The Government's €450 million bank levy could breach EU state aid rules, according to legal advice given to the Irish Banking Federation (IBF).

The opinion, supplied to the IBF by Irish law firm Mason Hayes & Curran in early January, states that the levy could be challenged on the basis that it is not being applied to credit unions or State-owned An Post, which offers a range of deposit and savings products to consumers.

This results in a loss of tax revenue and would amount to the Government conferring an advantage on the credit unions and An Post. The legal opinion also found that it confers an advantage on new entrants to the market as the levy applies to Deposit Interest Retention Tax (Dirt) paid in 2011.

To be considered as state aid, any measure must also affect intra-community trade. Mason Hayes & Curran said this criterion is likely to be met on the basis that banks here are in “direct competition” with financial institutions in other EU member states.

Levy applies
The levy applies to Irish banks and building societies – or their EU equivalents who have branches here – who collected Dirt tax in 2011.

Credit unions and An Post are excluded, even if they paid Dirt in 2011, as they do not operate on licences granted under the Central Bank Act of 1971.

It remains to be seen if the IBF will press the button on a legal challenge to the levy. It is understood that the advice will be considered by the federation’s executive advisory group in early February.

The IBF has about 70 members, including the main retail banks, IFSC companies and the specialist finance arms of companies such as computer maker Hewlett Packard.

However, the main retail banks such as AIB and Bank of Ireland carry a lot of clout within the federation. It is not clear if the domestic institutions would be willing to mount a legal challenge against the State, given that it owns 14 per cent of Bank of Ireland and more than 99 per cent of both AIB and Permanent TSB.

David Duffy, chief executive of AIB, recently took over as IBF president and his support for a legal challenge would be crucial for it to proceed.

The levy was announced by Minister for Finance Michael Noonan in his budget speech on October 15th. It involves the banking sector paying €150 million annually on October 20th each year out to 2016.

It will be levied on the banks according to the proportion of Dirt tax they paid in 2011. A similar levy applied between 2003 and 2005, yielding more than €100 million a year to the the exchequer.

The levy is designed, in part, to compensate for the loss of fees to the exchequer by the Irish-owned banks for the eligible liabilities guarantee, which was scrapped in March of last year. This yielded just more than €1 billion in 2012 and €576 million last year.

Levy blow
The levy blow was softened for AIB and Bank of Ireland by the Government relaxing restrictions on the application of deferred tax assets, by allowing them to accelerate their use as an offset against future profits.

The IBF flagged its intention to seek legal advice on the bank levy at its annual conference in November. Its then president John Reynolds, a former chief executive of KBC Bank Ireland, said there was "considerable concern" at the levy.

No comment was available from the IBF yesterday. A spokesman for the Department of Finance declined to comment on “hypothetical situations”.