FROM THE PERSPECTIVE OF ACCOUNTING THEORY: BANKS’ LOAN LOSS PROVISIONS AND TAX LEGISLATION IN ALBANIA

Abstract

Tax authorities often are doubtful on the regulation of accounting and they fear to accept the tax treatment of bank loan losses which it reduces income taxes paid by banks. The banks and bank regulators generally want the tax rules for recognizing loan losses to conform closely to regulatory accounting in order to encourage banks not to under-provision for loan losses and to ensure a current tax benefit from loss provisions. In recent years, a sharp increase in the level of Non Performing Loans (NPL) in the banking system triggered mainly by the effects of the economic crisis but also emphasized by other internal and external factors. Other problems are present in the environment such as: lack of reliable financial information, clients’ poor business planning and execution, inefficient collateral collection processes etc. (Deloitte-Albania, 2013) In this paper, accounting theory will help us to understand and evaluate better the actual practice of loan loss provisions and their tax treatment in Albania. Also it will show us the way how to address for the actual debate between the banks and tax authority regarding the fiscal treatment of loan loss provisions. This paper aims to explain, when and how loan losses provisions should be recognized as a deductible expense for tax purposes by using the accounting theory. To address these issues financial accounting, according to International Financial Reporting Standards (IFRS) and regulatory accounting, according to central bank in Albania, Bank of Albania (BoA) of loan losses provisions must be considered.