The role of banks in the global economy, as well as in the functioning of countries’ tax systems, is of vital importance. As a result of the financial crisis, a large number of banks have sustained substantial losses. The scale of those losses, and the potential regulatory capital, profit and cash-flow benefits for banks able to convert them into cash, mean that revenue bodies must be alert to potential tax compliance risks as a result of aggressive tax planning involving losses.
The effects of the financial and economic crisis on bank profits worldwide has been phenomenal, with write-downs and losses of USD 1.3 trillion up to January 2010 specifically related to the financial crisis, and knock-on effects throughout the banking sector. Banks in countries participating in this study account for over 80% of global pretax losses of USD 400 billion in 2008, with the largest losses arising to banks headquartered in the US and UK, although other countries’ banks suffered larger losses measured as a share of their home country GDP.
Setting the context for current levels of bank tax losses
This chapter sets the context for current levels of bank tax losses, using data from a variety of publicly available sources. It briefly reviews the effect of the crisis on bank profits, the size and geographic distribution of banks’ pre-tax commercial losses, and the relationship between banks and national revenue bodies.
Potential scale/fiscal cost of banks' tax losses
This chapter assesses the likely extent and fiscal cost of banks’ tax losses, drawing on information in banks’ published accounts, while making clear that these can only provide a broad indication rather than a precise measure of banks’ tax losses.
Summary of country rules in relation to taxation of bank losses
This chapter summarises relevant country tax rules relating to bank losses. These include rules for how losses are recognised for tax purposes as well as rules for how tax relief may be given in respect of such losses. The rules are complex, and differ from country to country, and the chapter aims to summarise the key elements under a number of themes, including the tax treatment of the write-down of loans and securities, rules for offsetting tax losses against other income of the same company, rules for offsetting tax losses within a group of related companies, rules for the carry-over of unrelieved tax losses, rules for the treatment of foreign losses and restrictions on tax relief for a loss being given more than once.
Main issues for banks in relation to tax losses
This chapter identifies the main issues for banks in relation to tax losses. It highlights a number of issues raised by banks over current country tax rules relating to bank losses and underlines the importance to banks of their regulators’ treatment of tax losses. The chapter also touches on how an enhanced relationship with national revenue bodies can bring specific benefits to banks in relation to the tax treatment of losses.
Compliance/tax risk issues for revenue bodies in relation to bank tax losses
This chapter identifies the main compliance and tax risk issues for revenue bodies in relation to bank tax losses. It first gives an overview of the tax risks involving bank tax losses, and the incentives which give rise to those risks. It then describes the key tax risks in some detail, including a number of illustrative examples. Tax risks covered include risks relating to non arm’s-length transfer pricing, corporate reorganisations, financial instruments, and the possible circumvention of loss recognition and relief rules.
Tools available to revenue bodies to address compliance risks in relation to bank tax losses
This chapter summarises the tools available to revenue bodies to address compliance risks in relation to bank tax losses. It assesses the benefit of encouraging responsible tax reporting through co-operation and dialogue, the role of rulings, clearances and disclosure rules, and the role of audits, supported by international exchange of information and co-operation between revenue bodies and between revenue and regulatory authorities.
Conclusions and recommendations
This chapter sets out the key conclusions of the report and makes a number of recommendations for both revenue bodies and banks.
Annex A. Country rules in relation to taxation of bank losses
This section of the report summarises the main features of the relevant rules in the countries which contributed to the drafting of the report. It is not intended to be exhaustive but simply to give an overview of relevant rules in relation to the tax treatment of losses for the purpose of assessing where tax risks may arise both for business and for revenue bodies. The relevant rules can be categorised as, first, those relating to the recognition, for tax purposes, of losses on loans or securities and, second, those relating to the relief of overall losses incurred in a taxable period.
Glossary of acronyms and technical terms
This glossary is intended to help readers to understand the context in which certain technical terms are used for purposes of this report. It does not intend to provide a legal definition of the different terms.
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