Loss-Absorbing Capacity of Deferred Taxes

Overview

This calculator implements the adjustment for the Loss-Absorbing Capacity of Deferred Taxes (LACDT) within the Solvency II standard formula.^[1] The LACDT adjustment is defined as the reduction in the Solvency Capital Requirement (SCR) resulting from the potential use of deferred tax assets to offset losses following a 1-in-200 year event. It represents the value of the tax-deductible nature of the losses incurred in the SCR stresses.^[2]

Input Terms

• Basic SCR (BSCR): The undiversified capital requirement before the tax adjustment.^[1]
• Marginal Tax Rate: The corporate tax rate applicable to the undertaking’s future profits.
• Future Taxable Profits: The projected taxable income over the relevant time horizon that can be used to set off the SCR-driven losses.

Technical Rationale

The LACDT adjustment is a fundamental component of the undertaking’s capital-adequacy calculation. It ensures that the undertaking’s Net SCR reflects the true economic impact of a 1-in-200 year event after accounting for the tax-mitigating effect of the losses.

The calculation assesses the difference between the Net Asset Value (NAV) in the base case and the NAV in the stressed case, after accounting for the change in deferred taxes. This ensures the undertaking can quantify the specific capital-benefit derived from its tax-offset capabilities. The result represents the net reduction in the Total SCR.^[1]

Important Notes

• Recoverability: The undertaking must provide evidence to the supervisory authority that the future taxable profits are sufficiently probable to allow for the recovery of the deferred tax assets.
• Regulatory deviation: Material deviation from standard-formula assumptions at this layer may support a capital add-on or a move toward an internal model where justified.^[3]
• Reporting: The displayed result is intended to support the corresponding standard-formula component feeding the S.25.01 standard-formula reporting view.^[4]