Untitled Document

Global tax accounting services Newsletter

Focusing on tax accounting issues affecting businesses today

January-March 2014

Introduction

The Global Tax Accounting Services Newsletter is a quarterly publication from PwC's Global Tax Accounting Services Group. It highlights issues that may be of interest to tax executives, finance directors and financial controllers.
In this first release for 2014 we provide an update on country-by-country reporting, discuss what auditor rotation proposals in the European Union mean for businesses with a presence in Europe, and provide an update on an accounting alternative for non-public entities and the most recent International Financial Reporting Standards (IFRS) Interpretation Committee's guidance on some tax related matters.

We also draw your attention to some significant tax law and tax rate changes that occurred around the globe during the quarter ended 31 March 2014.

Finally, we highlight some similarities and differences for income tax accounting under IFRS and US Generally Accepted Accounting Principles (US GAAP), and provide guidance on when tax law changes should be accounted for under these frameworks.
If you would like to discuss any items in this newsletter, tax accounting issues affecting businesses today, or general tax accounting matters, please contact your local PwC team or the relevant Tax Accounting Services network member listed at the end of this document.

Readers should not rely on the information contained within this newsletter without seeking professional advice. For a thorough summary of developments, please consult with your local PwC team.

In this issue

Accounting and reporting updates

Recent and upcoming major tax law changes

Tax accounting refresher

Contacts and primary authors

Accounting and reporting updates

This section offers insight into the most recent developments in accounting standards, financial reporting, and related matters, along with the tax accounting implications.

Country-by-country reporting

Overview

As we mentioned in the Q4 2013 newsletter, on 30 January 2014 the Organisation for Economic Cooperation and Development (OECD) published a discussion draft on transfer pricing documentation and a template for country-by-country reporting (CBCR).
The OECD received more than 1,300 pages of comments on the draft by the end of the consultation period on 23 February 2014, including a response from PwC.

The OECD carried out a private consultation discussing the CBCR template with businesses in March 2014. It also provided an update on amendments to be made to the template during its second Base Erosion and Profit Shifting (BEPS) public webcast on 2 April 2014.

The next step is a public consultation on 19 May 2014, with a final version of the CBCR template expected in June 2014 for endorsement by September 2014.

Once the OECD has published its final version of the rules it will be up to individual countries to decide on how and when they will implement them.

Issues highlighted in PwC's response

PwC's response to the OECD's discussion draft highlighted the following main issues associated with the CBCR template:

PwC's response also made a number of recommendations to the OECD in relation to the above issues, including the following:

For more information on the highlighted issues and our recommendations, please follow the link to PwC's response.

Amendments to be made to the CBCR template
As mentioned above, the OECD provided an update on amendments to be made to the template during its second Base Erosion and Profit Shifting (BEPS) public webcast on 2 April 2014. The amendments included the following:

The methodology for filing/sharing of the CBCR template with tax authorities and the language of the template remain outstanding issues.

Practical challenges for multinationals
It is clear that the proposed CBCR template will have a significant impact on any multinational business.

To assist multinationals in understanding practical implications of the CBCR template for their business. we have recently issued a publication "Challenges multinationals may face in completing the OECD's country-by-country reporting template". In addition to issues highlighted above, such challenges could include the following:

Takeaway
Multinationals should pay close attention to CBCR developments, as they will have a significant impact on compliance, systems and processes, and human resources requirements, and it is highly likely that CBCR will be implemented in some jurisdictions the multinationals operate in.

Given the lead time necessary to prepare internal systems and processes for CBCR and the potentially substantial costs involved, it is critical that multinationals assess whether their current information and accounting systems will allow them to comply with the proposed CBCR requirements. Such an assessment should be undertaken now, even though it is possible the reporting may not be required immediately.
Multinationals should factor into their budgets the cost and time needed to prepare information and accounting systems and processes, and start formulating strategies to deal with additional compliance and audit requirements arising as a result of the proposed CBCR template.

