Journal of Tax Reform
Influence of Corporate Income Tax to Loan Loss Provision: Evidence from Uzbekistan
Shukhrat A. Toshmatov 1, Zafarjon A. Abdullaev 2, Zarif O. Ahrorov 3
1 National University of Uzbekistan, Tashkent, Uzbekistan 2 University of Public Safety, Tashkent, Uzbekistan 3 Samarkand Institute of Economics and Service, Samarkand, Uzbekistan
Abstract
This article is devoted to the analysis of the impact of corporate income tax on compulsory reserves created by commercial banks for possible loan loss provision. In the majority of countries banks are required to create compulsory reserves for potential loan loss provisions, and the corporate tax regime applies tax deductions to these compulsory reserves. The corporate tax system facilitates timely coverage of potential loan loss provision. In addition, corporate taxation is an essential factor in the transparency of banks’ financial statements. The research has revealed that reserves for potential loan loss provision are used primarily for profit regulator purposes, not to regulate capital. This implies that when deducting the amount of total reserves for tax purposes of banks the loan loss provision is positively related to the corporate income tax rate. The analysis of the selected commercial banks has confirmed that the impact of corporate income tax is more significant for the timely admitting potential loan loss provision when deducting general reserves from the tax base, mainly for the purpose of taxing banks’ profits. According to the results, an increase in the tax rate by an average of 1% could lead to an increase in the amount of required loan loss provision by 3.9%. This means that when total reserves are deducted for tax purposes, the underlying hypotheses that compulsory reserves for loan loss provisions are positively correlated with the corporate income tax rate and that the amount of loss reserves is increased at the income tax rate have been confirmed. In general, the following aspects are crucially important in the taxation of profits of commercial banks: which method is more convenient for loan loss provision (write-offs or formation of reserves); entire or partial compliance between the taxation and regulation of reserves for loan loss provision; imposing restrictions on the application of tax deductions to reserves for possible loan loss provisions.
Keywords
bank, loan, tax, loan loss provisioning, tax rate, corporate income tax, tax deduction
JEL classification
G 21, G 28, H 20, H 21, H 30References
1. Slemrod J. Lessons for Tax Policy in the Great Recession. National Tax Journal. 2009;62(3):387–397. https://doi.org/10.17310/ntj.2009.3.02
2. Shackelford D.A., Shaviro D.N., Slemrod J. Taxation and the Financial Sector. National Tax Journal. 2010;63(4):781–806. https://doi.org/10.17310/ntj.2010.4.10
3. Admati A., DeMarzo P., Hellwig M., Pfleiderer P. Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Socially Expensive. Working Paper No. 2065, Stanford University; 2013. Available at: https://www.gsb.stanford.edu/faculty-research/working-papers/fallacies-irrelevant-facts-myths-discussion-capital-regulation-why
4. Keen M., de Mooij R. Debt, Taxes, and Banks. Journal of Money, Credit and Banking. 2016;48(1):5–33. https://doi.org/10.1111/jmcb.12289
5. de Mooij R., Keen M., Orihara M. Taxation, Bank Leverage, and Financial Crises. Working paper No. 2013/048. International Monetary Fund; 2013. Available at: https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Taxation-Bank-Leverage-and-Financial-Crises-40341
6. Schepens G. Taxes and Bank Capital Structure. Journal of Financial Economics. 2016;120(3):585–600. https://doi.org/10.1016/j.jfineco.2016.01.015
7. Laeven L., Majnoni G. Loan loss provisioning and economic slowdowns: too much, too late? Journal of Financial Intermediation. 2003;12(2):178–197. https://doi.org/10.1016/S1042-9573(03)00016-0
