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
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
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
"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
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
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
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
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.