Proposals for auditor rotation and restrictions on non-audit services in the European Union
Overview
At the end of 2013 the European Commission, Parliament and Council reached agreement on draft legislation to reform the audit market within the European Union (EU). In April 2014 the European Parliament adopted the draft legislation in plenary session. The next steps are the formal approval by the EU Council and the publication of the new rules in the Official Journal of the EU, which is expected in mid-2014.
If approved, this legislation will mean that mandatory rotation of audit firms will be introduced for all public interest entities in the EU. There will also be additional restrictions on the non-audit services that audit firms can provide to audit clients. The restrictions take the form of a cap on the amount of non-audit fees that can be billed, and a 'blacklist' of prohibited services that the auditor cannot provide.
These changes are significant and may cause complexity for businesses. They are also the latest in a series of regulatory reforms impacting the audit marketplace.
Public interest entity
The draft legislation defines public interest entities as all EU-domiciled entities with instruments listed on a regulated EU exchange, all banks and all insurance undertakings.
The public interest entity definition applies even where a company is part of a group listed outside Europe. European subsidiaries of US groups, for example, will be caught, if they have EU-listed securities, an EU banking licence, or undertake insurance activities. This could cause complexities if subsidiaries are forced to rotate auditors, even when the parent (listed outside Europe) is not required to rotate.
Mandatory auditor rotation
Under the proposals, all EU public interest entities will be required to rotate their auditors every ten years.
If EU member states choose to allow it, this period of mandatory rotation can be extended to 20 years if a competitive tender is performed at the ten year point, or 24 years in the case of a joint audit appointment.
Member states can also implement a shorter rotation period, without the extension options.
This may be an option for those member states that already have a rotation regime in place (e.g., Italy, which currently requires auditor rotation every nine years).
Transition arrangements will vary depending on the length of the audit appointment at the date the new rules come into force. If the auditor has been in place for 20 years or more, the first rotation must take place within six years. If the auditor has been in place for between 11 and 20 years, the first rotation must take place within nine years. Otherwise, the new regime will apply from two years of the legislation implementation date, so as at mid-2016 (i.e., the mandatory auditor rotation would be required within ten years from that date).
Restrictions on non-audit services
The new legislation will also restrict the non-audit services that can be provided by the auditor of a public interest entity. The restrictions will begin to apply within two years of the legislation coming into force—likely to be mid-2016.

In this area, the proposed legislation is complex and, in some cases, unclear. There are a number of options for member states and national supervisors to consider whereby they can make national application less onerous or more stringent.


Firstly, fees received for non-audit services in any one year cannot exceed 70% of the average of the audit fees billed over the previous three years.
Secondly, there is a list of non-audit services that cannot be provided by the auditor of a public interest entity (or by its network firms) to that entity, or to its parent or subsidiaries within the EU. These are summarised in the table on the next page. Member states' interpretation of this guidance will be very important, and could differ between them.
In addition to the above list, Member states have the option to add other non-audit services to the prohibited list if it is believed that the service presents a particular threat to independence.
Other non-audit services may be provided, as long as the audit committee of the public interest entity approves the provision of these services after assessing the potential threats to independence that could arise, and the safeguards that have been applied.
What happens next?
Following formal approval from the EU Council the legislation will be written into the Official Journal of the EU, after which it comes into force within 20 days. This is expected to be mid-2014. At that point, national implementation decisions will begin.
As described above, there are a number of Member state options which will need to be decided at a national level. In addition, much of the text describing prohibited audit services is open to interpretation. We expect national supervisors will issue guidance suggesting how it should be implemented.
Takeaway
EU businesses should consider the affect of both mandatory rotation and increased non-audit service restrictions may have on their business. In particular, businesses will need to be mindful of extra time and effort that may be required in managing the rotation process and bringing new auditors up to speed. This may be particularly relevant for companies experiencing difficulty or going through significant corporate transactions.
Public interest entities (defined above) that use their auditor for provision of tax advice and tax compliance services will need to be mindful of the new restrictions for non-audit services, and should start planning transition in advance. This is particularly important if such services are locked in for a few years under a contract. The same applies to tax technology that could be licensed to the entity by its auditor and for which transition should be carefully managed.
Audit committees will need to monitor and manage auditor rotations carefully in order to minimise the risks that disruption brings to audit quality.
The mandatory rotation requirements could be imposed 'on top of' the existing specific tendering requirements in some EU member states (e.g., in the United Kingdom). Companies and their auditors will need to work carefully through the transition arrangements of the different regimes to understand how they will fit together. This is a complex area that will need to be considered on a case-by-case basis.

Prohibited non-audit service

Comment

Tax advice and compliance

Member states can allow these services if they are deemed to have no direct effect on, or are immaterial to, the audited financial statements. Services involving payroll tax and customs duties can never be permitted.

Services that involve playing any part in the management or decision-making process of the audited entity

This includes working capital and cash management, providing financial information, and creating supply chain efficiency as examples of such services.

Book-keeping and preparing accounting records and financial statements/payroll services

These restrictions will be similar to those already imposed by existing regulations.

Designing and implementing internal controls over financial information or systems

These services are all prohibited in the 12 months prior to an audit appointment, and throughout the audit appointment.

Valuation services

Member states can allow these services if they are deemed to have no direct effect on, or are immaterial to, the audited financial statements.

Legal services/Internal audit/Human resource services

Restrictions may be more extensive than those currently applied, depending on Member states' interpretation of the legislation.

Services linked to financing and investment strategy and allocation, and investment strategy of the audited entity

The draft text confirms that providing assurance services, including the provision of comfort letters on prospectuses, will still be permitted. The introductory text to the proposed legislation also suggests that due diligence services will be permissible.

Promoting, dealing in or underwriting shares in the audited entity

This restriction will be similar to that already imposed by existing regulations.

