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 release we discuss a variety of accounting and reporting developments and the related tax accounting considerations. We also draw your attention to some significant tax law and tax rate changes occurring during the quarter ended 31 December 2013 and some important tax accounting issues to consider.
For questions related to items discussed in this newsletter, for a comprehensive discussion of tax accounting issues affecting businesses today, or for general tax accounting questions, 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.
On 19 November 2013 the Financial Accounting Foundation (FAF) completed its postimplementation review of Financial Accounting Standards Board (FASB) Statement No. 109, Accounting for Income Taxes (FAS 109) (codified in Accounting Standards Codification Topic 740, Income Taxes).
The FAF concluded that FAS 109 adequately achieved its intended purposes, while noting that the complexity associated with accounting for income taxes has not been reduced.
Additionally, the FAF concluded that FAS 109 generally provides investors with decision-useful information, noting, however, that investors struggle to assess cash tax effects and find it difficult to understand the potential tax costs associated with foreign earnings considered to be indefinitely reinvested.
The FAF further indicated that preparers have difficulty with 'intraperiod tax allocation', accounting for intercompany transfers of assets, and indefinitely reinvested foreign earnings.
On 3 December 2013, the FASB subsequently released its response to the FAF's report, indicating that the FASB will follow-up on areas of concern noted in the report by seeking input from financial statement users, preparers, auditors, and others. The response specified that areas for follow-up include intraperiod tax allocation, intercompany transfers of assets, indefinitely reinvested foreign earnings, and income tax cash flows.
The outreach will seek to identify cost-effective solutions to reduce complexity or provide additional decision-useful information, while also considering stakeholders' views with respect to the priority of addressing those concerns in light of other FASB projects that may be undertaken.
The 2013 AICPA National Conference on current Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) developments held in December 2013 included representatives from regulatory and standard setting bodies, auditors, users, and preparers.
The conference highlighted themes of quality and transparency. Topics of quality included financial reporting and auditing, while transparency was discussed in the context of regulatory practices, audits, and disclosures.
SEC representatives emphasised the need for high-quality, concise disclosures, focusing on ways in which registrants can improve communications through their filings.
The SEC and PCAOB also highlighted the continued importance of internal control over financial reporting.
SEC representatives provided their annual list of areas of frequent comments from filing reviews. The areas noted included income taxes, pensions and other post-employment benefit disclosures, business combinations, goodwill and segment reporting.
In connection with income taxes, frequent comment areas included disclosures related to income tax rate reconciliations, valuation allowances and indefinite reinvestment assertions (see the tax accounting refresher section below for additional discussion regarding valuation allowances and indefinite reinvestment assertions).
'Disclosure overload' was a theme throughout the conference. Various representatives from the SEC and standard setters reiterated that more information is not always better. Preparers should focus on clear, transparent and understandable disclosures that are both relevant and material. While asking for transparency is often interpreted as requiring additional information, good disclosures should be clear and crisp, and written in plain language to effectively reach the financial statement users.
Representatives of the FASB and International Accounting Standards Board (IASB) discussed current and future standard setting, providing updates on both convergence and individual standard setting projects.
While there was some detailed discussion regarding the convergence projects, there was little discussion about International Financial Reporting Standards (IFRS) becoming an accepted accounting framework for companies regulated by the SEC. This year the topic received significantly less attention than last year's conference, when it was a frequent and recurring theme.
FASB and IASB provided updates regarding the status of four active convergence projects: revenue recognition, leases, financial instruments (classification and measurement), and insurance contracts.
Although the revenue standard is nearing completion, significant work remains on the leases project. The feedback received regarding the leasing project suggests that many preparers believe the costs of implementation will significantly outweigh the
related benefits.
There was general agreement on the objectives of the classification and measurement of financial instruments project (ie to reduce complexity, provide more decision-useful information, and achieve convergence); however, many do not believe that the current exposure draft adequately achieves those objectives.
The revenue recognition project is the furthest along of the joint projects, with a final standard expected before the end of 2014. Once completed, it will impact many industries resulting in either more complex deferred tax calculations or, in some cases an impact on cash taxes.
