Financial executives in the banking industry believe it will be difficult for their institutions to address the various tax implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and Basel III, according to a recent survey from KPMG LLP, the U.S. audit, tax and advisory firm.
In the KPMG survey, 64 percent of the nearly 100 financial executives in the banking industry said it would be difficult for their business to address the tax implications of the Dodd-Frank Act and Basel III. When asked at what stage their bank was in preparing for the Dodd-Frank Act and Basel III from a tax perspective, 48 percent of the respondents said they were still trying to understand the tax implications, while 27 percent said they were in the process of incorporating scenarios into tax planning.
"Various tax issues related to the Dodd-Frank Act and Basel III have broad and potentially significant implications," said Tony Anzevino, national leader of KPMG LLP's Banking and Finance practice. "Senior management should be engaged with their finance and tax teams to understand how these tax issues may impact the business from a strategic, risk and earnings perspective. Ideally, banks at this stage should be well along in determining a way forward."
Thirty-one percent of the respondents in the KPMG survey said they anticipate the tax implications of the Dodd-Frank Act and Basel III will have a significant impact on their business. Capital and liquidity rules established by the Dodd-Frank Act and Basel III are expected to have the greatest impact from a tax standpoint, according to 41 percent of the respondents. Derivatives-related issues ranked a distant second with 16 percent saying it would have the greatest impact.
"It's critical for CFOs, tax directors and other executives to be aware of the tax implications of the Dodd-Frank Act and Basel III," said Mark Price, KPMG's Banking and Finance practice national tax leader. "Tax-related issues arising from new bank capital requirements, securitization reform, new rules affecting the derivatives markets, business changes in response to new consumer financial protections, and restructuring activities are all areas that need to be examined now."
In the KPMG survey, 49 percent of the respondents said their bank was currently considering restructuring activities in order to comply with the Dodd-Frank Act or Basel III.
"Many banks are considering legal entity rationalization and dispositions in response to the living will and Volcker Rule provisions, while others are looking at operational and debt-related changes to meet new capital requirements," said Price. "All of these restructuring-related activities will raise tax issues that need to be considered as banks make these strategic decisions."
In a smaller respondent pool of nearly 60 finance and tax executives in the banking industry, 64 percent said their board of directors had not requested information related to tax planning efforts around the Dodd-Frank Act and Basel III. In addition, 60 percent said they update the CFO about tax issues related to the Dodd-Frank Act and Basel III on a regular basis or as they deem appropriate, while 40 percent said they don't update the CFO.
KPMG White Paper Can Help Banks Understand Tax Implications of Dodd-Frank Act
KPMG's Washington National Tax practice and its Americas' Financial Services Regulatory Center of Excellence also jointly released a white paper today titled "An Introduction to the Tax Implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act." The white paper examines the various provisions that have tax implications for banks -- such as living wills, the Volcker Rule, derivatives, capital and liquidity requirements, and executive compensation -- and provides insight on the tax issues raised by them. The white paper can be downloaded here.
The KPMG survey was conducted in late March during a KPMG Tax practice-sponsored event focused on the tax implications of the Dodd-Frank Act and Basel III.
About KPMG LLP
KPMG LLP, the audit, tax and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG International Cooperative ("KPMG International"). KPMG International's member firms have 138,000 professionals, including more than 7,900 partners, in 150 countries.