Accounting alternative for non-public entities in relation to goodwill
Overview
On 16 January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-02, Accounting for Goodwill.
This standard provides non-public entities with an accounting alternative, which is intended to allow amortisation of goodwill on a straight-line basis and simplify the goodwill impairment model.
Accounting for goodwill under the alternative
As mentioned above under the goodwill alternative, a non-public entity is able to amortise goodwill on a straight-line basis over a period of ten years, or a shorter period if the company demonstrates that another useful life is more appropriate.
Goodwill would be subject to impairment testing only upon the occurrence of a triggering event (typically, when circumstances change, such as the fair value of a company is below its carrying value). Upon adoption, a company will need to make a policy election regarding whether it will assess goodwill for impairment at an entity-wide level or a reporting unit level.
If a triggering event occurs, a non-public entity will continue to have the option to first assess qualitative factors to determine whether a quantitative impairment test is necessary. If a quantitative impairment test is required, a one-step impairment test would be performed. The amount of the potential impairment would be measured by calculating the difference between the carrying amount of the entity (or reporting unit, as applicable) and its fair value. A hypothetical purchase price allocation to isolate the change in goodwill (i.e., step two) would no longer be required.
If a non-public entity elects to apply the alternative accounting, it will be required to apply all aspects of the alternative (i.e., both amortisation and the simplified impairment test).
What are the main tax accounting implications of this accounting alternative?
From a tax accounting perspective, adoption of the goodwill alternative may require a reassessment of income tax valuation allowances in certain circumstances.
Under US GAAP, a deferred tax liability (DTL) would often arise in relation to goodwill as a result of the tax amortisation. However, such DTL is usually not recognised as a source of income when assessing the realisation of deferred tax assets. This is because it will not reverse until some indefinite future period when the business is sold, or goodwill is impaired.
If the company that adopted the goodwill alternative has a DTL relating to the goodwill it may be able to now consider the DTL as a source of income when determining how much of a valuation allowance it needs. This is because the amortisation of goodwill for book purposes provides a degree of predictability as to the reversal of the DTL.
Effect of the accounting alternative on public companies
As mentioned above, the new standard applies to non-public entities; however, it may also affect public companies.
If a public company is required to include a non-public entity's financial statements in a regulatory filing, the non-public entity's financial statements would need to be retrospectively adjusted to unwind any previously elected private company accounting alternatives.

Additionally, a public company would be able to apply the private company standards in the standalone financial statements of a subsidiary, as long as the subsidiary, on its own, meets the definition of a non-public entity.
What's next?
The standard is effective for annual periods beginning after 15 December 2014, and interim periods within annual periods beginning after 15 December 2015.
Early adoption is permitted, which means that an eligible non-public entity could elect to apply the alternative in its 2013 financial statements, as long as those financial statements have not been made available for issuance prior to the release of the final standards.
The alternative would be applied on a prospective basis, with amortisation of existing goodwill commencing at the beginning of the period of adoption.
The FASB has separately added a project to its technical agenda to address the accounting for goodwill for public business entities and not-for-profit entities. Deliberations on this project are expected to commence in 2014.

The IFRS Interpretations Committee (IFRIC) update
Overview
During the first quarter of 2014 the IFRIC considered the following tax related issues:

Below we outline the IFRIC's tentative conclusions on the above issues.
Does IAS 12 require that DTAs are recognized to the extent of suitable taxable temporary differences?
In 2013 the IFRIC received a request for guidance on the recognition and measurement of DTAs when an entity is loss-making. It was asked to clarify whether IAS 12 requires that a DTA is recognised when there are suitable reversing taxable temporary differences regardless of an entity's expectations of future tax losses.
During its January 2014 meeting, the IFRIC confirmed that a DTA should be recognised when there are suitable reversing taxable temporary differences, and that it is not necessary to consider future tax losses. This position is based on the following:

What are the implications of loss limitation when DTAs are recognised only to the extent of suitable taxable temporary differences?
The IFRIC was asked to clarify how the guidance in IAS 12 is applied when tax laws limit the extent to which losses can be recovered against future profits.
The IFRIC confirmed that the DTAs should be adjusted accordingly to reflect the impact of tax loss limitations when DTAs are recognised only to the extent of taxable temporary differences.

What is the threshold for the recognition of DTAs for uncertain tax positions?
The IFRIC considered a request for guidance on the recognition of a DTA in the following situation:

The IFRIC noted that paragraph 12 of IAS 12 provides sufficient guidance on the recognition of current tax assets and current tax liabilities. It states that current tax for current and prior periods shall, to the extent unpaid, be recognised as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess shall be recognised as an asset.
The IFRIC confirmed that, in the above situation, an asset is recognised if the amount of cash paid (which is a certain amount) exceeds the amount of tax expected to be due (which is an uncertain amount).
What are the deferred tax implications of assets held in a corporate wrapper, and does IAS 12 require that an entity accounts for both the inside and outside basis differences?
The IFRIC received a request to clarify tax accounting for a parent entity in the consolidated financial statements, in the situation when a subsidiary owns only one asset (the asset), and the parent expects to recover the carrying amount of the asset by selling the shares in the subsidiary (the shares).
Specifically, the IFRIC was asked to confirm whether the deferred tax should be calculated using the tax base of the asset (the inside basis) or the tax base of the shares (the outside basis).
The IFRIC acknowledged that, in practice, there are different views on this issue. The IFRIC's view, however, is that IAS12's requirements in this situation are clear - the parent has to recognize both the deferred tax related to the asset and to the shares, provided tax law treats the asset and the shares as two separate assets and no specific exceptions in IAS 12 apply in this situation.
What are the deferred tax implications of financial assets measured at fair value when that fair value is less than cost?
A few years ago the IFRIC received a request to clarify the accounting for DTAs in the following situation:

The IFRIC previously concluded that DTAs for unrealised losses on debt instruments are recognised, unless recovering the debt instrument by holding it until an unrealised losses reverses does not reduce future tax payments and instead only avoids higher tax losses. In effect, it may be difficult to recognise a DTA if a company has accumulated losses.
At its meeting in January 2014, the IFRIC analysed feedback from the consultation with IASB members and tentatively decided to confirm its recommended approach and to draft an amendment to IAS 12 that illustrates the application of the existing principles of IAS 12 in accounting for DTAs for unrealized losses on debt instruments measured at fair value.
Subject to reviewing the draft amendment to IAS 12, the IFRIC supported the IASB staff's recommendation that such an amendment to IAS 12 should mainly be an illustrative example, with other amendments to IAS 12 made only if the clarification through an illustrative example is insufficient.
What are the deferred tax implications, and does the initial recognition exception apply when businesses are transferred in an intra-group reorganisation?
The IFRIC received a request to clarify tax accounting under IAS 12 in the following situation:

At its January 2014 meeting, the IFRIC confirmed that deferred tax balances should be determined separately for each entity in the consolidated group that files separate tax returns.
The IFRIC also confirmed that transferring the goodwill to the subsidiary would not meet the initial recognition exception described in paragraphs 15 and 24 of IAS 12 in the consolidated financial statements. As a result, deferred tax for temporary differences should be recognised in the consolidated financial statements (subject to meeting the recoverability criteria for recognising deferred tax assets in IAS 12).
As such, in the above situation, a DTA should be recognised in the consolidated financial statements to the extent of tax goodwill remaining in the parent entity. In addition, a deferred tax liability should be recognised as a result of the book goodwill transferred to the subsidiary.

Recent and upcoming major tax law changes

Notable enacted tax rate changes


Country

Prior rate

New rate

Guatemala (CIT)

31%

28%/25%1

Israel

5.47%3/4.10%4

4.31%2/3.23%3

Japan (ETR)

38.01%

35.65%4

Portugal (CIT)

25%

23%5

Portugal (CIT—state surcharge)

3%/5%

3%/5%/7%5

1 The reduction in the tax rate was enacted on 1 January 2014 and is effective from 1 January 2014 (28%) and 1 January 2015 (25%).
2 The reduction of the tax rate on interest charged on a loan from a company to its supplier, employee or a controlling shareholder was enacted on 6 January 2014 and is effective from 1 January 2014.
3 The reduction of the tax rate on interest charged on intercompany loans was enacted on 6 January 2014 and is effective from 1 January 2014. 4 These changes were enacted on 5 December 2013 and are effective from 1 January 2014.
4 The termination of the Restoration Corporation Surtax resulting in the reduction of the effective tax rate (ETR) in Japan was enacted on 20 March 2014 with the effect from 1 April 2014 (the above ETR is for corporations with capital exceeding JPY100 million in Tokyo Metropolitan area).
5 These changes were enacted on 16 January 2014 (substantively enacted on 26 December 2013—see the Q4 2013 newsletter) and are effective from 1 January 2014. The rate of the state surcharge depends on the amount of taxable income (before deduction of tax losses) and is as follows:

Austria
Various Austrian tax proposals that we covered in the Q4 2013 newsletter were enacted during the first quarter of 2014. These included the following:

Canada
The following measures were proposed in Canada during the first quarter of 2014 as part of the federal budget:

Chile
During the first quarter of 2014, a significant tax reformwas proposed in Chile. The reform's primary stated objective is to increase tax revenues to finance public education.
In particular, the tax reform includes the following measures:

In addition, the Chilean government enacted changes to the foreign tax credit rulesthat increased the maximum foreign tax credit amount available to taxpayers to 35% (if foreign income is derived from a treaty country) or 32% (in all other circumstances).