The conference highlighted concerns about the effort that will be required for the full retrospective and modified retrospective adoption alternatives, as well as the volume of expected incremental disclosures.
Additional disclosures about the disaggregation of revenue, significant judgments made in applyingthe standard, and changes in contract assets related to costs to obtain or fulfil a contract will add to the burden of adoption. However, the new disclosure requirements are somewhat reduced for non-public entities and interim reporting as compared to what public companies should expect for annual reporting requirements.
There was broad agreement that preparers will need to expend significant effort and resources to understand the new standard and implement process and system changes well in advance of the expected 2017 effective date. Registrants will also need to consider appropriate disclosures related to the expected impact of the standard in the periods after its issuance but before its adoption.
As mentioned above, the final standard is expected to be released during 2014. As such, 2015 would mark the beginning of the comparative periods required to be retrospectively revised in a typical three-year financial statement presentation (ie for most companies filing under US GAAP, the 2017 Form 10-K will show 2017, 2016, and 2015 statements of operations). However, the SEC has yet to determine the manner in which retrospective adoption of the new revenue standard will be treated in the five-year selected financial data table required by Regulation S-K, Item 301.
PCAOB Chairman James Doty highlighted that the PCAOB continues to examine the role the audit can and should play in enhancing capital formation, investor protection and the economy.
Quality control continues to be at the forefront for the PCAOB. For audit firms, a system of quality control is broadly defined as a process to provide the firm with reasonable assurance that its personnel comply with applicable professional standards and the firm's standards of quality. The PCAOB believes that improvements in the systems of quality control could prevent and detect audit deficiencies and improve audit quality.
Other near- and long-term agenda items include continued outreach to audit committees, identification and tracking of audit quality measures, and focus on inspections and remediation processes, as well as standard-setting initiatives.
Internal control over financial reporting continued to be an important theme at the conference, discussed by representatives from both the SEC and PCAOB. It was commented that investors benefited from improvements in the reliability of financial reporting due to the increased focus on internal control.
To maintain the improvements achieved to date, a continued focus on the internal control over financial reporting is required. Maintaining and evaluating internal control over financial reporting must be an iterative and ongoing process that receives the appropriate level of involvement and support from management.
The SEC noted that as part of their comment letter process, they are also looking for potential indicators of material weaknesses, such as corrections of an error or disclosures regarding material changes in internal controls. They further noted that in instances where the SEC does not agree with a registrant's conclusion on an accounting matter, they may also be interested in a registrant's conclusions regarding the internal control implications.
Takeaway
The above themes of financial reporting and auditing quality, and transparency of regulatory practices, audits, and disclosures are expected to be the key focus areas of the SEC and PCAOB during 2014. Tax accounting matters will also remain high on the agenda as taxes are one of the most common areas of material weakness.
In prior 2013 issues of this newsletter we touched on various aspects of tax transparency and countryby-country reporting (CBCR).
In this issue we will give a brief overview of the current CBCR regulations, proposals to extend CBCR to all large companies and groups in Europe and their current status, as well as initiatives from the Organisation for Economic Co-operation and Development (OECD) related to CBCR and
their timing.
Currently there are four CBCR frameworks that are effective or in the process of being implemented:
The EITI applies to companies in the extractive sector ie companies extracting natural resources, including oil, gas, metals, and minerals.
The EITI was originally established in 2003, and then substantially revised in a new standard in May 2013. More than 20 countries are already fully compliant with the requirements of the EITI, with the United Kingdom, United States, and Italy seeking to become compliant in the near future.
Similar to the EITI, the Dodd-Frank Act also applies to companies in the extractive sector. The rules were implemented by the SEC on 22 August 2012, but were successfully challenged in court on 2 July 2013. Therefore, the country-by-country disclosures in the Dodd-Frank Act are currently suspended until the SEC introduces revised rules. There has been no announcement as to when the SEC expects the new rules to be ready, and no timeline has been given for their implementation.
