EU regulators are scrutinising four EU countries’ treatment of banks’ deferred tax assets (DTAs) to see if they constitute potentially illegal state aid, the European Commission said yesterday.

The EU executive said it had contacted authorities in Spain, Italy, Portugal and Greece following requests from some lawmakers in the European Parliament and other parties about state guarantees on such assets.

A deferred tax asset is an asset used to reduce the amount of tax subsequently due, such as from a loss-making period, to a future period of profit when tax would normally be due. Under globally agreed Basel III capital rules, banks will not able to include DTAs that rely on future profitability to demonstrate their ability to absorb losses. These assets will have to be deducted by 40 per cent this year, rising to 100 per cent from 2018.

The process is at a very early stage

Their treatment is significant because local accounting behaviour, such as allowing DTAs to be converted into tax credits, can boost banks’ core capital and so help prop up a country’s financial sector.

European Competition Commissioner Margrethe Vestager has authorised a letter be sent to each member state requesting information. The Commission said this did not amount to a formal investigation.

“To be clear, the process is at a very early stage. We cannot prejudge whether a formal investigation is needed or the outcome of the Commission’s assessment of these measures,” the EU regulator said.