Japanese Banks Unlikely To Get Tax Bailout

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

24 June 2003

Japanese banks hoping to be given favourable tax treatment for bad loans are setting themselves up for disappointment, according to reports emanating from the region recently.

Many large Japanese banks are now suffering the consequences of bad debts, and several may find themselves going the same way as Japan's fifth biggest bank, Resona, which was recently bailed out to the tune of $17 billion by the taxpayer when auditors declared it under-capitalised.

However, other banks hoping to receive millions of yen in tax refunds from the writing-off of bad debt against their tax liability are unlikely to get their way if reported comments from government officials are to be believed. As one senior official told the FT: "This is not feasible politically. It's dead. There may be some changes, but nothing dramatic enough to save the banks."

The unnamed official added that in his opinion, at least two of Japan's four so-called megabanks are heading the same way as Resona.

As bad debt has caused banks' profits to all but dry up, many have begun to rely too heavily on deferred tax assets (DTAs) which are credits against future tax liabilities. In the case of Resona, some 76% of the bank's capital base consisted of these DTAs, and it was deemed that the bank would struggle to realise the credits due to poor profitability. According to the FT, about half of the big four's capital base is made up from DTAs.

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