Beruflich Dokumente
Kultur Dokumente
supervision: taxes
are of capital
importance
H. de Gunst
International
Erik de Gunst*
1.
Basel III: A global framework for more resilient banks and banking
systems, available at www.bis.org/bcbs/basel3.htm.
See e.g. website of the Dutch Central Bank (DNB), www.dnb.nl/
publicatie/publicaties-dnb/nieuwsbrief-banken/nieuwsbrief-bankendecember-2012/dnb282757.jsp. In Nov. 2012, US regulators already
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Erik de Gunst
Source: European Banking Authority, Results of the Basel III monitoring exercise based on data as of 31 December 2011, available at www.eba.europa.eu.
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Art. 36(2)(a) and (b) draft CRR. The most recent draft CRR, which can be
found on the website of the European Parliament (www.europarl.europa.
eu), provides for a new paragraph (d), which describes a deferred tax asset
scenario that is also not considered to rely on future profitability. The
author s understanding is that this is one of over 2,000 amendments that
have come out of discussions with the European Parliament, and that it is
uncertain whether this amendment will be approved. Further discussion
of this issue is beyond the scope of this article.
It is uncertain whether this 100% RWA will survive (see supra n. 17).
The table above was taken from a recent report of the European Banking Authority.
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Every six months, the European Banking Authority investigates the expected impact of Basel III on European banks.
The distinction between Group 1 and Group 2 banks is
made based on their size, with Group 1 banks being the
bigger banks. For the first category of banks, the expected
deductions from 100 CET1 capital are 34.6. Of this amount,
5 relates to deferred tax assets relying on future profitability (3.5 plus 1.5). Excess above 15% also includes deferred
tax assets, but how much is not clear. Tax (netting) is also of
importance in relation to goodwill and intangibles, and
also under Other to the extent this relates to the deduction for defined benefit pension fund assets. Essentially,
this means that tax is one of the more important deductions from CET1 capital coming out of Basel III.
The gradual phased-in introduction of the deduction
for deferred tax assets for tax loss carry-forwards, might
lead some banks to not giving this aspect the attention
it deserves, the view being that existing losses would be
recovered before a full deduction must be made in 2018.
However, the financial crisis is continuing much longer
than originally expected and it is questionable whether
sufficient profits will be realized in the coming years to
make up for the existing losses, and indeed in the current
climate, there is a real chance of the losses increasing rather
than decreasing, exacerbating the problem.
Furthermore, the market has shown little interest in the
phasing-in aspect of Basel III. The expectation is that
banks show the impact of an integral introduction of Basel
III. Banks are also releasing figures distinguishing between
Basel III phase-in and Basel III fully loaded, as if Basel
III had entered into force fully on 1 January 2013.23 Some
banks have also publicly announced their intention to be
fully Basel III compliant as from 1 January 2013.
Also, if phasing-in is considered, a partial deduction of say
60% of deferred tax assets in 2016 could already have a significant detrimental impact, with the bank being required
to have increased its minimum CET1 capital level to 4.5%
of RWA.
Finally, the increased 250% risk weight for deferred tax
assets arising from temporary differences (not deducted
because below 10%/15% threshold) could have a negative impact. As mentioned, this increased risk weighting
applies immediately from the date the new rules enter
into force; banks will be required to maintain more CET1
capital against this.24
6. Some Areas of Attention for Dutch Banks
Basel III is a global effort. The Capital Requirements Regulation and Capital Requirements Directive IV form the
implementation of Basel III at the EU level. By contrast,
tax still very much operates at a local level. Each individual
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country applies its own local tax rules to determine the tax
implications of the different aspects of the new regulatory
rules. An example is the different tax treatment afforded to
the payment of coupons on new Additional Tier 1 instruments. Some countries allow banks to deduct these payments for local corporate income tax purposes, while
others do not. And there are countries such as the Netherlands which have yet to formulate policy on this issue.
The following are a few examples of how Dutch banks
could be affected by the new rules relating to deferred tax
assets and deferred tax liabilities. Banks in other jurisdictions may face similar issues.
Consider a Dutch bank with a foreign permanent establishment, which incurred losses in years before 2012.
If deferred tax assets were formed locally at the branch
level, these would, in principle, be fully deductible from
the bank s CET1 capital (albeit with the five-year phasein). Where these branch losses were deducted from Dutch
taxable profits, the Netherlands imposes a mandatory
recapture rule, implying that no exemption would be
given from Dutch corporate income tax under the Dutch
double tax relief system, for future profits coming out of the
branch. Relief would not become available until after the
losses previously deducted from the bank s Dutch taxable
profits had been recaptured in full. The Netherlands introduced a new double tax relief system for branch results in
2012. This new system is more territorial based, removing the possibility for permanent establishment losses to
be deducted from Dutch taxable profits at the head office
level. However, as a transitional measure, the recapture rule
for pre-2012 losses has remained in place.25 Generally, the
Dutch bank will have recorded a deferred tax liability in
relation to the possible future recapture. With deferred tax
asset being a future receivable on the tax authorities of the
jurisdiction where the permanent establishment is situated on the one hand, and the deferred tax liability being
a future liability towards the Dutch tax authorities on the
other, netting as described above will not be possible. As
a result, the deferred tax asset would be deducted in full
from the bank s CET1 capital.
Another area that is affected concerns tax consolidations
(fiscal unities in the Netherlands) existing between banks
and non-banks, e.g. insurers. The question involves how to
deal with intra-group (tax) receivables, tax set-offs and socalled tax sharing agreements. What if differences exist
between tax consolidation and consolidation for financial
accounting purposes? Dutch domestic accounting guidelines (Richtlijnen voor de Jaarverslaggeving) provide some
guidance for the allocation of taxes within fiscal unities,
but leave many questions unanswered.
