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Regulatory and Tax Treatment of Loan Loss Provisions
Author:
Ms. Claudia H Dziobek
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Series:
IMF Policy Discussion Papers
Volume/Issue:
Volume 1996: Issue 006
Language:
English
Publication Date:
01 Jun 1996
DOI:
https://doi.org/10.5089/9781451972009.003
ISBN:
9781451972009
ISSN:
1564-5193
Pages:
29
Keywords:
PDP; loan; provision; tax treatment; classified loan; tax; loan classification system; loss allowance; loan portfolio; performance mandate; valuation procedure; loan contract; loan quality; loss-making bank; country loan; loan write-off; bank regulator; tax deductibility; Loan loss provisions; Loans; Distressed assets; Income; Non-wage benefits; Central and Eastern Europe; Global
Legal-disclaimer:
This Policy Discussion Paper should not be reported as representing the views of the IMF. The views expressed in this Policy Discussion Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Policy Discussion Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.
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Provisioning for loan losses is a method for recognizing the reduction in the value of a hank’s loan portfolio. Provisions are an essential element of prudential risk management and capital adequacy measurement and an important market signal. Loan loss provisions constitute a normal operating expense and should be deducted from taxable income provided that banks adhere to consistent and strictly enforced provisioning procedures, and provided that these mirror loan default probabilities. The argument for harmonized regulatory and tax treatment of loan loss provisions can be based on the economic similarity between loan losses and depreciation of machines and equipment. Tax deductibility of loan loss provisions does not imply a tax deferral or a special subsidy for banks.
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Cover IMF Policy Discussion Papers
IMF Policy Discussion Papers
ISSN:
1564-5193
Publisher:
International Monetary Fund