Portugal preparing law to offset banks' impairments against tax

LISBON (Reuters) - Portugal is preparing to change the law to allow banks to deduct billions of euros in impairments from their tax bills over 15 years, a move that could sharply boost lenders’ capital ratios, the senior government official in charge of taxation said.

Secretary of state for tax affairs Fernando Rocha Andrade said the changes would replace laws that have been in place since the 1990s and would allow impairments identified under European banking regulations to be considered as a tax credit.

“(The new law) is being prepared by the government,” Rocha Andrade told Reuters. “We expect this to go into effect this year and that it applies to the (banks’) results this year.”

Weighed down by large portfolios of non-performing loans from the country’s 2011-14 debt crisis, when it was bailed out by the European Union and International Monetary Fund, Portugal’s banks have struggled to return to profitability and have low capital ratios.

According to data from the Bank of Portugal, impairments stood at around 1.6 percent of banks’ total assets of 398.5 billion euros in 2016, roughly equivalent to 6.4 billion euros. Portuguese banks’ non-performing loans stand at about 30 billion euros.

Impairments are the permanent reduction of banks’ assets due to non-performing loans and other financial exposures.

Tax authorities have traditionally taken longer than supervisory authorities to recognize such impairments, which “in today’s supervisory rules are charged on banks’ capital ratios”, reducing their capital, Rocha Andrade noted

He said the government hoped the change would end the delay in recognizing banks’ impairments in the tax system.

Banks had previously been able to account for impairments in tax terms without impacting their capital, but changes to European bank rules in 2015 mean banks now have to take a capital charge immediately.

“In the long-term, the billions of euros (in impairments), would always represent a tax cost, the question is whether it would be in one year or another year.”

With the transition to the new system the stock of banks’ impairments will be registered as of the end of 2016 and “afterwards a deadline of 15 years will be established and deducted off corporate tax over that time”, Rocha Andrade said.

From 2017, further impairments imposed by bank supervisors will be treated as a tax credit in annual accounts.

He said he did not foresee any problems winning approval from Brussels for the change because European authorities have requested that accounting and tax rules be aligned with banking supervision norms.

Writing by Axel Bugge; Editing by Catherine Evans