Operational risk – gross loss in tax related events in accordance with REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor, Article 318.
How should an institution calculate gross loss based on the regulatory changes stipulated in Article 318. of the Regulation amending Regulation 575/2013 in the following examples? Case 1 – Delayed tax payment, penalty interest payment, and system repairment expenses Case 2 – Delayed tax payment, no penalty interest payment, system repairment expenses. Case 3 – Tax to be paid for this year and previous years, no penalty interest, or fine, financial reports for previous year to be revised and re-published. Case 4 – Tax to be paid for this year and previous years, no penalty interest or fine, no changes to financial reports for previous year. Case 5 – Tax to be paid for this year and previous years, penalty interest and fine, financial reports for previous year to be revised and re-published Case 6 – Tax to be paid for this year and previous years, penalty interest and fine, no changes to financial reports for previous year
Background
Operational risk – gross loss in tax related events in accordance with REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor, Article 318.
Answer
Article 318 (2) (a) (ii) of the CRR3 states that in the computation of the gross loss the following items must be included: “ where payments relate to failures or inadequate processes of the institution, penalties, interest charges, late-payment charges, legal fees and, with the exclusion of the tax amount originally due, tax, unless that amount is already included under point (e)”. The last part of the sentence “ unless that amount is already included under point (e) ” clarifies that where the loss has been already included in the computation since recognised as “timing loss”, it should not be considered under para (a)(ii), so to avoid its double counting in the computation of the gross loss. As far as the tax loss is concerned, the CRR3 in the aforementioned article 318 (2) (a) (ii) envisages that the “tax amount originally due” must not be included in the perimeter of the loss computation, while penalties, interest charges, late-payment charges and legal fees must be included. Therefore: Case 1: The gross loss is penalty interest + system repair expenses; Case 2: The gross loss is system repair expenses; Cases 3 and 4: Gross loss is zero (i.e. the “tax amounts” for the current and the previous years should not be included in the gross loss, regardless of the restatement of the previous financial report); Cases 5 and 6: Gross loss is penalty interest + fine It should be finally observed that, in cases of unduly tax reimbursements in force of misconduct actions carried out by a bank, either in the interest of the bank itself or its clients, such as those stemming from Cum-Cum schemes or Cum-Ex schemes, the bank’s repayments of the unduly tax reimbursements should be included in the perimeter of the gross loss computation, in addition to the other losses and expenses related to these cases (e.g. disgorgements, late interest payments, other late-payment charges, related fines and penalties, related legal costs and other fees).
Original source: European Banking Authority, Q&A ID 2024_7107
This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated
weekly from official ESA sources.