Denmark
The following measures were enacted during the first quarter of 2014 in Denmark:

Greece
The following measures were enacted during the first quarter of 2014 in Greece:

Japan
Tax reform in Japan, as we reported in the Q4 2013 newsletter, was enacted in the first quarter of 2014. It included the following significant measures:

New Zealand
Financial arrangement rules in New Zealand were amended in relation to certain interest-free and reduced-interest loans. The amendments clarify that any positive adjustments that may be required in relation to these loans under IFRS are not taxable, and likewise any negative adjustments are not deductible.
This measure was enacted in the first quarter of 2014.

Panama
As mentioned in the Q4 2013 newsletterthe new worldwide income tax system enacted in Panama in December 2013 was repealed on 10 January 2014 effective retroactively.

Portugal
Various corporate tax reform proposals that were substantively enacted in the fourth quarter of 2013 (see the Q4 2013 newsletter) were enacted for US GAAP purposes in the first quarter of 2014.

Qatar
During the first quarter of 2014 a proposal was introduced in Qatar to exempt foreign investors in Qatar funds, invested in shares and other securities, from income tax in Qatar.

Russia
During the first quarter of 2014 the Russian Ministry of Finance proposed to introduce Controlled Foreign Company (CFC) rules in Russia. Under the proposed CFC rules, a Russian tax resident must pay tax in Russia on undistributed retained earnings of their controlled offshore entities. The list of the offshore jurisdictions subject to the CFC rules will be determined by the Ministry of Finance.

It is expected that these rules will be enacted on 1 January 2015.

Singapore
The following measures were announced in Singapore as part of the 2014 Budget speech and were substantively enacted for IFRS purposes during the first quarter of 2014 (please note that for US GAAP purposes these measures were not enacted):

South Africa
The following measures were announced in South Africa as part of the 2014 Budget and were substantively enacted during the first quarter of 2014 (please note that for US GAAP purposes these measures were not enacted):

South Korea
The following tax reform proposals announced in August 2013 were enacted during the first quarter of 2014 in South Korea:

The maximum research and development (R&D) tax credit available to large corporations was reduced from 6% to 4% of the amount of R&D expenses.

Spain
During the first quarter of 2014 Spain enacted the following urgent measures in relation to refinancing and restructuring corporate debt:

These measures are effective from 1 January 2014.

Taiwan
During the first quarter of 2014 the Ministry of Finance of Taiwan proposed the following measures:

United Kingdom
During the first quarter of 2014 it was proposed that the annual investment allowance (a 100% upfront tax relief for qualifying plant and machinery) in the United Kingdom is increased to GBP 500,000.

United States
During the first quarter of 2014 the United States' House Ways and Means Committee Chairman Dave Camp released a 976-page discussion draft 'Tax Reform Act of 2014', which would lower the corporate tax rate from 35% to 25%, reform US international tax rules and simplify the tax code.
A few days later the Obama Administration released its fiscal year 2015 budget proposals in the Treasury Green Book which also includes several tax proposals.
For more information on the above proposals please refer to the following PwC's publications:

Although tax reform is unlikely this year or next, we encourage multinationals to consider the potential impact of the above proposals on their business and tax accounting. We will keep you informed on further developments.

Tax accounting refresher

In this section we highlight some similarities and differences for income tax accounting under International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (US GAAP), and provide guidance on when tax law changes should be accounted for under these frameworks.

IFRS and US GAAP: similarities and differences
The current income tax accounting frameworks under IFRS and US GAAP are both balance sheet liability models and share many fundamental principles At times, however, they are applied in different manners, and there are differences in the exceptions to the fundamental principles under each framework.

Since 2002, the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been committed to the convergence of US GAAP and IFRS. Preparers and regulators have called for convergence to simplify financial reporting and to reduce the burden of compliance for listed companies, especially those with a stock-market listing in more than one jurisdiction (for an update on the status of the four active convergence projects see the Q4 2013 newsletter).
Meanwhile preparers should be aware of the current similarities and differences between IFRS and US GAAP, particularly in relation to the following items that are outlined in the table below:

For broader comparison of accounting for income tax under IFRS and US GAAP, please refer to our publication "IFRS and US GAAP: similarities and differences"

Impact

US GAAP

IFRS

Tax basis
Under IFRS, a single asset or liability may have more than one tax basis, whereas there would be generally only one tax basis per asset or liability under US GAAP

Tax basis is based upon the relevant tax law. It is generally determined by the amount that is depreciable for tax purposes or deductible upon sale or liquidation of the asset or settlement of the liability.
As contrasted with IFRS, there is no rebuttable presumption of recovery through sale for investment property.

Tax basis is determined based on the expected manner of recovery. Assets and liabilities may have a dual manner of recovery (e.g., through use and through sale). In that case, the carrying amount of the asset or liability is bifurcated, resulting in more than a single temporary difference related to that item.
A rebuttable presumption exists that investment property measured at fair value will be recovered through sale.

Tax rate applied to current and deferred taxes
The impact on deferred and current taxes as a result of changes in tax laws impacting tax rates may be recognized earlier under IFRS.

US GAAP requires the use of enacted rates when calculating current and deferred taxes (for more information see discussion in section 'When to account for tax changes' below).