The EU Accounting and Transparency Directives apply to listed and large unlisted EU companies in the extractive sector and those engaged in the logging of primary forests (we discussed these directives in the second-quarter 2013 issue of the newsletter). Each EU member state is now responsible for passing the requirements under these directives into local legislation by 20 July 2015. The directives provide that the requirements will come into effect for financial years beginning on or after 1 January 2016 at the latest.
CRD IV applies to EU banks, other credit institutions and certain investment entities (please refer to the second-quarter 2013 issue of the newsletter for more detail on this directive). The directive is intended to be effective from 1 January 2014 and is being adopted by the EU member states into their local legislation.
Proposals to extend CBCR to large companies and groups
Proposals to extend CBCR to large companies and groups via amendments to the draft directive on non-financial and diversity information emerged in Europe in 2013. The draft directive amends the accounting directives mentioned above and aims at increasing EU companies' transparency and performance on environmental and social matters in order to contribute effectively to long-term economic growth and employment.
These proposals were considered by three EU institutions, namely, Parliament, Council, and Commission, with the Parliament and Council working as EU co-legislators.
In December 2013 the EU Parliament's Legal Affairs Committee (the JURI) decided not to adopt recommendations of the Economic and Monetary Affairs Committee (ECON) in relation to the extension of CBCR to large companies and groups.
Additionally, a number of the member states in the Council also indicated that they do not support this proposal.
As a result, at this point any future discussion regarding the introduction of CBCR for large companies and groups is effectively postponed until after the directive on disclosure of non-financial and diversity information becomes effective in 2018. However, there is a chance that the EU Parliament, the Council, and the European Commission may bring forward this discussion, as well as consider the alignment of any CBCR initiatives with the OECD's Base Erosion and Profit Shifting (BEPS) project (see below).
OECD's initiatives and timeline
In July 2013, at the request of G20 Finance Ministers, the OECD launched an Action Plan on BEPS that was later fully endorsed by G20 Heads of State at their September 2013 meeting in Saint-Petersburg.
Among other areas, the plan outlined specific actions focused on greater transparency and data and reporting requirements including CBCR to tax authorities.
The timeline of the BEPS project, including CBCR, is extremely ambitious with the first deliverables expected by September 2014 and completion of the project expected by the end of 2015.
In the 2013 third-quarter issue of the newsletter, we discussed the draft memorandum on transfer pricing and CBCR released by the OECD on 3 October 2013 and the subsequent public consultation held by the OECD on 12 and 13 November 2013.
On 3 December 2013, the OECD released a calendar for planned stakeholder input on the BEPS project, including CBCR. The calendar provides a tentative timeline for the release of discussion drafts, deadlines for comments, and public consultations.
In accordance with the timeline, the OECD published a discussion draft on transfer pricing documentation and a template for CBCR on 30 January 2014. The public consultation on these documents is scheduled to take place in March 2014. It should be noted that the deadline for public comments is 23 February 2014, which represents an extremely tight timeframe.
During the webcast on the BEPS action plan on 23 January 2014, the OECD confirmed that the BEPS project is continuing on schedule, consistent with the timeline above.
Takeaway
While the EU proposals addressing the possibility of extending CBCR to all large companies and groups are on hold, the OECD is maintaining momentum as part of the BEPS project. The OECD's specific request for comments, along with corresponding dates for public consultations, has been well received, as the OECD has opened a dialogue with the tax community regarding the BEPS project. Nonetheless, given the short timeline proposed by the OECD, companies with a viewpoint on the draft CBCR template should consider potential feedback now.
Given this timeline, it is also worthwhile to connect with your PwC contacts to consider processes and technology that could be used in relation to the country-by-country data collection and start forming strategies for dealing with the additional compliance and relevant audit requirements.
European Commission amendments to Parent Subsidiary Directive
On 25 November 2013, the European Commission proposed amendments (2011/96/EU) to the Parent Subsidiary Directive. The historical goal of the Parent Subsidiary Directive has been to revent the double taxation of group companies based in different EU member states.
