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Sunday, 14th April 2024
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Banking industry welcomes Cowen’s first Finance Bill Back  
There may have been no radical measures in Finance Minister Brian Cowen’s first Finance Bill but the clarification of a number of technical concerns put forward by the banking industry has been welcomed by the Irish Bankers Federation, although Cathrine Burke writes that issues still remain to be addressed.
<Finance Minister Brian Cowen’s maiden Finance Bill - published last month and currently winging its way through its final stages - may have been short on innovation but it addressed head-on many of the issues and concerns raised by the banking industry in recent years, such as International Financial Reporting Standards (IFRS) and the Savings Tax Directive.

After many years of change being introduced year-on-year by his predecessor, the Minister appears to have opted for some stability. This is no harm in a business environment that is currently characterised by wholesale change. At the same time, while the Bill may not have given many media commentators much to talk about, it contains some very significant technical amendments that are to be welcomed. The Bill also highlights the ever increasing international and EU dimensions to our fiscal regime in the form of provisions relating to the Savings Tax Directive and International Financial Reporting Standards. Not exactly stuff that will get the masses excited but with far reaching implications for the industry none the less.

IFRS
The Irish Bankers Federation (IBF) has been heavily involved in consultation with the Revenue Commissioners on the introduction of IFRS and its impact on tax. The provisions as set out in the Bill are to be welcomed as giving a degree of certainty to financial institutions facing into the challenge of implementing the standards. As expected, the Bill confirms that financial statements prepared under IFRS will be acceptable for tax purposes. The provisions also address such issues as transitional arrangements, revenue recognition, capital expenditure and, most significantly, the taxation of fair value gains/losses on financial instruments and bad debt provisions.

In relation to the fair value issues, the industry welcomes the transparency and simplicity of operation that the provisions will ultimately bring. In relation to bad debt provisioning, while there is some ongoing debate regarding transitional arrangements, the future eligibility for tax purposes of all provisions calculated per the standards (IAS 39) is a major success for the industry and has been welcomed. The other provisions essentially ensure a very equitable treatment going forward in that nothing will fall out of the tax net but there will also be no double counting. However, the Bill is unlikely to be the end of the story on this one. It is a complex area and the true impact of IFRS on accounting profits for Irish financial institutions will only be known when some of the major players report their first full set of results under IFRS early next year. In addition, the Minister’s predecessor, Internal Market Commissioner Charlie McCreevy, is on record as saying he intends to ensure that some of the outstanding issues relating to the now infamous standard on financial instruments, IAS 39, are resolved before the end of 2005. This will undoubtedly lead to changes in the standard that may have knock on consequences. It must also be remembered that although the Bill talks about IFRS, the introduction of the Irish equivalent of IAS 39 (FRS 26) will essentially mean that these provisions ultimately apply to far more than just the large Irish listed institutions. Therefore, we would expect to see some very detailed practice notes in this area and indeed more provisions in next year’s Bill.

Savings Tax Directive
This particular gem has crept up on many people despite its very lengthy gestation period in Brussels. In essence, the Directive, which has been in force since 1 January 2004 (with reporting due to commence for the period commencing 1 July 2005), introduces formal exchange of information between tax authorities on interest payments to individuals and certain collections of individuals. Most of the key provisions were contained in Finance Act 2004 but additional provisions are included this year to deal with the revised reporting date and agreements reached between the EU and Andorra, Liechtenstein, Monaco, San Marino and Switzerland.

The implementation is a significant headache for financial institutions, and indeed their customers, both on the retail side and for the funds industry, and one has to question what information will ultimately be gleaned from the exercise. It has highlighted yet again, just how complex the area of interest has become with withholding and reporting obligations on paying agents. The UK have already indicated that they would like to see a review of the Directive as part of their EU Presidency later this year so do not be surprised to see more on this. In the meantime, Irish paying agents are faced with this additional burden on top of already complex interest rules. Irish Bankers Federation continues to work closely with the Revenue Commissioners on guidance in this area.

The good news
The provisions above are technical in nature but the Bill also contained some very positive news for the industry:

- Stamp duty on cards: The industry has waged a very high profile campaign on this issue and will continue to do so. However, the elimination of the double charge on the switching of institution or indeed on upgrade was a very welcome development.

- Abolition of encashment tax at bank branch level: This has long been an issue due to the practical difficulties for bank branch staff of identifying foreign dividend cheques at the counter. The move is very welcome and it removes a very significant administrative headache for retail banks with no material impact on tax take.

- Capital duty on shares: The industry has long campaigned for the abolition of this tax which is levied on share capital. It is even more important following the introduction of the holding company legislation and the abolition of the duty by most of Ireland’s competitor jurisdictions. While the reduction in the duty is very welcome and sends the right signals, the industry will continue to lobby for its complete abolition.
- Amendments to holding company legislation: The Finance Act 2004 introduced important measures relating to holding companies locating in Ireland that were warmly welcomed by the industry. This year’s Bill deals with the changes required by the European Commission and replaces the previous value thresholds with a flat 5 per cent shareholding requirement.

So what next?
So it’s Finance Bill number one of what may be three from the new Minister – did it indicate anything for the future?

It is worth noting that most of the industry submissions in advance of the Budget over the last few years have focused on technical amendments and clarifications rather than radical change or innovation. This is primarily a reflection of the relative maturity of the market here and the importance of the 12.5 per cent rate corporate tax rate. Even the IDA-commissioned report by Deloitte published last year on the future of financial services does not identify very significant fiscal barriers to the further development of the sector. The report talks in terms of clarifications but highlights interest and withholding tax and VAT as important areas. It is not surprising that there is a very significant international and EU dimension to these issues. They are difficult areas that impact directly on the competitive position of Ireland Inc and must be addressed.

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