Under IFRS current and deferred taxes are calculated using enacted or substantively enacted rates (for more information see discussion in section 'When to account for tax changes' below).

Recognition of deferred tax assets
The frameworks take differing approaches to the presentation of deferred tax assets. It would be expected that net deferred tax assets recorded would be similar under both standards.

Deferred tax assets are recognised in full, but are then reduced by a valuation allowance if it is considered more likely than not that some portion of the deferred taxes will not be realised.

Deferred tax assets are recognised to the extent that it is probable (defined as 'more likely than not') that sufficient taxable profits will be available to utilise the deductible temporary difference or unused tax losses. Valuation allowances are not allowed to be recorded.

Tax holidays
Tax holidays may be treated differently under US GAAP and IFRS.

There is no official definition of a tax holiday for US GAAP purposes. However, there is guidance on the appropriate tax accounting for tax holidays. Specifically, the FASB considered whether a deferred tax asset should be established for the future tax savings on the premise that such savings are similar to a net operating loss (NOL) carryforward or other tax attribute.

Ultimately, the FASB decided to prohibit recognition of a deferred tax asset for future anticipated benefits for any tax holiday.

However, the effects on existing deferred income tax balances resulting from the initial qualification for a tax holiday or its extension/renewal should be recognised on the approval date or on the filing date if approval is not necessary. There may be exceptions, for instance, if government approval is considered perfunctory because the qualification requirements can clearly and objectively be assessed. In those cases, depending upon a company's specific facts and circumstances, the effects of the holiday may be recorded prior to the final approval.

Additionally, differences often exist between the book and tax basis of assets and liabilities on balance sheet dates within the holiday period. If these differences are scheduled to reverse during the tax holiday, deferred taxes should be measured for the differences based on the conditions of the tax holiday (e.g., full or partial exemption). If the differences are scheduled to reverse after the tax holiday, deferred taxes should be provided at the enacted rate that is expected to be in effect after the tax holiday expires. The expiration of the holiday is similar to an enacted change in future tax rates, which must be recognised in the deferred tax computation. In some circumstances, tax planning actions to accelerate taxable income into the holiday period or to delay deductions until after the holiday may be considered.

Similar to US GAAP, IFRS provides no official definition of a tax holiday. In addition, there is no specific guidance under IFRS regarding tax holidays, but the treatment of holidays is typically not substantially different than under US GAAP. However, for temporary differences that reverse after the tax holiday period, deferred taxes should be measured at the enacted or 'substantively enacted' tax rates that are expected to apply after the tax holiday period.

Unrealised intra-group profits

The frameworks require different approaches when current and deferred taxes on unrealised intragroup activity are considered.

For purposes of the consolidated financial statements, any tax impacts to the seller as a result of an intercompany sale are deferred and recognized upon a sale to a third-party or as the transferred property is amortised or depreciated.

In addition, the buyer is prohibited from recognising a deferred tax asset for any excess of tax basis over the carrying amount of the transferred assets in the consolidated financial statements.

Any tax impacts to the seller as a result of the intercompany transaction are recognised as incurred.
A temporary difference usually arises on consolidation as a result of retaining the pre-transaction carrying amount of the transferred asset while having its tax base according to the intragroup transaction price.

Deferred taxes resulting from the intra-group sale are recognised at the buyer's tax rate.

Uncertain tax positions

Differences with respect to recognition unit of account, measurement, methodology, and the treatment of subsequent events may result in varying outcome under the two frameworks.

Uncertain tax positions are recognised and measured using a two-step process: (1) determine whether a benefit may be recognised, and (2) measure the amount of the benefit. Tax benefit from uncertain tax positions may be recognised only if it is more likely than not that the tax position is sustainable based on its technical merits.
Uncertain tax positions are evaluated at the individual tax position level.
The tax benefit is measured by using a cumulative probability model: the largest amount of tax benefit that is greater than 50% likely of being realised upon ultimate settlement.

Relevant developments affecting uncertain tax positions after the balance sheet date but before issuance of the financial statements (including the discovery of information that was not available as of the balance sheet date) would be considered a non-recognised subsequent event for which no effect would be recorded in the current-period financial statements.

Accounting for uncertain tax positions is not specifically addressed within IFRS. The tax consequences of events should follow the manner in which an entity expects the tax position to be resolved with the tax authorities at the balance sheet date.
Practice has developed such that uncertain tax positions may be evaluated at the level of the individual uncertainty or group of related uncertainties. Alternatively, they may be considered at the level of total tax liability to each tax authority.
Acceptable methods by which to measure tax positions include (1) the expected value/probability weighted average approach, and (2) the single best outcome/most likely outcome method. Use of the cumulative probability model required by US GAAP is not supported by IFRS.

Relevant developments affecting uncertain tax positions occurring after the balance sheet date but before issuance of the financial statements (including the discovery of information that was not available as of the balance sheet date) would be considered either an adjusting or non-adjusting event depending on whether the new information provides evidence of conditions that existed at the end of the reporting period.

