Single Rulebook Q&A

Question ID: 2017_3225
Legal act : Regulation (EU) No 575/2013 (CRR) as amended
Topic : Own funds
Article: 36, 38, 39
Paragraph: 36 (1), 39 (2)
Subparagraph: 36 (1) (c)
Article/Paragraph : Not applicable
COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable
Type of submitter: Competent authority
Subject matter : Deduction of deferred tax assets
Question:

Does the CRR recognise any form of deferred tax assets (DTAs) that do not rely on future profitability, other than those specified in Article 39(2) of the CRR?

Background on the question:
In accordance with Article (4)(1)(106)CRR “deferred tax assets” has the same meaning as under the applicable accounting framework. Additionally, under Article (4)(1)(107)CRR “deferred tax assets that rely on future profitability” means deferred tax assets the future value of which may be realised only in the event the institution generates taxable profit in the future. The credit institution under analysis applies IFRS / IAS. In accordance with IAS 12, a deferred tax asset (DTA) shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. In other words, the reversal of a deductible temporary difference results in a deduction from the taxable profit of the year. The accounting recognition of DTAs assumes future economic benefits related with the recovery of the higher amount of current taxes paid upfront and not with the specific features or the transactions that originated those temporary differences (below more information on the type of transactions is provided).
 
Regarding the transactions giving rise to the recognition of these DTAs, in accordance with the information provided, the following characteristics need to be highlighted: 1) The deductible temporary differences relate to income that is deferred in the statement of financial position but has already been included in taxable profit in the current or prior periods; 2) The cash related with the deferred income (presented as a liability in the financial statements) is collected upfront (and taxed immediately) while the recognition of the corresponding income is performed through a certain number of subsequent years. For this reason, a temporary difference between the accounting and tax basis is originated. The recognition of this income in P&L represents the reversal of the temporary difference, meaning that the corresponding amount of DTAs is derecognised (in accounting terms) simultaneously. These two accounting entries represent a positive effect in P&L. Contrary to other types of DTAs (such as loss carried forward) these specific DTAs correspond to a delayed income that will necessarily be accounted for.
 
The current prudential regulation (CRR) only distinguishes between: (i) DTAs that rely on future profitability, which have to be deducted from CET1 in accordance with Articles 36(1)(c) and Article 38; and (ii) DTAs that do not rely on future profitability, which are not deducted from CET1 capital, being subject to a risk weight of 100% in accordance with Article 39(2) CRR .
 
The abovementioned DTAs do not meet the conditions established under Article 39(2) of the CRR. In particular, these DTAs are not subject to conversion into tax credits, which means that no reimbursement from the central government will occur in any circumstance. It was also mentioned by the credit institution that in case of liquidation the total amount of deferred income and corresponding DTAs are recognised in P&L generating a positive result as, naturally, the amount of deferred income (gain) is higher than the amount of DTAs (loss). However, even with the positive effect generated by these transactions in case of liquidation, these DTAs are not available to cover any losses on an on-going (i.e. going-concern) basis but will offset the income that have been initially delayed.
 
It appears that the specific economic nature of these DTAs is not taken into account in the current provisions of CRR. As the income has been received and taxed in full upfront and its accounting recognition are simply delayed following different timelines, there is no risk for the institution of not recovering these specific DTAs (from the moment that there is enough tax profitability). The institution is not in a situation where an excessive tax has been paid and it should be reversed by a deduction from a future profit. Therefore, it is different in essence from other types of DTAs relying on future profitability such as loss carried forward.
 
Although these DTAs are originated under different circumstances than those related with non-deductible losses (i.e. the higher taxable profit is not generated by a loss not recognized for fiscal purposes in a given year, but by a higher profit that, although it has been cashed in, it is not recognized for accounting purpose in that given year), no legal basis to grant an exemption for DTAs’ deduction from CET1 was identified, due to the following aspects: - Tax basis is not computed separately for these specific transactions; - DTAs are not converted into a tax credit in case of institution reports a loss; and - The current rules of the CRR, do not allow any other exemption from deduction except for those DTAs that meet the conditions under Article 39(2) or stock of DTAs below the tresholds defined in Article 48. 
Date of submission: 14/03/2017
Published as Final Q&A: 25/05/2018
EBA answer:
The DTAs relate to a revenue (collected through a single cash payment) which is included in the taxable profit of the year where it is perceived, whereas in accounting, the revenue is taken to profit or loss over a certain number of subsequent years.
 
Apart from the DTAs covered by Article 39 CRR, which do not rely on future profitability (conversions into tax credits) and are not to be deducted from CET1, the CRR does not recognise any other type of DTAs resulting from the application of the accounting framework as DTAs that do not rely on future profitability. This implies that all the DTAs resulting from the application of the accounting framework [temporary differences (revenue taxed, not yet recognised in accounting or expense recognised in accounting not yet deductible)], except those DTAs arising from temporary differences where all the conditions of Article 39(2) CRR are met, are subject to deduction from CET1 in the terms of Articles 36(1)(c), 38 and 48 CRR.
 
In accordance with IAS 12, a DTA arisingfrom temporary differences shall be recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. As such, independently of the characteristics of the transactions that gave origin to the recognition of these DTAs, no legal basis is available to justify granting an exemption from deducting these assets from CET1.
Status: Final Q&A
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