

Where T is the net tax contribution from the activity after relief for double taxation.

R is to be taken as the rate per cent of corporation tax for the accounting period concerned.

“adjusted group base tax” of a relevant period is determined by applying the formula set out in the definition to the group base tax – see below. This increases the group base tax in line with the increase in profitability.

The adjusted group base tax is set at a minimum figure equal to the group advance corporation tax liability of the period concerned. This achieves a situation whereby a bank will only be setting off the bank levy against the increases in its corporation tax liability which arise by refraining from using tax shelters as opposed to advance corporation tax which it must pay on the paying of a dividend to its shareholders.

“advanced corporation tax” of a relevant period is the amount of advanced corporation tax paid or treated as paid in respect of distributions made in the year ended 31 March in any year or, if the accounting period does not end on 31 March, the aggregate of amounts paid in the parts of accounting periods falling in that year.

“base profit” of a company is the average of the accounting profits of the company for the 2 years ended 31 March, 1991. Provision is made for a situation where accounts are not prepared to the 31 March date. In such a case the base profit is the aggregate of amounts in the parts of the accounting periods falling in that year.

“base tax” means 50 per cent of the corporation tax, aside from tax attributable to chargeable gains and before the set-off of advance corporation tax chargeable on a company for the 2 years ended 31 March, 1991, with aggregation rules to be applied where a bank does not have a 31 March accounting date.

“group advance corporation”, “group base tax” and “group base profit” are the aggregate of the advanced corporation tax, base profit and base tax of individual group companies. In the case of base tax, minimum and maximum amounts are set by reference to accounting profits. The provision attributes a group base tax of 25 per cent of group base profit to groups whose base tax is less than 10 per cent or more than 43 per cent of group profits. This makes it easier for the group which has not engaged in tax based transactions to set off the levy and sets a higher target for those banks which have engaged in a very high level of tax based transactions.

“group profit” and “group tax liability” of a relevant period are the aggregate of the profit and tax liability, respectively, for individual companies.

“levy payment” is the bank levy which is charged under section 200 of the Finance Act, 1992, or section 142 of the Finance Act, 1995.

“profit” of a relevant period is the profits, computed on the same basis as base profit, of an individual company of the year ended 31 March. Aggregation rules apply where necessary.

“relevant period” in relation to any levy payment is the year ended 31 March in which the levy payment was made.

“tax liability” of a relevant period is the corporation tax liability aside from tax on chargeable gains and before the set-off of advance corporation tax, of an individual company for the year ended 31 March. Aggregation rules apply where necessary.

Interpretation

(1)(b) These interpretational rules provide for the meaning of group relationship. Two companies are members of a group where one is a 75 per cent subsidiary of the other or both are 75 per cent subsidiaries of a third company. This is in line with the definition for group relief purposes.

In determining group relationship, one significant difference between this provision and the group relief provisions is that non-resident companies do not debar the existence of a group under this section.

Share capital owned by a company is not to be taken into account in determining group relationship if a profit on sale of the shares would be treated as a trading receipt of the company which holds the shares.

Where the shares are held indirectly and are held directly by a company for which a profit on the sale of the shares would be a trading receipt, the holding is not to be taken into account in determining group relationship.

A life assurance company which is owned by the banks is not regarded as a member of the group.

The provisions of sections 412 and 418 which apply for the purposes of determining group relationship are applied for the purposes of this section. These ensure that only real groups qualify (that is, not only must a company hold 75 per cent of the share capital, it must also be entitled to 75 per cent of any distribution made by the subsidiary company and 75 per cent of the assets in the event of a winding-up).

The meaning of the term “group” is provided for where a sub-group exists as part of a larger group. Where this applies the sub-group is ignored and the larger group is the one considered for the purposes of the section.

A company which is not a member of a group is not denied the set-off of the bank levy by reason only that it is not a member of a group. The provisions apply to such a company as if it were itself a group.

The rules for the calculation of the amount of tax attributable to chargeable gains are set out.

The profits attributed to a particular operation are to be attributed on a just and reasonable basis.

The corporation tax chargeable in respect of any income is the tax which would not be payable but for the existence of that income.

Relief

(2) The amount of the bank levy payment which is equal to the excess of the group tax liability over the adjusted group base tax is available for set-off against group tax liability of the relevant period.

Apportionment between companies

(3) The amount of levy to be apportioned between individual companies under the section is the amount of the levy apportioned on the basis of the tax liability of each of the individual companies. However, all the companies which are members of the group may elect to have the apportionment done on any basis that they choose.

(4) When an amount is so apportioned to a company, that amount is set off against its tax liability of the period and is treated for the purposes of the Corporation Tax Acts as if it were a payment of corporation tax. However, under no circumstances can the amount of levy so set off be repaid to a company.

(5) If the accounting period of the company is not the year ended 31 March, the amount to be set off is attributed between the various accounting periods falling partly in the year ended 31 March.

(6) Where an accounting period of a company does not end on 31 March, then, in order to determine the amount of levy payment which may be set off in that accounting period, it is necessary to take into account the results of later accounting periods. If on the return date for the accounting period it is not possible to determine the amount of levy set-off, a provisional amount may be set off.

The provisional amount is determined by substituting for the base period the 12 month period ending on the most recent accounting date of the parent company in the relevant period.

Delivery of particulars

(7) A company is required to deliver particulars which would enable the correct amount of levy to be set off as soon as they become available. Where the particulars are delivered the computations can be adjusted and tax underpaid paid or tax overpaid repaid.

Interest

(8) Interest will be paid on any amount to be repaid to a company under subsection (7). Interest will not be charged in respect of any underpayment unless the amount is not paid within one month. The amount of the undercharge will not be treated as part of the company’s preliminary tax obligation.

Relevant Date: Finance Act 2021