THE DEADLOCK between Ireland and its EU partners over corporation tax may be resolved by the imposition of a levy on banks as one of the terms of the €85 billion loan package being negotiated with the EU and the IMF.
Levies have been brought in by a number of EU states and would increase the “tax yield” from the corporate sector while leaving the 12.5 per cent corporation tax rate intact. A diplomatic source in Brussels said “it would be logical” for Dublin to follow the example of bank levies introduced by other member states. Officials in Paris confirmed that several countries have been considering such a measure.
“It’s of no use to try and humiliate a partner: we need an Irish government that’s able to act, or the whole thing is worthless,” said a German government source yesterday. “But we are negotiating and it’s all about the mix, because income side is simply too weak.”
The putative breakthrough emerged yesterday, along with further detail on how the banking sector will be restructured. Senior bankers from Bank of Ireland, Allied Irish Banks and Irish Life and Permanent were the first banks to meet with the Central Bank which has been in intense negotiations with the EU-IMF team. Under the bailout, the banks will be required to raise their capital reserves to meet new levels expected at international banks.
The banks must raise their capital ratios to 12 per cent from the previous 8 per cent level set by the regulator last March in what was described as a “shock and awe” recapitalisation of the banks to ease investor nerves.
Money will be provided to the banks from the €85 billion fund being negotiated, which will include a “contingency fund” the banks can draw on should they continue to lose money on loans. The rescue team will insist the banks draw on this to maintain their capital ratio at a minimum of 10.5 per cent. Further injections will push Bank of Ireland, currently 36 per cent State-owned, into majority Government control, and AIB to almost full nationalisation, with a State stake of 99.9 per cent.