Since the global financial crisis, tax authorities globally have been carefully monitoring compliance risks from planning activities associated with the use of tax losses by banks.
Some of the concerns and implications for global banking groups are discussed.
The Organisation for Economic Co-operation and Development (OECD) recently issued a paper, Addressing tax risks involving bank losses, highlighting potential tax risks associated with losses generated by global banks from the GFC.
The OECD paper notes that the estimated total tax losses which have been incurred by global banks is at least US$700 billion with a potential tax benefit of about US$230 billion as a result of GFC related investment write downs and credit losses. The OECD paper also indicates that these losses may take up to eight years to be substantially utilised, and in some cases longer.
Some banks in the United States and Europe have booked the benefit of these tax losses in their earnings creating deferred tax assets in their balance sheets. It is, therefore, important that these deferred tax assets are able to be recovered to avoid any negative impact on future earnings from having to write them off.
The United States and many countries in Europe have strict loss utilisation rules which may affect the quantum and timing of these losses, including unrealised losses. For example, these include restrictions as a result of any changes in underlying ownership and business activities. In some cases, where banks have experienced changes in ownership because of Government or other third party capital injections, these banks have been forced to closely monitor their business strategies to ensure that any changes in these will not adversely affect their ability to utilise their tax losses.
Tax authorities globally are engaging with global banks on a real time basis to better understand what strategies are being developed for the utilisation of these losses and how these are aligned to the broader business strategies.
In particular, tax authorities are focusing on cross border arrangements involving the allocation of losses to profitable group entities through the pricing of group services including funding, the transfer of loss assets as part of group internal reorganisations, financial derivative transactions involving risk transfers between group entities or the allocation of capital between group entities. Tax authorities are also monitoring arrangements within banking groups involving the refreshing of losses and transactions between banks and customers where the bank is able to gain some value for its losses by pricing these into the transaction.
The OECD paper recommends that tax authorities should cooperate with each other to share intelligence on aggressive tax planning involving bank losses and share practices on identifying cross border arbitrage of loss utilisation rules, including opportunities for loss duplication and multiple deductions for the same economic loss. In addition, it encourages tax authorities to provide better guidance on how they will interpret loss utilisation rules in circumstances where there are internal restructures involving asset transfers and transfer pricing considerations. The OECD paper notes that banks should have sound processes and controls, with supporting documentation, over the utilisation of losses and openly engage with tax authorities in their planning initiatives involving losses.
The OECD paper also notes that there is evidence of tax planning by banks in this area to enable deferred tax assets which are attributable to tax losses to count towards regulatory capital in some countries.
The Australian Commissioner of Taxation noted in a recent speech that the ATO has a current focus in this area, particularly on the role that structured finance arrangements and transfer pricing play in relation to tax and economic outcomes. The Commissioner has recently stated that foreign banks operating in Australia which have made substantial losses during the GFC will be monitored and expressed concerns about activities involving loss transfers to their profitable Australian businesses. The ATO has already issued guidance on arrangements involving the transfer of loss assets to Australian branches of foreign banks.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
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Emanuel Hiou is a Partner on Financial Services Taxation at Deloitte Australia.