The proposed amendments follow the political guidance which was determined in 2009 within the EU's Code of Conduct Group. The group agreed to address mismatches resulting from differences in the tax treatment of hybrid loans between EU member states.
The European Commission also proposed replacing the current anti-abuse provision in the directive with a common general anti-abuse rule based on a similar clause included in its 6 December 2012 recommendation on aggressive tax planning.
The main proposed amendments are as follows:
If the proposed amendments are implemented, the member states will be required to adopt the amended directive in their local laws, regulations, and administrative provisions by 31 December 2014.
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Australia
During the fourth quarter of 2013 the new Australian government released its response to previously announced but unlegislated tax measures. In particular, the government will proceed with the following measures:
The new government also announced it will not proceed with the proposal to remove the debt deduction for funding offshore subsidiaries, but will consider an alternative anti-avoidance measure.
Austria
The following proposals were introduced in the fourth quarter of 2013 in Austria:
Brazil
The following measures were enacted during the fourth quarter of 2013 in Brazil:
Canada
The following measures, as we reported in the previous issue of the newsletter, were enacted in Canada during the fourth quarter of 2013:
Colombia
The following measures were enacted during the fourth quarter of 2013 in Colombia:
Denmark
The following proposals were introduced during the fourth quarter of 2013 in Denmark:
Finland
The following measures were enacted during the fourth quarter of 2013 in Finland:
France
The following measures were enacted during the fourth quarter of 2013:
Germany
During the fourth quarter of 2013 Germany substantively enacted the following measure:
Gibraltar
Royalties that have been received or are receivable by a Gibraltar company will be taxable at 10%. This measure was enacted in Gibraltar during the fourth quarter of 2013.
Hungary
During the fourth quarter of 2013 the following measures were enacted in Hungary:
Ireland
The following measures were enacted during the fourth quarter of 2013 in Ireland:
Israel
During the fourth quarter of 2013 Israel enacted the following measures:
Italy
The following measures were enacted during the fourth quarter of 2013 in Italy:
Japan
During the fourth quarter of 2013, the Japanese government tabled a proposal for significant tax reform, which will be considered further by the Diet (Japanese parliament) in early 2014. The tax reform package includes the following significant measures:
Latvia
The following measures were enacted during the fourth quarter of 2013 in Latvia:
Mexico
During the fourth quarter of 2013 Mexico enacted the 2014 Mexican tax reform package we covered in the 2013 third quarter newsletter.
In summary, the tax reform package repealed the current income tax law, including the flax tax regime and tax consolidation. It introduced changes to the corporate income tax rate and an additional 10% tax on dividends paid by Mexican entities. It also made modifications to various deductions and the maquiladora regime (regime favouring establishment of foreign owned companies to process and/or assemble temporarily imported materials and parts for re-export).
Netherlands
Further guidance was released in the Netherlands in the fourth quarter of 2013 regarding the application of the arm's length principle. The guidance highlights the importance of arm's length terms and conditions and the economic rationale underlying an inter-company arrangement. The guidance also includes specific situations that have led to controversies and audit activities over the past decade.
Netherlands also enacted measures to increase the additional research and development (R&D) deduction to 60% (previously 54%) of the costs (other than wages) directly related to R&D activities.
New Zealand
The following measure was enacted during the fourth quarter of 2013 in New Zealand:
The following proposal was also introduced during the above period:
Norway
The following measures were enacted during the fourth quarter of 2013 in Norway that we covered in the 2013 second quarter issue of the newsletter:
Panama
On 30 December 2013, Panama introduced a worldwide income tax system effective 31 December 2013. Under the new system Panamanian taxation was to apply to Panamanian residents on any income derived from sources in or outside of Panama.
Portugal
The following measures were substantively enacted during the fourth quarter of 2013 in Portugal:
In addition, the 2014 Federal Budget enacted in the fourth quarter of 2013 introduced a 10% deduction for retained earnings reinvested by small and medium companies in eligible assets. The deduction is limited to 25% of the corporate income tax liability for the year.
