Japan's Major Banks Reduce Levels Of Deferred Tax Assets

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

25 November 2003

Bowing to pressure from banking regulators, Japan’s seven largest banks have cut their combined deferred tax assets by some 1.4 trillion yen ($12.8 billion) in the six months to the end of September according to a report in the Japan Times.

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.

DTAs arise from loan-loss provisions put up by a bank to protect itself from a bad creditor in a given fiscal year which the tax authorities do not recognise as tax deductible. If the borrower goes bust then these loan-loss provisions are considered a loss and can be deducted from tax.

The major banks have faced severe criticism from the regulators for their readiness to exploit deferred tax assets and as a result the ratio of DTAs to self-assessed taxable income has dropped to 35%, below the 40% ceiling set by the accounting rules of the Japanese Institute of Certified Public Accountants.

Recommended