8. Bikker J.A., Metzemakers P.A.J. Bank provisioning behaviour and procyclicality. Journal of International Financial Markets, Institutions and Money. 2005;15(2):141–157. https://doi.org/10.1016/j.intfin.2004.03.004
9. Fonseca A.R., González F. Cross-country determinants of bank income smoothing by managing loan-loss provisions. Journal of Banking & Finance. 2008;32(2):217–228. https://doi.org/10.1016/j.jbankfin.2007.02.012
10. Huizinga H., Laeven L. Bank Valuation and Accounting Discretion During a Financial Crisis. Journal of Financial Economics. 2012;106(3):614–634. https://doi.org/10.1016/j.jfineco.2012.06.008
11. Cummings J.R., Durrani K.J. Effect of the Basel Accord capital requirements on the loan-loss provisioning practices of Australian banks. Journal of Banking & Finance. 2016;67:23–36. https://doi.org/10.1016/j.jbankfin.2016.02.009
12. Krüger S., Rösch D., Scheule H. The impact of loan loss provisioning on bank capital requirements. Journal of Financial Stability. 2018;36:114–129. https://doi.org/10.1016/j.jfs.2018.02.009
13. Andries K., Gallemore J., Jacob M. The effect of corporate taxation on bank transparency: Evidence from loan loss provisions. Journal of Accounting and Economics. 2017;63(2/3):307–328. https://doi.org/10.1016/j.jacceco.2017.03.004
14. Bushman R.M., Williams C.D. Accounting Discretion, Loan Loss Provisioning, and Discipline of Banks’ Risk-Taking. Journal of Accounting & Economics. 2012;54(1):1–18. https://doi.org/10.2139/ssrn.1521584
15. Gallemore J.D. Bank Financial Reporting Opacity and Regulatory Intervention. Review of Accounting Studies. 2022. https://doi.org/10.1007/s11142-022-09674-4
16. Ozili P.K. Loan Loss Provisioning, Income Smoothing, Signaling, Capital Management and Procyclicality: Does IFRS Matter? Empirical Evidence from Nigeria. Mediterranean Journal of Social Sciences. 2015;6(2):224–232. https://doi.org/10.5901/mjss.2015.v6n2p224
17. Ryan S.G. Financial Reporting for Financial Instruments. Foundations and Trends in Accounting. 2011;6(3/4):187–188. https://doi.org/10.1561/1400000021
18. Beatty A., Liao S. Financial Accounting in the Banking Industry: A Review of the Empirical Literature. Journal of Accounting and Economics. 2014;58(2/3):339–383. https://doi.org/10.1016/j.jacceco.2014.08.009
19. Wall L.D., Koch T.W. Bank Loan-Loss Accounting: A Review of Theoretical and Empirical Evidence. Economic Review. 2000;85(Q2):1–20. Available at: https://www.atlantafed.org/-/media/documents/research/publications/economic-review/2000/vol85no2_wall-koch.pdf
20. Walter J.R. Closing Troubled Banks: How the Process Works. Economic Quarterly. 2004;90(1):51–68. Available at: https://www.richmondfed.org/publications/research/economic_quarterly/2004/winter/walter
21. Berger A.N., Bouwman C.H.S. How Does Capital Affect Bank Performance During Financial Crises? Journal of Financial Economics. 2013;109(1):146–176. https://doi.org/10.1016/j.jfineco.2013.02.008
22. De Vincenzo A., Ricotti G. The Use of Tax Law from a Macroprudential Perspective: The Impact of Some Recent Tax Measures on Procyclicality and Banks’ Stability. Working paper, Bank of Italy; 2014. https://doi.org/10.2139/ssrn.2434682
23. Ma C.K. Loan loss reserve and income smoothing: The experience in the U.S. banking industry. Journal of Business Finance and Accounting. 1988;15(4):487–497. https://doi.org/10.1111/j.1468-5957.1988.tb00150.x
24. Liu C.-C., Ryan S.G. Income Smoothing over the Business Cycle: Changes in Banks’ Coordinated Management of Provisions for Loan Losses and Loan Charge-Offs from the Pre-1990 Bust to the 1990s Boom. The Accounting Review. 2006;81(2):421–441. Available at:
http://hdl.handle.net/2451/26745