Romania
In the fourth quarter of 2013 Romania enacted legislation introducing a participation exemption regime for Romanian holding companies. Under this regime, qualifying income eg dividends, capital gains, and liquidation proceeds will not be taxable in Romania.
Singapore
The following measures were enacted during the fourth quarter of 2013 in Singapore:
Slovakia
The following measures were enacted during the fourth quarter of 2013 in Slovakia:
Slovenia
The following thin capitalisation measures were enacted during the fourth quarter of 2013 in Slovenia:
Spain
The following measures were enacted during the fourth quarter of 2013 in Spain:
Switzerland
During the fourth quarter of 2013 corporate tax reform was proposed in Switzerland, including introduction of an innovation box regime and a notional interest deduction.
Sweden
During the fourth quarter of 2013 research and development relief in Sweden has been amended to reduce a deduction for employer's contributions for foreign key employees engaged in qualified research or development activities. A deduction is now 10%, capped at SEK 230,000 per month for the group.
United Kingdom
The following proposals were introduced during the fourth quarter of 2013 in the United Kingdom (UK):
United States
A number of widely relevant US tax law provisions affecting businesses expired on 31 December 2013. That includes the research and development tax credit, work opportunity tax credit, increased expensing and bonus depreciation allowances, and certain favourable 'subpart F' provisions (ie the look-through treatment on payments between related controlled foreign corporations and exceptions for certain active financing income).
Tax accounting considerations
Accounting Standards Codification (ASC) Topic 740, Income Taxes, requires companies to measure current and deferred income taxes based upon the tax laws that are enacted as of the balance sheet date of the relevant reporting period.
With respect to deferred tax assets and liabilities, that means measurement is based upon the enacted law for the period in which the temporary differences are expected to be realised or settled. Expired tax laws are not considered, nor would they be in statements prepared under IFRS.
Accordingly, some of the more significant effects that should be considered with respect to these expired tax laws include the following:
A company that has historically asserted indefinite reinvestment with respect to a foreign subsidiary may not be able to maintain the assertion to the extent the difference in the company's book and tax bases in the foreign subsidiary will be taxable under subpart F. For example, without the lookthrough rule, distributions paid from a lower-tier foreign subsidiary to its foreign parent may result in a deemed dividend (ie subpart F income) to the US parent.
Accordingly, the US parent may be unable to assert indefinite reinvestment on the book/tax basis difference related to the unremitted earnings in the lower-tier foreign subsidiary if dividends are expected to be paid after the expiration date of the subpart F look-though exception.
Where the active financing exception applies, it may be necessary to record US deferred taxes for a foreign subsidiary's inside basis temporary differences if their reversals will result in subpart F consequences. See Example 11-17 and 11-18 in PwC's Guide to Accounting for Income Taxesfor an illustration of the interaction of subpart F income and the indefinite reinvestment assertion.
Uzbekistan
The following measures were enacted during the fourth quarter of 2013 in Uzbekistan:
The assertion of indefinite reinvestment of foreign subsidiary earnings continues to be one of the more complex and judgmental areas of accounting for income taxes. The continued growth in unremitted foreign earnings; scrutiny from stakeholders, such as the OECD, around base erosion and profit shifting; and the ongoing uncertainty within the global economy has brought heightened attention to the application of the indefinite reinvestment assertion. Companies should consider a number of factors when evaluating their indefinite reinvestment assertion. Some of these factors are discussed below.
Coordination and alignment among the multiple business functions within a company's global organisation is imperative. Processes and controls must be in place to ensure that the indefinite reinvestment assertion is consistent with the best information available to the organisation and represents the whole organisation's view, plans, and expectations.
A specific, documented plan should lay out items such as the parent and subsidiary's long- and short-term projected working capital and other financial needs in locations where the earnings are generated. Evidence maintained by management should include documented reasons why any excess earnings are not needed by the parent or another entity in the group.