Finally, many Dutch banks have concluded IFRS agreements with the Dutch tax authorities under which they
have agreed that the measurement of financial instruments for accounting purposes is determinative for their
tax measurement. However, this is not always the case, and
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Erik de Gunst
there are a few important exceptions. How do the new regulatory capital requirements affect these agreements?
7. Improvement of CET1 Capital Ratios
A bank can improve its CET1 capital ratio by increasing
CET1 capital or by reducing RWA. Currently, they do both.
Profits are retained and cost reduction programmes are
carried out. There are share/rights issues (although limited
due to their comparatively expensive nature and dilutioneffect for existing shareholders). Banks are also attempting
to reduce balance sheet totals through disinvestments and
reduced lending. Risk weighting is also actively managed,
e.g. by transferring certain risks to insurers or other nonregulated institutions, such as hedge funds.26 Another
option is reducing or mitigating the mandatory deductions from CET1 capital of which deferred tax assets
are one.
Given the impact that deferred tax assets could have on the
size of a bank s qualifying CET1 capital and the impetus
for increased capital levels, a critical and detailed analysis by banks of their deferred tax asset and deferred tax
liability positions could help improve CET1 levels. This
would be cheaper and easier to achieve compared to, say,
issuing new shares. Also, improved netting could ensure
that more deferred tax liabilities are set off against deferred
tax assets for loss carry-forwards, thus reducing the deduction from CET1 capital. Deferred tax liability positions
would need to be analysed in (minute) detail to achieve
optimal netting.
A possibility is also to accelerate income recognition for
tax purposes. In the Netherlands, this has also received
some recent attention as a means to prevent the expiration of loss carry-forwards.27 An existing tax loss could
be set off against accelerated profits (profit reserves). The
deferred tax asset recognized in the bank s accounts disappears and may be replaced with a deferred tax asset arising
from temporary differences. As a result, deferred tax assets
are no longer deducted from CET1 capital, that is provided
and for as long as the combined 10%/15% threshold is not
exceeded.
There are other ways in which to optimize a bank s
deferred tax asset position for regulatory purposes,
without this reaching the level of tax planning. Rather,
what is required is a granular analysis of the deferred tax
asset/deferred tax liability positions of a bank. In particular, banks with foreign subsidiaries or operating abroad
through branches should analyse their foreign tax positions, more so if foreign tax consolidations are in place or
local netting has occurred.
8. Regulatory Reporting: Common Reporting
Banks are required to periodically file reports about their
solvency position, on both a solo and consolidated basis.
Common reporting (COREP) is the standardized reporting framework issued by the European Banking Authority
for Capital Requirements Directive reporting.28 Common
reporting has been in existence since 2005/2006, when it
was introduced by the Committee of European Banking
Supervisors (CEBS), the predecessor of the European
Banking Authority. Member States had the option to
implement common reporting or not, or only partially.
The Netherlands more or less introduced a full version of
common reporting. Germany implemented the best part
of common reporting, as well. By contrast, the United
Kingdom implemented only a very small part.
These differences in common reporting within the European Union will come to an end. As with the Capital
Requirements Regulation, the new common reporting
will take the form of a regulation, and there will be one
set of reporting rules applicable throughout the European
Union. The new common reporting will embed the new
capital requirements for banks as contained in the Capital
Requirements Regulation.
The European Banking Authority has been tasked with
drafting so-called Implementing Technical Standards.29
In December 2011, it published a consultation document
for the Implementing Technical Standards which describes
in detail what must be reported, the frequency of reporting and the format to be used. The Implementing Technical Standards also provide for a large number of templates which must be completed by banks, including one
relating to taxes.30 Once these Standards have been finalized, they will be mandatory for all EU banks; the Standards will also be in the form of a regulation. The intended
commencement date of the new common reporting was
1 January 2013, the same as for the Capital Requirements
Regulation, implying first submission for Q1 2013 in May
2013. The delay in the introduction of the Regulation will
also have an impact on the start date of the new common
reporting. When it will eventually start will become clear
as soon as the Capital Requirements Regulation has been
adopted.
The amount of data that will need to be submitted, is
substantial and significantly more than that currently
required. The level of detail has also increased compared
to current regulatory reporting. Reporting will be required
each quarter, semi-annually and annually, within 30 business days of the end of the respective period.
The increased importance of taxes and deferred tax assets
in Basel III and the Capital Requirements Regulation
means a significant increase in the tax information that
must be provided to regulators. Because of the potential
adverse impact of existing deferred tax assets on the size
of banks CET1 capital, banks will not be able to escape
the provision of detailed tax information. The expectation
is that regulators will increasingly be scrutinizing banks
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9. Conclusion
The global introduction of Basel III will have a
dramatic impact on banks. Business models are under
pressure. Banks are shedding non-core businesses.
Almost on a daily basis, newspapers feature articles
about the impact of the new rules. Banks are looking
at ways to reduce capital utilization of activities.
Activities are streamlined and/or scaled back when
capital utilization is considered too intense compared
to the activities profitability and profit potential going
forward. Banks are attempting to reduce RWA to
improve capital ratios.
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064TT/A06/H
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Erik de Gunst
Is verbonden aan
Ernst & Young Belastingadviseurs LLP
Tel:
088-4071896
E-mail: erik.de.gunst@nl.ey.com
Verschenen in:
Derivatives & Financial Instruments 2013 nr. 2
March/April 2013. - p. 42-47,
een uitgave van
IBFD Publications te Amsterdam
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Ernst & Young 2013
Basel III and banking supervision: taxes are of capital importance / H. de Gunst. Derivatives & Financial Instruments 2013 nr. 2