25. Lobo G.J., Yang D.-H. Bank Managers’ Heterogeneous Decisions on Discretionary Loan Loss Provisions. Review of Quantitative Finance and Accounting. 2001;16(3):223–250. https://doi.org/10.1023/A:1011284303517
26. Hasan I., Wall L.D. Determinants of the Loan Loss Allowance: Some Cross-Country Comparisons. The Financial Review. 2004;39(1):129–152. https://doi.org/10.1111/j.0732-8516.2004.00070.x
27. Anandarajan A., Hasan I., McCarthy C. Use of loan loss provisions for capital, earnings management and signaling by Australian banks. Accounting & Finance. 2007;47(3):357–379. https://doi.org/10.1111/j.1467-629X.2007.00220.x
28. Pérez D, Salas-Fumás V, Saurina J. Earnings and capital management in alternative loan loss provision regulatory regimes. European Accounting Review. 2008;17(3):423–445. https://doi.org/10.1080/09638180802016742
29. Leventis S., Dimitropoulos P.E., Anandarajan A. Signalling by banks using loan loss provisions: the case of the European Union. Journal of Economic Studies. 2012;39(5):604–618. https://doi.org/10.1108/01443581211259509
30. El Sood H.A. Loan loss provisioning and income smoothing in US banks pre and post the financial crisis. International Review of Financial Analysis. 2012;25:64–72. https://doi.org/10.1016/j.irfa.2012.06.007
31. Balbao M., López-Espinosa G., Rubia A. Nonlinear dynamics in discretionary accruals: An analysis of bank loan-loss provisions. Journal of Banking & Finance. 2013;37(12):5186–5207. https://doi.org/10.1016/j.jbankfin.2013.05.020
32. Sunley E.M. The tax treatment of bank loan losses. Chapter 9. World Bank; 2003.
33. Bassett W.F., Zakrajšek E. Profits and balance sheet developments at U.S. commercial banks in 2000. Federal Reserve Bulletin. 2001;87:367–393. https://doi.org/10.17016/bulletin.2001.87-6
34. Bouvatier V., Lepetit L., Strobel F. Bank income smoothing, ownership concentration and the regulatory environment. Journal of Banking & Finance. 2014;41:253–270. https://doi.org/10.1016/j.jbankfin.2013.12.001
35. Skała D. Saving on a Rainy Day? Income Smoothing and Procyclicality of Loan-Loss Provisions in Central European Banks. International Finance. 2015;18(1):25–46. Available at: https://econpapers.repec.org/article/blaintfin/v_3a18_3ay_3a2015_3ai_3a1_3ap_3a25-46.htm
36. Norden L., Stoian A. Bank earnings management through loan loss provisions: a double-edged sword? De Nederlandsche Bank Working Paper No. 404, 2013. https://doi.org/10.2139/ssrn.2369798
About Authors
Shukhrat A. Toshmatov – Doctor of Economics, Professor, The first Vice-rector of the National University of Uzbekistan (4, University str., Olmazor district, Tashkent, 100174, Uzbekistan); ORCID: https://orcid.org/0000-0002-4404-8044, e-mail: sh.toshmatov@nuu.uz.
Zafarjon A. Abdullaev – Doctor of Economics, Professor, Department Economic sciences, University of Public Safety (Zangiota district, Tashkent region, Tashkent, 100109, Uzbekistan); ORCID: https://orcid.org/0000-0002-4827-1040, e-mail: zafarjon1808@mail.ru
Zarif O. Ahrorov – PhD, Associate professor, Department Finance, Samarkand Institute of Economics and Service, (9, Amir Temur str., Samarkand, 140100, Uzbekistan); ORCID: https://orcid.org/0000-0003-4403-9137, e-mail: axrorov_z@sies.uz
For citation
Toshmatov S.A., Abdullaev Z.A., Ahrorov Z.O. Influence of Corporate Income Tax to Loan Loss Provision: Evidence from Uzbekistan. Journal of Tax Reform. 2022;8(3):236–250. doi.org/10.15826/jtr.2022.8.3.119
Article info
Received July 5, 2022; Revised September 20, 2022; Accepted November 27, 2022
DOI: https://doi.org/10.15826/jtr.2022.8.3.119
Download full text article:
~415 KB, *.pdf
(Uploaded
10.12.2022)
Created / Updated: 31 August 2015 / 3 July 2017
© Federal State Autonomous Educational Institution of Higher Education «Ural Federal University named after the first President of Russia B.N.Yeltsin»
Remarks?
select the text and press:
Ctrl + Enter
Portal design: Artsofte
ISSN 2414-9497 (online)