Central bank warns against blanket write-downs of pandemic debt

Central bank economists are warning against forgiving the tax debt of distressed companies that have parked debt in the tax agency’s warehouse program during the pandemic.

They say letting companies — some of them healthy — have their tax debts slashed would be unfair to companies that didn’t take advantage of the revenue program but are now struggling with high energy costs and other inflationary pressures.

Instead, they recommend that the state take equity stakes or impose profit premiums on companies that are unable to pay their back taxes in the coming years.

“[O]Full forgiveness of deferred tax liabilities is likely to be untargeted, costly and perceived as unfair,” economists say in a new research paper on policy options for distressed companies.

“Providing equity-like support to distressed companies is another policy option with some positive attributes. Equity instruments or inventive profit surcharge tax solutions could provide some returns for government should companies return to profitability.”

More than 84,000 companies owe a total of €2.8 billion in unpaid taxes from 2020 and 2021 after tax revenues were suspended for companies negatively affected by the pandemic.

Tax officials are now requiring companies that have used tax debt storage to submit their plans to pay off their debt from January 2023.

Companies are being asked to either pay in full or sign up for a low-interest tiered payment arrangement before the end of the year.

But the call for repayments comes as thousands of small businesses find themselves under severe pressure from rising energy bills and soaring utility prices just months after the government ended its Covid support programs.

The central bank’s inquiry warns that “the magnitude of the latent hardship that has yet to materialize is potentially large” with up to 4 per cent of companies – about 10,000 companies – facing restructuring, liquidation or dissolution.

The paper suggests that the new small business bailout process — a quick, low-cost alternative to auditing — is likely to be useful for many businesses.

However, the paper also advocates informal, bilateral agreements between companies and creditors that can be implemented quickly and without additional legal effort.

The research also rekindles the idea of ​​formal rent arrears arbitration to reduce SME debt to landlords – an idea that would go beyond the voluntary code on rent disputes introduced by Leo Varadkar in 2020.

https://www.independent.ie/business/irish/central-bank-warns-against-blanket-write-offs-of-pandemic-debts-42057000.html Central bank warns against blanket write-downs of pandemic debt

Fry Electronics Team

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