EU Says Probe Still Open on Italy's Existing Deferred Tax Assets

  • Investigation of Portugal and Greece also continues, EU says
  • Greece, Portugal have state guarantee compensation in place

Italy’s use of deferred tax assets for its banking sector remains under European Union review to make sure that existing measures didn’t overstep state aid rules, the European Commission said.

By promising to stop creating new state-guaranteed deferred tax assets, Italy has taken a “step in the right direction,” commission spokesman Ricardo Cardoso said on Tuesday in Brussels. At the same time, the EU is still looking into whether the rules were followed in the past, he said.

‘‘As regards the remaining guaranteed DTAs, the commission continues to assess the law in place” to make sure there is a “level playing field” in EU banking markets, Cardoso said. For a “significant part” of the existing stock of deferred tax assets, he said, the state guarantee may have been appropriate because of taxes that were overpaid due to a specific Italian law that affected banks.

The EU has been investigating deferred tax assets in Italy, Spain, Greece and Portugal to make sure countries weren’t giving improper help to their banks during the financial crisis. Three of the four nations in the probe received bailouts during the euro area’s sovereign debt crisis, which exacerbated the link between struggling sovereign borrowers and weak banks and led the euro area to put the European Central Bank in charge of banking supervision.

The Brussels-based commission needed to make sure that the benefits of the state-guarantee regime wouldn’t benefit the banking sector disproportionately, said Nicolas Veron, senior fellow specializing in financial services at Bruegel in Brussels. He said each nation needed to be assessed individually because their banks made different use of the benefits.

“Greek DTAs are very different from Spanish DTAs, which are different from
Italian DTAs and those from Portugal,” Veron said. “They should be considered entirely separately.”

Italy’s new law approved in June says that Italian banks will have to spread over 10 years any losses that are booked but not yet deducted for tax purposes. For new provisioning, banks can take the deduction in one year.

The law is designed to free up credit for Italy’s struggling economy by forcing banks to deal with bad loans that have restrained lending for years. UniCredit SpA and Intesa Sanpaolo SpA are among five banks that set aside about 46 billion euros ($51.7 billion) for loan losses in 2013 and 2014 under pressure from regulators to shore up their balance sheets.

The EU commission is also reassessing its investigations into the other nations that used deferred tax assets. The commission said on Monday that it expects to end its probe of Spain’s practices because new government proposals are in line with the EU demands. Cardoso reiterated the EU’s view at a Tuesday press briefing.

Under the new rules, Spain won’t guarantee new deferred tax assets that can’t be justified, Cardoso told reporters in Brussels, saying this solution “will address the concerns in a satisfactory manner for the future.” Existing DTAs will be assessed a yearly compensation of 1.5% of the state guarantee amount if they can’t show a proportionate tax overpayment, he said.

In contrast to the measures in Spain and Italy, “the measures in Greece and Portugal already have provisions to remunerate the state when the guarantee is triggered,” Cardoso said. “We are taking this into account in our assessment, which is ongoing.”

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