Intraperiod allocations

Differences in subsequent changes to deferred taxes could result in less volatility in the statement of operations under IFRS.

Subsequent changes in deferred tax balances due to enacted tax rate and tax law changes are taken through the income statement regardless of whether the deferred tax was initially created through the income statement, through equity, or in acquisition accounting.

Changes in the amount of valuation allowance due to changes in assessment about realisation in a future period are generally taken through the income statement, with limited exceptions for certain equity-related items.
Subsequent changes in deferred tax balances are recognised in the income statement, except to the extent that the tax arises from a transaction or event that is recognised, in the same or a different period, either in other comprehensive income or directly in equity.
     

When to account for tax law changes


Issue


Recently, we have seen a few examples when substantial changes in tax law were introduced, and shortly after that, announced to be repealed or reversed. Tax accounting for law changes in these situations can be particularly tricky.
For example, Panama on 30 December 2013 introduced a worldwide income tax system effective 31 December 2013. However, within a few days, following strong criticism of the new law, the government announced its intention to repeal the law retroactively to 31 December 2013. The repealing law was enacted on 10 January 2014, and the new system was deemed never to have applied for Panamanian tax purposes (see the Q4 2013 newsletter for more detail).
In another example, France, in August 2013, added Jersey, Bermuda, and British Virgin Islands to its list of non-cooperative states and territories, effective 1 January 2014. As a result, stringent and punitive tax measures were to apply to transactions between France and these countries from 1 January 2014.
In December 2013 (i.e., before the 1 January 2014 effective date), following successful resolution of information exchange issues by Jersey and Bermuda with France, the French Ministry of Economy and Finance announced that these countries would be removed from the non-cooperative list. However, the official decree to remove Jersey and Bermuda from the list was made only mid-January 2014. As a result, these countries were effectively on the non-cooperative list and subject to punitive tax measures during the first weeks of January 2014.
As mentioned above, tax accounting for law changes in the situations where tax law changes were enacted and subsequently announced to be repealed or reversed, can be particularly tricky. However, the main issue to consider in such situations is whether the law that introduced the relevant changes or the law that repealed previously enacted legislation is 'enacted' for US GAAP purposes or 'enacted' or 'substantively enacted' for IFRS purposes.
Below we provide some guidance on when law is considered to be 'enacted' or 'substantively enacted'.

US GAAP and IFRS guidance

Legislation is considered 'enacted,' as defined by US GAAP, when the country's official ultimately signs it into law and the full legislative process is complete (i.e., the law cannot be overturned without additional legislation).
Companies are required to measure current and deferred income taxes based on the tax laws that are enacted as of the balance sheet date of the relevant reporting period.
With respect to deferred taxes and liabilities, that means measurement is based upon enacted law that is expected to apply when the temporary differences are expected to be realised or settled. As a result, even legislation having an effective date considerably in the future will typically cause an immediate financial reporting consequence.
Under IFRS companies are required to measure current and deferred income taxes based on the tax laws that are 'enacted' or 'substantively enacted' as of the balance sheet date of the relevant reporting period.

The IASB has indicated that 'substantive enactment' is achieved when any future steps in the enactment process will not change the outcome. In this context, 'will not' does not mean 'cannot'. Rather, it is necessary to assess whether the future steps in the enactment process are steps that historically have affected the outcome and whether there are other factors that indicate that those steps are substantive.
In some cases, enactment and substantive enactment will occur at the same point in a legislative process. If the respective dates differ, it is naturally possible that they will occur in different reporting periods. Awareness and identification of the relevant milestones in a jurisdiction's legislative process are therefore essential to complying with the applicable financial accounting standard.
Application by jurisdiction
As each country has its own legislative process, the point at which a new law is considered enacted for US GAAP purposes or substantively enacted for IFRS purposes depends upon the particular jurisdiction process. It is therefore important to understand the process on a country-by-country (as well as on a state, provincial or other jurisdictional) basis.
For example, in some countries, the announcement of a change in tax law by the government may have the effect of actual enactment, even if certain formalities of the legislative process have yet to take place (e.g., announcement of tax measures in Singapore by the Minister of Finance during the annual budget speech—see 'Recent and upcoming major tax law changes' section of this newsletter). In such cases, the law may be considered substantively enacted under IFRS, even though it may not yet be considered enacted under US GAAP.
The below table summarises when law is 'enacted' and 'substantively enacted' in some major countries based on our understanding of each jurisdiction's current laws, governing procedures and practices as of December 2013. For a broader list please refer to our publication "Global Tax Accounting Services. Around the world: When to account for tax law changes".

Jurisdiction

Substantive enactment

Enactment

Australia

Generally upon passage through both houses of Parliament, unless in rare circumstances where there is no significant uncertainty about the outcome of a tax bill.

Upon royal assent of the bill.

