The government’s recent move to cut business income tax is likely to have positive effects on Taiwan’s banks in the long term, but will have some negative impact in the short term, Moody’s Investors Service said on Monday.
The Legislative Yuan passed an amendment to the Income Tax Act (所得稅法) on May 28, lowering business income tax to 17 percent from 25 percent.
“The reduction is credit positive for all Taiwanese banks, since lower tax rates will result in stronger capital formation. But there will be a short-term negative accounting impact on some banks’ 2010 earnings,” Moody’s vice president Christine Kuo (郭書岑) said in a report.
That is because, in the short term, banks that have substantial amounts of deferred tax assets (DTA) arising from loss carryovers will have to cut the value of those assets and recognize some asset impairment this year, the report said.
Based on Moody’s study, Taiwan Business Bank (台灣企銀), Taishin International Bank (台新銀行), Chang Hwa Bank (彰化銀行), Bank SinoPac (永豐銀行) and First Commercial Bank (第一銀行) are likely to see a negative effect on earnings this year, as their DTA impairment charges are estimated to be larger than the benefits of the lower tax rate.
However, Taiwan Cooperative Bank (合作金庫銀行), Mega International Bank (兆豐國際商銀), Land Bank of Taiwan (土地銀行), Cathay United Bank (國泰世華銀行) and Taipei Fubon Bank (台北富邦銀行) are likely to reap the benefits of the tax cut immediately because these lenders do not have any DTAs arising from loss carryovers, Moody’s said.
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