Is the deduction of the deferred tax assets that rely on future profitability (hereinafter, the “DTAs”) and the amount of the associated deferred tax liabilities (hereinafter, the “DTLs”) relevant for the calculation of the amount to be deducted from Common Equity Tier 1 (CET1) according to Article 36(1)(c) of Regulation (EU) No. 575/2013 (CRR) to be determined independently of the Accounting Policies defined by the Bank for the offsetting of the DTAs and the DTLs in the Balance Sheet and regardless of the way in which the DTAs and DTLs are reported in the Financial Statements?
The Standard IAS 12, paragraph No 74, states that “An entity shall offset deferred tax assets and deferred tax liabilities if, and only if:
(a) the entity has a legally enforceable right to set off current tax assets against current tax liabilities; and
(b) the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either:
(i) the same taxable entity; or
(ii) different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered”.
The next paragraph (No 75) states that “To avoid the need for detailed scheduling of the timing of the reversal of each temporary difference, this Standard requires an entity to set off a deferred tax asset against a deferred tax liability of the same taxable entity if, and only if, they relate to income taxes levied by the same taxation authority and the entity has a legally enforceable right to set off current tax assets against current tax liabilities”.
Although the “Bank (hereinafter, the “Parent Company”, or the “Group”) has a legally enforceable right to set off a current tax asset against a current tax liability when they relate to income taxes levied by the same taxation authority and the taxation authority permits the entity to make or receive a single net payment, the Bank has defined the provisions of paragraphs No 74 and No 75 more specifically.
Inter alia, the Bank has stated for accounting purposes that the Parent Company and the Subsidiaries may offset the deferred tax assets and deferred tax liabilities recognised in the Financial Statement only with reference to temporary differences which, in addition to satisfying the requirements set in paragraph No 74 of IAS 12, refer to a finite period of reversal/annulment and to the same year of reversal/ annulment. Therefore, in years in which deductible temporary differences exceed taxable temporary differences, the net deferred tax assets are recognised in the asset section of the Balance Sheet under “Deferred tax assets”; conversely, in years in which taxable temporary differences exceed deductible temporary differences, the net deferred tax liabilities are recognised in the liabilities section of the Balance Sheet under “Deferred tax liabilities”. For the safe of clarity please see the following example:
Years of reversal / annulment
Tot T1 T2 T3 T4 T5 Indefinite
Taxable temporary differences (A) 800 100 100 100 200 200 100
Deductible temporary differences (B) 950 50 50 250 300 300 0
Net temporary differences (C = A – B) -150 50 50 -150 -100 -100 100
Tax rate = 30%
DTL D = C > 0 x Tax rate 15 15 n.a. n.a. n.a. 30
DTA E = C < 0 x Tax rate n.a. n.a. 45 30 30 n.a.
Total amount of DTL recognised at T0 in the asset section of the Balance Sheet (Sum of D): 60
Total amount of DTA recognised at T0 in the liabilities section of the Balance Sheet (Sum of E): 105
Because of the aforementioned approach, based on the reversal/annulment period of the DTAs and the DTLs, there are positive and negative temporary tax differences that are not offset against each other and, therefore, are reported in Financial Statements with “open” balances, respectively, among the deferred tax assets and the deferred tax liabilities of the Balance sheet.
Regarding the deduction of deferred tax assets that rely on future profitability, the paragraph 3 of the article 38 of the del Regulation (UE) No 575/2013 (CRR) states that the amount of deferred tax assets that rely on future profitability may be reduced by the amount of the associated deferred tax liabilities of the institution, provided the following conditions are met:
(a) the entity has a legally enforceable right under applicable national law to set off those current tax assets against current tax liabilities;
(b) the DTAs and the DTLs relate to taxes levied by the same taxation authority and on the same taxable entity.
The aforementioned paragraph does not subordinate the deduction of DTAs that rely on future profitability and the associated DTLs to a detailed scheduling of the timing of the reversal/annulment of each temporary difference. Furthermore, paragraph 4 only specifies that associated DTLs of the institution used for the purposes of paragraph 3 may not include deferred tax liabilities that reduce the amount of intangible assets or defined benefit pension fund assets required to be deducted, while the paragraph 5 establishes the method for allocation of the DTLs to the DTAs that rely on future profitability. Following this approach and taking into consideration the previous example, assuming that DTLs do not include amounts related to intangible assets or defined benefit pension fund assets, the amount of DTA to be deducted from Common Equity Tier 1 according to Article 36(1)(c) of CRR should be 45 (105 of DTA recognised in Balance Sheet net of 60 of DTL recognised in Balance Sheet).
As set out in EBA Q&A 2013_258, the amount of net Deferred Tax Assets (DTAs) calculated under the conditions of Article 38 of Regulation (EU) No. 575/2013 (CRR) can be distinct from the amount of net DTAs calculated under the relevant accounting framework, as the applicable rules in each individual case can lead to different outcomes. Articles 38(3), 38(4) and 38(5) of the CRR are the only applicable netting rules for the purpose of the deduction of DTAs from CET1 items, regardless of the way in which DTAs are reported in financial statements.