BOC told to reverse 4.5b yuan of losses
The central government has ordered the Bank of China, the mainland's second-largest lender, to reverse 4.5 billion yuan of asset impairment losses expensed before tax in 2004.
The Ministry of Finance (MOF) and State Administration of Taxation (SAT) ruling could expose the lender to up to 1.5 billion yuan of additional corporate income tax based on the standard rate of 33 per cent just ahead of its planned US$6 billion to US$8 billion initial public offering in Hong Kong next month.
BOC officials contacted yesterday declined to say whether the additional tax payment would reflect on last year's results or this year's earnings.
However, the bank, which aims to debut on the Hong Kong stock exchange on May 25, had submitted last year's audited accounts to the Hong Kong stock exchange as part of a preliminary listing application in February.
The case served as the latest example of how frequent ad hoc tax rulings led to earnings instability at mainland financial institutions, which typically surrender 40 per cent to 45 per cent of pre-tax profit to state coffers.
'SAT often awarded companies tax benefits on a case by case basis,' one investment bank analysts said. 'It is therefore difficult to forecast with precision a mainland financial institution's tax expenses each year.'
Of 10.3 billion yuan of asset impairment losses that BOC booked in 2004, only 5.8 billion yuan should have been expensed before tax to reduce corporate income tax liabilities, the notice said without elaborating.
'The banks themselves often have differences of opinion with SAT over tax treatments,' the analyst said.
Bank of Communications (Bocom), the nation's fifth-largest commercial lender, was forced to reverse 9.67 billion yuan of accumulated tax credit related to asset impairment losses in 2004, the year before its Hong Kong share offer in June, after government help to remove non-performing loans off its books.
The bank doubled the tax rate on its earnings in 2004, leading to a 63 per cent year-on-year drop in net profit.
The government orchestrated the removal of 272 billion yuan of bad loans to clean up BOC's balance sheet as part of a financial restructuring launched in 2003.
In a show of greater transparency and willingness to help financial institutions retain talent with better compensation packages, however, SAT and MOF in a separate notice last month raised the tax-deductible staff expenses of China Construction Bank (CCB), the nation's third-largest commercial lender, to 16.65 billion yuan last year.