Management should consider the consistency of its assertion with the parent and subsidiary's long- and short-term budgets and forecasts, any past dividends, and the tax consequences of a decision to remit or reinvest. To the extent management can demonstrate that the rate of return on reinvesting foreign earnings exceeds the rate of return on repatriated funds, management should consider documenting that consideration.
Management should consider any transactions, such as loans or credit support, provided by the foreign operations to the US parent that may be relevant
in assessing whether the indefinite reinvestment assertion can be made. Transactions that present risk of US taxation may suggest that foreign funds or liquidity are needed in the US, thereby possibly preventing an assertion of indefinite reinvestment.
Management's support
Management must have the ability and intent to indefinitely postpone home country taxation. The assertion needs to be supported by all levels of management with significant decision-making input on plans or transactions that could impact the company's assertion. Where controlling or shared ownership is present, the assertions must be aligned with the expectations of owners who may have governance or decision-making influence.
Financial position and the tax profile of the company
The liquidity and overall financial health of the company must be factored into the assessment of the assertion. If the unremitted earnings may be needed at the parent level to meet existing and anticipated obligations, it may be difficult to support an assertion of indefinite reinvestment. The tax profile of the company should also be considered. For example, if the unremitted earnings were needed to avoid the expiration of foreign tax credit carryforwards, it might also be difficult to support the assertion.
Expired favourable provisions
As mentioned in the section above, certain favourable subpart F provisions (eg the look- through treatment of payments between related controlled foreign corporations and exceptions for certain active financing income) expired on 31 December 2013.
These expired provisions, which may have previously enabled US tax deferral, should be considered, particularly, when evaluating the indefinite reinvestment assertion at the lower levels of a company's organisational structure. This is due to the increased potential for subpart F to arise from cross-border dividend (or certain other) payments.
Recognition of a deferred tax asset
When the outside tax basis exceeds the book basis in a foreign subsidiary, a deferred tax asset (DTA) related to that temporary difference is recognised only when it is apparent that the difference will reverse in the foreseeable future. For example, recognition of a benefit may occur when there is a planned disposal of the subsidiary. However, the expectation of near-term subsidiary profits would not by itself provide a basis for recognising a DTA on the outside basis difference.
Foreign tax credit benefit
We believe there are limited circumstances in which foreign taxes that are expected to become foreign tax credits in the foreseeable future would be recognised as a benefit through the recording of a DTA prior to the actual repatriation event. Among factors to consider, the company must be committed to making the repatriation that triggers the foreign tax credit benefit in the near term.
Disclosures
Due to the significant judgments involved in assessing the indefinite reinvestment assertion, and the potential magnitude of the unrecorded
deferred tax liability, transparent disclosure is often critical. For more information, please refer to the recently released PwC Tax Accounting Services publication –Income Tax Disclosure.
The valuation allowance assessment on DTAs is an area that has always presented a challenge for financial statement preparers.
The assessment requires significant judgment and a thorough analysis of all positive and negative evidence available to determine whether all or a portion of the DTAs is more likely than not to be realised. In this analysis, the weight given to positive or negative evidence is directly related to the extent to which it can be objectively verified. Accordingly, recently observed financial results are given more weight than future projections which are often inherently subjective.
As companies perform their assessments, the following reminders may be helpful.
The valuation allowance assessment needs to be performed on a jurisdiction-by-jurisdiction basis. Further, where the local tax law does not allow for consolidation, the valuation allowance assessment may be at the separate legal-entity level, as opposed to the jurisdictional level.
The accounting standard requires that all available evidence be considered in determining whether a valuation allowance is needed, including events occurring subsequent to the balance sheet date but before the financial statements are released. However, a valuation allowance assessment should not anticipate transactions over which the company does not have control. For example, initial public offerings, business combinations, and financing transactions are generally not considered as part of a valuation allowance assessment until the period the transactions are completed.
In assessing potential changes to a valuation allowance (ie establishing or releasing), it is important to consider what triggering events have occurred since the prior assessment and whether a change in conclusion is warranted.
