1. Accounting Basis - Spanish Banking

IFRS IAS 12 + Spanish PGC + Banco de España Circular 4/2017 (replaced 4/2004)

In Spain DTA is account 474 in PGC - Activos por impuesto diferido.

Two sources in banks:

Type A - Temporary Differences (90% of Spanish bank DTAs):

• Loan loss provisions: Under Circular 4/2017 Annex 9, banks provision expected credit losses (IFRS 9). For tax purposes, Art 13.1 LIS says credit impairment is deductible only when borrower in insolvency or 6 months overdue with collection attempts. So accounting expense > tax expense = deductible temporary difference = DTA.
• Provision for foreclosed assets, pension obligations, fees amortisation under Circular 4/2004 vs 4/2017 transition.

Type B - Tax Loss Carryforwards (Bases imponibles negativas):

• Losses 2008-2013 of Bankia, Banco Popular, Catalunya Banc etc. Art 26 LIS allows carryforward unlimited (limit 70% of base).

Recognition Rule - Rule 42 of Circular 4/2017:

Quantification of deferred tax assets and liabilities is done by applying tax rate expected to be recovered/settled to timing differences.

Under IAS 12.24: DTA is recognized only to extent it is highly probable and documented that there will be taxable profits against which deductible differences can be used. This is the dispute.

2. The Capital Problem - Why DTA Became Political

Under Basel III / CRR Regulation (EU) 575/2013:

• Art 36(1)(c): DTAs that rely on future profitability (tax losses) must be fully deducted from CET1.
• Art 38-39: DTAs from temporary differences can be exempted from deduction up to threshold (10% individual, 17.65% aggregate with significant investments).

Spanish banks in 2012: Huge temporary DTAs from loan provisions. If deducted, CET1 would fall 200-300 bps - Bankia, Banco Popular would be insolvent.

3. Spanish Solution - Monetizable DTAs / Guaranteed DTAs

Royal Decree-Law 14/2013 of 29 Nov and RD-Law 27/2018 - Art 130 LIS

Spain created DTA monetization - conversión de activos por impuesto diferido en crédito exigible frente a la Administración tributaria.

Mechanism:

Certain DTAs are "monetizable": those arising from:

• Impairments of credit / foreclosed assets (Art 13 LIS)
• Pension provisions

These DTAs can be converted into a receivable from Spanish Tax Agency (AEAT) when:

• Company records accounting losses in audited accounts, OR
• Company in liquidation/insolvency, OR
• After 18 years without use

Once converted, it is guaranteed by Spanish State - so under CRR Art 39, it is no longer dependent on future profitability, therefore not deducted from capital.

To get guarantee, banks must pay 1.5% annual fee on guaranteed DTAs (Disposición adicional 13ª LIS) - introduced by Budget Law 2016 to satisfy EU Commission that it is not free state aid.

This is unique to Spain, Italy, Portugal, Greece.

Journal entry in Spain:

Code

Dr 4740 Activos fiscales monetizables  Cr 6301 Impuesto diferidoOn conversion:Dr 4709 Hacienda Pública deudora por conversión DTA  Cr 4740

4. Disputes - Recognition vs Derecognition

Dispute 1: When to recognize DTA on loan provisions?

Accounting view (Bank of Spain): Under Circular 4/2017, ECL provisions must be recognized immediately. DTA recognized simultaneously because reversal expected.

Tax view (AEAT + TEAC): TEAC doctrine 2019-2024 on accreditation of tax losses: When tax losses originated in non-statute-barred years, taxpayer must provide self-assessments, accounting books and documentary evidence of transactions. If documentary evidence not provided, taxpayer will not have proven origin of tax losses. For banks, TEAC requires granular proof of each loan that generated provision, not generic portfolio estimate.

Result: Bank recognizes DTA in accounting, but Tax Agency denies deduction later if documentation insufficient -> DTA impairment hits P&L.

Dispute 2: Probability of future profits - Bankia / Banco Popular cases

• Auditors (EY, PwC) refused to allow full DTA recognition in 2012-2015 because no convincing evidence of future taxable profits. Bankia had €2.1bn DTA not recognized in 2012, later recognized after BFA injection and restructuring plan approved by EU Commission.
• Banco Popular 2017 - Had €5bn DTA, €1.2bn monetizable. When resolved by SRB and sold to Santander for €1, Santander could not use all DTA because Art 26 LIS limits use after change of control if main activity changed. Dispute whether Popular's losses survive.

Dispute 3: State Aid Investigation - EU Commission vs Spain

• 2014-2015: EU Commission sent administrative letters to Spain, Italy, Portugal, Greece - "scrutinising treatment of banks' deferred tax assets to see if they constitute potentially illegal state aid" - because state guarantee on DTAs allows banks to include DTAs as core capital.
• Commission argument: Guarantee without market premium = selective advantage.
• Spain argument: Preamble to RDL 14/2013: reform allowed certain DTAs to continue to be computed as capital, in line with rules in force in EU, so that Spanish credit institutions could operate in uniform competitive environment. Plus 1.5% fee makes it market-conform.
• Decision: Commission closed investigation in 2016-2017 after Spain introduced 1.5% fee and limited scope - concluded not state aid if fee paid and only temporary differences.

This mirrors earlier Spanish Tax Lease System (STLS) and Spanish goodwill amortization cases where Commission in 2009, 2011, 2014 decisions held Spanish tax breaks for shareholdings in foreign companies constituted illegal state aid and ordered recovery.

Dispute 4: IFRS 9 Transition - Circular 4/2017 First Adoption

On 1 Jan 2018, IFRS 9 increased provisions. Royal Decree-Law 27/2018 adapting Corporate Income Tax Law to new Circular 4/2017 provided transitional regime: DTA generated before 1 Jan 2018 from IFRS 9 adoption can be integrated 50% in 2018, 50% in 2019, etc. Banks disputed timing - whether DTA should be recognized immediately or over transition, leading to litigation with AEAT on Art 130.3 LIS conversion timing.

5. Case Law Summary

6. Current Rule for Spanish Bank Today (2024-2026)

1. Recognize DTA on loan provisions only if you can document individual loan file (TEAC doctrine).
2. For CET1: If DTA is monetizable (Art 130 LIS) and you pay 1.5% fee, you can count it as 100% risk-weighted asset (100% RW) instead of deduction. If not monetizable, deduct from CET1 if it exceeds 10% threshold.
3. Tax losses: Can be carried indefinitely, but use limited to 70% of taxable base, 25% if turnover >€60m.
4. Conversion into claim: Occurs filing Corporate Tax return when accounting losses approved. Art 130.2 LIS: losses in audited accounts.