EUROPEAN Union (EU) regulators are scrutinizing four EU countries’ treatment of banks’ deferred tax assets (DTAs) to see if they constitute potentially illegal state aid, the European Commission said Tuesday.

    The EU executive said it had contacted authorities in Spain, Italy, Portugal and Greece following requests from some lawmakers in the European Parliament and other parties about state guarantees on such assets.

    A deferred tax asset is an asset used to reduce the amount of tax subsequently due, such as from a loss-making period, to a future period of profit when tax would normally be due.

    Under globally agreed Basel III capital rules, banks will not be able to include DTAs that rely on future profitability to demonstrate their ability to absorb losses. These assets will have to be deducted by 40 percent this year, rising to 100 percent from 2018.

    Their treatment is significant because local accounting behavior, such as allowing DTAs to be converted into tax credits, can boost banks’ core capital and so help prop up a country’s financial sector.

    European Competition Commissioner Margrethe Vestager has authorized a letter be sent to each member state requesting information. The commission said this did not amount to a formal investigation.

    “To be clear, the process is at a very early stage. We cannot prejudge whether a formal investigation is needed or the outcome of the commission’s assessment of these measures,” the EU regulator said.

    (SD-Agencies)