An entity should consider the appropriate timing to release the valuation allowance when circumstances change. Cumulative income (eg on a three-year basis) is not a prerequisite to releasing a valuation allowance. Rather, an entity must consider the totality of all positive and negative evidence when considering whether to release a valuation allowance.
The realisation of DTAs is dependent upon the existence of sufficient taxable income of the appropriate source and must create incremental cash tax savings. For example, if tax losses are carried back to prior years, freeing up tax credits (which were originally used to reduce the tax payable) rather than resulting in a refund, a valuation allowance would still be necessary if there are no sources of income that allow for the realisation of the freed-up tax credits. In other words, utilisation does not always mean realisation. The substitution of one DTA for a future DTA, without a source of income for the future DTA's realisation, does not represent realisation.
The reversal of an outside basis difference in a foreign subsidiary can only be viewed as a source of taxable income to support recovery of DTAs, when the foreign earnings have not been asserted as indefinitely reinvested.
Taxable temporary differences on equity method investments can be considered a source of taxable income, provided there is an appropriate expectation as to the timing and character of reversal in relation to DTAs.
Taxable temporary differences associated with indefinite-lived assets (eg land, goodwill, indefinite-lived intangibles) generally cannot be used as a source of taxable income. Thus, a valuation allowance on DTAs may still be necessary even when an enterprise is in an overall net deferred tax liability (DTL) position. When the existence of future taxable income is in doubt and the enterprise is in a net DTL position, the timing and nature of reversal of the DTLs must be analysed.
In jurisdictions with unlimited carryforward periods for tax attributes (eg NOLs, AMT credit carryforwards, and other non-expiring loss or credit carryforwards), the related DTAs may be supported by the indefinite-lived DTLs.
Due to the significant judgments involved in determining whether a DTA is realisable, transparent disclosures are often critical. For more information, please refer to the recently released PwC Tax Accounting Services publication –Income Tax Disclosure.
The assessment of an uncertain tax position (UTP) is a continuous process that does not end with the initial determination of a position's sustainability.
As of each balance sheet date, unresolved positions must be reassessed to determine whether new information exists. The US GAAP accounting standard ASC740, Income Taxes, requires that changes in the expected outcome of a UTP be based on new information, and not on a mere re-evaluation of existing information.
New information can relate to developments in case law, changes in tax law, new regulations issued by taxing authorities, interactions with the taxing authorities, or other developments. Such developments could potentially change the estimate of the amount that is expected to eventually be sustained or cause a position to meet or fail to meet the recognition threshold.
In assessing UTPs, an organisation is required to recognise the benefit of a tax position in the first interim period that one of the following conditions is met:
For a tax position to be considered effectively settled, all three of the following conditions must be met:
In jurisdictions like the United States, where the taxing authority can re-examine tax positions that gave rise to a net operating loss or other carryforward in the year those carryforwards are used, the judgment as to whether effective settlement has occurred becomes more complex. If the requirements of effective settlement are met, the resulting tax benefit is required to be reported. In other words, the application of effective settlement criterion is not elective.
Required disclosures related to UTPs are often extensive and can be highly sensitive. For more information, please refer to the recently released PwC Tax Accounting Services publication – Income tax disclosure.
Access a PDF copy of the article on PwC.com.
Chicago
United States
Ken Kuykendall
Global, US & Americas Tax
Accounting Services
+1 (312) 298 2546
o.k.kuykendall@us.pwc.com
Birmingham
United Kingdom
Andrew Wiggins
Global Tax Accounting Services
Knowledge Management Leader
+44 (0) 121 232 2065
andrew.wiggins@uk.pwc.com
Brussels
Belgium
Janet Anderson
EMEA Tax Accounting
Services Leader
+32 (2) 710 4323
janet.anderson@be.pwc.com
Shanghai
China
Terry SY Tam
Asia Pacific Tax
Accounting Services Leader
+86 (21) 2323 1555
terry.sy.tam@cn.pwc.com
Miami
United States
Rafael Garcia Latin America
Tax Accounting Services Leader
+1 (305) 375 6237
rafael.h.garcia@us.pwc.com