In the final months of 2012, Mexico, Colombia, Nicaragua, and the Dominican Republic all enacted tax reform packages that included income tax rate changes along with a variety of other tax reforms. Additionally, Costa Rica repealed certain withholding tax laws in December. Under US Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS), many companies will need to analyze their tax provision calculations and reflect any corresponding impacts from these newly enacted laws in their 2012 financial statements.
Under US GAAP, Accounting Standards Codification (ASC) 740, Income Taxes, requires organizations to use the tax law in effect at the balance sheet date of the relevant reporting period.
The impact of enacted tax law changes should be assessed on both existing deferred tax balances and current year activity. For existing deferred tax balances, the associated impact would be included as a discrete item in the interim period in which the changes are enacted. To the extent the tax law change relates to current year activity, the impact would be reflected in the estimated annual effective tax rate (AETR).
The effects, both current and deferred, are reported as part of the tax provision attributable to continuing operations, regardless of the category of income in which the underlying pre-tax income or expense or deferred tax asset or liability was or will be reported.
Under International Accounting Standard (IAS) 12, organizations are also required to use the tax law in effect at the balance sheet date of the relevant reporting period. However tax law changes only need to have been substantively enacted by the balance sheet date for deferred tax balances to be adjusted, or for the impact to be reflected in the estimated AETR, if applicable. Unlike US GAAP, under IFRS, organizations should backward- trace the effects of a law change upon existing deferred tax balances in order to determine the portion of the adjustment that is recognized as part of the tax provision attributable to continuing operations or otherwise recognized as part of the tax provision that is allocable to other comprehensive income or equity.
During late 2012, there was a lot of legislative activity in Latin America which included changes in corporate income tax rates as well as other provisions that may require a reassessment of a valuation allowance and uncertain tax positions.
From a tax accounting perspective, it is important to distinguish between the period in which the legislation was enacted and the period(s) in which its provisions become effective. Under US GAAP, the period of enactment is the proper period to recognize any corresponding income tax accounting effects. From an IFRS perspective, the date of enacted or substantively enacted law dictates the appropriate period to reflect a change in tax law. Substantively enacted would mean that future events required by the enactment process historically have not affected the outcome and are unlikely to do so. As such, under IFRS, companies may need to apply new tax rates or law changes earlier under IFRS than under US GAAP.
The recently enacted laws in Mexico, Colombia, Nicaragua, and the Dominican Republic all include a change to the corporate income tax rates applicable in future tax periods. With respect to deferred taxes, under US GAAP, the total effect of tax rate changes on deferred tax balances is recorded as a component of the income tax provision related to continuing operations for the period in which the law is enacted, even if the assets and liabilities relate to other components of the financial statements, such as discontinued operations, a period business combination, or items of accumulated other comprehensive income. As discussed in ASC 740-10-55-23 and 740-10-55-129 through 55-135, an enacted change in future tax rates often requires detailed analysis.
Depending on when the rate change becomes effective, knowledge of when temporary differences are expected to reverse is necessary in order to estimate the amount of reversals that will occur before and after the rate change, and so that the temporary differences are tax-effected at the enacted tax rate expected to apply in the period the temporary difference reverses.
Unlike US GAAP, under IFRS, organizations should backward-trace the effects of a law change upon existing deferred tax balances in order to determine the portion of the adjustment that is recognized as part of the tax provision attributable to continuing operations or otherwise recognized as part of the tax provision that is allocable to other comprehensive income or equity.
Below are several recent publications that discuss the specific legislative developments that took place in each of the above-mentioned countries during the latter months of 2012.
Access a PDF copy of the article on PwC.com.
For a deeper discussion of how this issue might affect your business, please contact:
Ken Kuykendall,
Global & US Tax Accounting Services Leader
+1 (312) 298-2546
o.k.kuykendall@us.pwc.com
Doug Berg,
Global & US Tax Accounting Services
+1 (313) 394-6217
douglas.e.berg@us.pwc.com
Rafael Garcia,
Latin America TAS Leader
+1 (305) 375-6237
rafael.h.garcia@us.pwc.com
Marjorie Dhunjishah,
Latin America & US Tax Accounting Services
+51 (1) 211-6500
marjorie.dhunjishah@pe.pwc.com