Austria

Upon signature of the president.

Upon publication of the bill in the official gazette.

Belgium

Upon acceptance by the Senate and transmittal to the Chamber of a draft bill.

Upon ratification of the bill by the monarch.

Canada

If there is a majority government—when detailed draft legislation has been tabled for first reading in Parliament.
If there is a minority government—once the proposals have passed the third reading in the House of Commons

Upon royal assent of the bill.

China

For tax laws—upon passage by the National People's Congress. For tax regulations—upon passage by the state council for tax regulations.

For tax laws—upon signature of the president and publication of the legislation immediately. For tax regulations—upon signature of the premier of the state council and publication immediately after.

France

Upon adoption by the two assemblies and after validation by the Constitutional Council, or after expiration of the period to refer the law to the Constitutional Council.

The day following the publication in the official bulletin unless a different date is stated in the law.

Germany

Upon passage by the Upper and Lower houses of the Parliament.

Upon signature of the federal president.

India

Upon passage by both houses of Parliament.

Upon signature of the president and publication in the official gazette of India.

Italy

Upon signature by the president.

Upon signature by the president.

Japan

Upon passage by the Diet.

Upon passage by the Diet.

Mexico

Upon signature of the president.

The day following publication of the tax bill in the federal official gazette unless a different date is stated in the law.

Netherlands

Upon approval by both houses of Parliament.

The day after formal publication of the law in the state gazette.

Panama

Upon approval by the National Assembly's president and the president.

Upon publication in the official legal gazette.

Russia

Upon signature of the president.

Upon publication of the law in the official media.

Singapore

Upon announcement by the minister of finance during the annual budget speech.

Upon presidential assent of the bill.

Switzerland

Upon announcement by the minister of finance during the annual budget speech.

Upon approval by the respective Parliament, i.e., federal, cantonal or communal (at the end of the 100-day referendum term)—unless a referendum is held, in which case (at the federal level) after the referendum ballot. In some cases enactment can also depend on fulfilment of certain economic conditions set in the law.

United Kingdom

Upon passage of a resolution under the Provisional Collection of Taxes Act by the House of Commons or after the third reading in the House of Commons.

Upon royal assent of the bill.

United States—federal

Upon signature of the president or upon a successful override of a presidential veto by both houses of Congress.

Upon signature of the president or upon a successful override of a presidential veto by both houses of Congress.


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Contacts

Global and regional tax accounting leaders


United States and Global
Ken Kuykendall
Global, US & Americas Tax
Accounting Services Leader
+1 (312) 298 2546
o.k.kuykendall@us.pwc.com
EMEA
Janet Anderson
EMEA Tax Accounting
Services Leader
+32 (2) 710 4323
janet.anderson@be.pwc.com
Latin America
Rafael Garcia
Latin America Tax Accounting
Services Leader
+1 (305) 375 6237
rafael.h.garcia@us.pwc.com

United Kingdom and Global
Andrew Wiggins
Global Tax Accounting Services
Knowledge Management Leader
+44 (0) 121 232 2065
andrew.wiggins@uk.pwc.com
Asia Pacific
Terry SY Tam
Asia Pacific Tax Accounting
Services Leader
+86 (21) 2323 1555
terry.sy.tam@cn.pwc.com

Tax accounting leaders in major countries


Country

Name

Telephone

Email

Australia

Ronen Vexler

+61 (2) 8266 0320

ronen.vexler@au.pwc.com

Brazil

Manuel Marinho

+55 (11) 3674 3404

manuel.marinho@br.pwc.com

Canada

Spence McDonnell

+1 (416) 869 2328

spence.n.mcdonnell@ca.pwc.com

China

Terry SY Tam

+86 (21) 2323 1555

terry.sy.tam@cn.pwc.com

France

Thierry Morgant

+33 (1) 56 57 49 88

thierry.morgant@fr.landwellglobal.com

Germany

Heiko Schäfer

+49 (69) 9585 6227

heiko.schaefer@de.pwc.com

Japan

Masanori Kato

+81 (3) 5251 2536

masanori.kato@jp.pwc.com

United Kingdom

Andrew Wiggins

+44 (0) 121 232 2065

andrew.wiggins@uk.pwc.com

United States

Ken Kuykendall

+1 (312) 298 2546

o.k.kuykendall@us.pwc.com

Primary authors

Ken Kuykendall
Global, US & Americas Tax Accounting Services
Leader
+1 (312) 298 2546
o.k.kuykendall@us.pwc.com

Steven Schaefer
National Professional Services Group
Partner
+1 (973) 236 7064
steven.schaefer@us.pwc.com

Andrew Wiggins
Global Tax Accounting Services Knowledge
Management Leader
+44 (0) 121 232 2065
andrew.wiggins@uk.pwc.com

Katya Umanskaya
Global & US Tax Accounting Services
Director
+1 (312) 298 3013
ekaterina.umanskaya@us.pwc.com