Royal Dutch Shell And Barclays To Incur Huge Charges As Value Of Deferred Assets Fall

Barclays Bank and Royal Dutch Shell have disclosed that the tax reforms carried out in the United States will see them take large charges. Royal Dutch Shell estimates that in Q4, tax-related charges for its U.S. business would reach up to $2.5 billion. This would largely be as a result of deferred tax assets being reduced in value. Corporations usually log those assets in unprofitable times and then utilize them in offsetting future tax payments. With the headline corporate tax rate in the United States having been reduced to 21% from 35%, those assets are now worth less following the tax overhaul.

Barclays has on the other hand indicated that in Q4 its noncash charge would amount to approximately $1.3 billion as the value of deferred tax liabilities and assets would be changed. Consequently the charge plus other restructuring costs will see the British bank record a net loss this year. Barclays’ capital ratio, which is key indicator of balance-sheet strength, will reduce by 0.2%.

Long-term benefits

According to both firms, the reduction in the rate of corporate taxes in the United States will be positive in the long term despite the huge paper losses they will incur in the short run. Barclays however indicated that other provisions in the legislation recently passed were being scrutinized before it could make a determination. Foreign companies have said that base-erosion measures introduced as a way of discouraging tax avoidance was likely to have an impact on legitimate tax arrangements that multinationals have and this would in turn increase the overall taxes they pay.

“It is possible that any impact of [the base erosion measures] could significantly reduce the benefit of the reduction in the statutory U.S. federal rate,” said Barclays.

Deferred tax liabilities

Due to the uncertainty surrounding the application of the various measures, the British bank argued that it was impossible to estimate the impact. Last week Credit Suisse indicated that its write-off in Q4 would amount to approximately $2.3 billion as tax-deferred assets, dating back to 2008, were marked down.

The German luxury car manufacturer BMW also disclosed last week that adjustments to deferred tax liability would lead to a boost of this year’s profits by amounts ranging between $1.13 billion and $1.84 billion per initial calculations. Daimler, on the other hand, expects the changes in deferred tax liabilities to boost its net income by approximately 1.7 million euros. Japanese ink maker, DIC Corp, earlier this week revealed that changes in deferred tax assets would result in a lower net profit.

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