March 27 (IFR) - The world's largest banks hope to cash in on more than US$160bn of tax credits in the coming years, as they look to offset their tax bills against losses racked up through the credit crisis, creating a boon for investors and denying billions of taxes to governments in the US, UK and elsewhere.
Citigroup alone has more than US$55bn of deferred tax assets - up from US$13.5bn in 2007 - which chief executive Michael Corbat said he plans to "consistently utilise" over the next few years. Others are expected to follow, unlocking accrued credits.
Corbat is attempting to draw a line under Citigroup's crisis legacy, and hopes that using the DTAs won't only boost earnings in the short term, but also long term by removing zero-yielding assets.
"The DTA doesn't earn income, and is, in fact, a drag on our equity return," he said.
DTA levels have nearly quadrupled since 2007 among ten of the world's largest banks, according to data compiled by IFR. But banks ability to use them will depend on their ability to make profits within the jurisdictions losses were incurred before the DTAs expire.
Next to Citigroup, Bank of America holds the second highest level of DTAs with US$31bn as of the end of 2011 - the most recent data. At the end of the same year, JP Morgan had US$14.7bn, BNP Paribas 9.3bn euros and Deutsche Bank 8.7bn euros.
"There is a fairness element to it," said a tax analyst. "If you've had a loss, you should be able to take account of that in the tax system. But at the same time you can have difficult consequences, such as if banks are making more money now and not paying taxes."
Deferred tax assets are accrued when a company posts a loss and can later be used to offset the corporate tax bill. There are other more technical ways to get them via investments in areas such as new technology or infrastructure. Broadly speaking, a US$10bn loss could offset future taxes on US$10bn in profits.
However, deferred tax rules can be complex and quite different across jurisdictions, meaning that it might not quite be so straightforward for Citigroup and others, who may find that claiming the tax benefit will be more complicated than simply posting profits.
For one, the DTA figure is determined not only from the losses accrued but also from projected future profits. In effect, Citigroup saying it holds US$55bn in DTAs means that it believes that in a few years time - usually around five or six years - it will be this profitable.
In addition, DTAs booked from losses in one country cannot be used in another jurisdiction. In the case of Citigroup, most of its losses were booked in the US. If Corbat wants to bring down its level of DTAs, he will have to find ways to make more profits in the US.
"DTAs only have value if the bank generate profits in the jurisdictions where the DTAs arise - in their case, the US," said Doug Shackelford a professor of taxation at the University of North Carolina.
"They want to report profits in the US to reduce the DTAs and thus demonstrate that the remaining DTAs will be utilised at some point and thus should be valued as any other asset even now, well before utlisation."
Some tax experts are sceptical that Citigroup and other banks will manage to use all of their DTAs, simply because they are not convinced that they are likely to be as profitable as the banks are projecting.
"In order to use the DTAs, you have to have taxable income, and at Citi you don't," said Lee Sheppard, a tax lawyer and managing editor at Tax Analysts. "Their balance sheet looks like the European Central Bank right now, with a huge pile of garbage."
The next most important restriction is time. In the UK, DTAs have no time limit, but in other jurisdictions such as the United States there is a five-year limit, upon which they simply expire and could explain part of Corbat's urgency to use these assets while he still can.
A failure to use DTAs would prompt questions from shareholders who will want to know why the credits were written up as aggressively as they were in some cases. Furthermore, they will demand answers as to why they were led to believe that the firm would see substantial future profits and pay little corporate tax against them.
The development comes at a time when governments are already seeing revenues from corporation tax from banks decline substantially.
According to HM Revenue, corporation tax from UK banks has declined from 7.3bn pounds in 2006-2007 to 1.3bn pounds in 2011-2012. Total receipts from corporate tax in the UK were 42.1bn pounds in 2011-2012.