France enacted legislation in December 2012 to encourage investment and create jobs. The legislation grants companies a tax credit for qualifying salaries. The credit is equal to 4% of salaries paid for financial year 2013 and increases to 6 % for financial year 2014. During March 2013, the French tax authorities provided guidance on this "wage tax credit" (crédit d'impôt pour la compétivité et l'emploi or "CICE") explained in further detail below. Organizations with operations in France will need to consider the impact of the new legislation on their financial statement accounting under either US Generally Accepted Accounting Principles (US GAAP), International Financial Reporting Standards (IFRS), or French Generally Accepted Accounting Principles (French GAAP). Under US GAAP and IFRS, the credit is recognized and measured as a component of pre-tax income. Under French GAAP there is a choice to account for the credit either as a component of pre-tax income or as a component of income tax expense.
In December 2012, France passed a law to grant companies a tax credit, CICE, for financial years 2013 and 2014. In March 2013, the French tax authorities provided practical guidance on the CICE credit.
CICE is a credit available to French businesses equalling 4% of salaries for financial year 2013. The credit increases to 6% for financial year 2014 and subsequent years. The credit is calculated on an individual employee basis. In order to qualify for the credit, an employee salary must be less than 2.5 times the French minimum wage which is approximately €45,000 per year.
To apply the minimum wage requirement eligible salaries are calculated by adding the worker's legal work hours plus any additional hours (i.e., overtime hours) and multiplying the total by the base pay rate when applying the French minimum wage requirement.
There is no requirement for a company to have taxable income to be eligible for the credit.
The credit will reduce income taxes owed by the company in 2013 and 2014. Any excess credits will have a carryforward period of three years. At the end of three years, the excess credits become fully refundable in cash. There are additional provisions for qualifying small businesses that could allow excess credits to be immediately refundable.
Under US GAAP, credits that do not have a direct relationship to taxable income or are refundable are not accounted for under Accounting Standards Codification (ASC) 740, Income Taxes. Rather, the tax credit would be accounted for as part of pre-tax income. There is specific wording in the authoritative guidelines stating the CICE is not intended to have an effect on other tax base calculations (e.g., the tax on the value added by a Company, the "CVAE", which is determined by applying the CVAE tax rate to the positive difference between certain elements of income and expense).
When a credit is accounted for in determining pre-tax income, a variety of possible income recognition models may apply depending on the specific attributes of the benefit. One possible model that could apply, depending on facts and circumstances, is grant accounting. US GAAP does not provide specific guidance for grant accounting. As a result, in the absence of US GAAP guidance most companies consider the guidance provided by International Financial Reporting Standard IAS 20, Accounting for Government Grants and Disclosure of Government Assistance.
We believe based on the facts and circumstances of the CICE credit, that for most companies the appropriate US GAAP treatment is to account for the credit is a reduction to salary expense. This is similar to the treatment under IAS 19 Employee Benefits.
We do not believe accounting for the CICE in revenue appropriate in these circumstances as the credit would not be considered part of a company's ordinary business. Additionally, presentation of the credit in other income does not seem to reflect the intention of the legislator.
Companies should apply judgment to determine the appropriate income statement classification. We believe this decision should be consistently applied and disclosed. In cases where companies record the credit as a reduction of cost of sales, it may be helpful for the company to provide enhanced disclosures that describe the effect on gross margin in the current period and expectations for the future. If the credit is material, disclosures should be sufficient to provide financial statement users with a full understanding of the nature and amount of the credit.
International Accounting Standard 12 (Income Taxes) would not apply to the credit; rather, the credit would be accounted for as a component of pre-tax income. The requirements set forth in IAS 19, Employee Benefits, outlines the accounting requirements for employee benefits, including short-term benefits (e.g. wages and salaries, annual leave), post-employment benefits such as retirement benefits, other long-term benefits (e.g. long service leave) and termination benefits. Accounting for the credit may be different for individual companies depending on the facts and circumstances. For example, a company may account for the credit as a reduction in employee benefit costs, a negative social security cost, or as a reimbursement. Additionally, based on the fact and circumstances, some companies may consider accounting for the CICE credit under International Financial Reporting Standard IAS 20, Accounting for Government Grants and Disclosure of Government Assistance.
The French regulators have recommended companies account for the CICE credit as a reduction of salary expense. However, under French GAAP, companies could account for the credit under the income tax model when "facts and circumstances permit" and with the agreement of the legal auditors. The tax authorities have not mentioned the option of income tax classification in their guidelines and only addressed treating the CICE as a reduction of salary costs.
Generally, the final amount of the CICE will be not be determined until the end of the year due to the number of elements in the calculation that are unknown until then (i.e., bonuses and annual leave). The conclusion from the French regulator is that companies should provide monthly accounting and an annual reconciliation based on the final calculations. If companies determine that there may be a significant level of uncertainty, disclosures should be considered.
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For a deeper discussion of how this issue might affect your business, please contact:
Ken Kuykendall
Global & US Tax Accounting Services Leader
Partner
+1 (312) 298-2546
o.k.kuykendall@us.pwc.com
Doug Berg
Global & US Tax Accounting Services
Managing Director
+1 (313) 394-6217
douglas.e.berg@us.pwc.com
John Schmitt
US Tax Accounting Services
Manager
+1 (602) 364-8243
john.schmitt@us.pwc.com