Japanese Banks Continue To Use Deferred Tax Assets

by Mary Swire, Tax-News.com, Hong Kong

15 July 2003

The Japanese government has yet to decide whether to cap the amount of deferred tax assets that the nation's largest lenders count as part of their core capital, according to a recent report by Japanese newspaper Nihon Keizai.

There has been concern for some time within Japan that some of the country's largest banks have been propping up their capital levels with unrealised tax credits, which cannot be used to pay creditors if a bank fails. In response, the government has set up a panel (the Financial Systems Council) to look into the banking system, which was initially expected to recommend a limit to the amount of deferred tax assets that banks could include in their core capital. A draft report seen by the Nihon Keizai however, merely suggests that further discussions on the matter are warranted.

The Financial System Council's report apparently goes no further than to state a case for greater transparency as to how deferred tax assets are calculated. The panel reportedly hopes that this will make the process of applying for deferred tax assets more difficult and therefore bring some kind of voluntary regulation into the system.

Japan's banks often count alarmingly high levels of deferred tax assets within their core capital, and on March 31 this year it was reported that the country's sixth largest bank, Sumitomo Trust and Banking Co, had 39.5% of its core capital booked as deferred tax assets. Meanwhile, the level at Mitsui Trust Holdings Inc, the seventh largest bank, was 99.9% of capital.

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