Tax Accounting

Foreword v

Chapter 1: Introduction to Tax Accounting 1
Tjeerd van den Berg
1.1. Introduction 1
1.2. Importance of accounting for income taxes 2
1.3. Primary tax accounting terminology 3
1.4. How are income taxes accounted for? 6
1.5. Other factors affecting tax reporting: Looking beyond the accounting requirements 13
1.5.1. Introduction 13
1.5.2. Fair share of taxes, non-financial reporting and pressure from investors 15
1.5.2.1. Publish What You Pay 15
1.5.2.2. Work by non-governmental organizations 16
1.5.2.3. The alphabet soup 18
1.5.2.4. The GRI standard on tax and payments to governments 20
1.5.2.5. The UN Principles for Responsible Investment 25
1.5.3. Regulatory industry, country-by-country and other reporting requirements 25
1.5.3.1. The Extractive Industries Transparency Initiative 26
1.5.3.2. US development in CbC reporting 28
1.5.3.2.1. Proposed update from FASB to income tax disclosures 28
1.5.3.2.2. International exchange of CbC reports 29
1.5.3.2.3. Recent developments in the United States 30
1.5.3.3. Relevant EU directives 31
1.5.3.3.1. EU Directives on Accounting and Transparency 32
1.5.3.3.2. EU Capital Requirements Directive 34
1.5.3.3.3. European Non-Financial Reporting Directive 35
1.5.3.3.4. European Directive on Mandatory Disclosure Rules (DAC6) 36
1.5.3.4. Transfer pricing documentation under the OECD Guidelines 37
1.5.4. Conclusion 40
1.6. International Financial Reporting Standards 41
1.6.1. Introduction 41
1.6.2. Why are International Financial Reporting Standards developed? 41
1.6.3. The convergence project 43
1.6.4. The structure of the IFRS Foundation 44
1.6.4.1. The Board 45
1.6.4.2. IFRS Foundation 46
1.6.4.3. IFRS Foundation trustees 46
1.6.4.4. IFRS Foundation monitoring board 47
1.6.4.5. IFRS advisory council 48
1.6.4.6. IFRS Interpretations Committee 48
1.6.4.7. Accounting Standards Advisory Forum 49
1.6.5. Financial reporting standards 49
1.6.5.1. Introduction 49
1.6.5.2. The due process of IFRS 50
1.6.5.3. The due process of IFRIC interpretations 51
1.6.6. Conclusion 52

Chapter 2: Definition of Income Taxes 55
Eva Eberhartinger, Alexandra Patloch-Kofler and Elisabeth Höltschl
2.1. Introduction 55
2.2. Scope of IAS 12 55
2.3. Income taxes in the statements and analysis 58
2.4. Income taxes 59
2.5. Specific forms of taxation 61
2.5.1. Income tax 61
2.5.2. Withholding tax 62
2.5.3. Business tax 63
2.5.4. Tonnage tax 65
2.5.5. Mining tax 66
2.5.6. Interest payments and penalties 67
2.5.7. Alternative minimum taxes 69
2.5.8. Tax on value added 70
2.5.9. Taxes beyond the scope of IAS 12 70
2.5.10. Digital services taxes 70
2.6. Differences between IFRS and US GAAP 72
2.7. Developments with respect to COVID-19 73

Chapter 3: Book-to-Tax Differences: Permanent and Temporary 75
Eduardo Flöring and Konstantin Smolsky
3.1. Introduction 75
3.2. Tax returns and reconciliation of financial statements 81
3.3. Adjustment of profit for tax purposes and the performance statements 82
3.4. Recovery of assets and settlement of liabilities 84
3.5. Impact of COVID-19 on IFRS reporting and deferred tax calculation 86
3.6. Frequently asked questions 88

Chapter 4: Current Tax and Prior Year Adjustments 91
Khadija Baggerman-Noudari
4.1. Introduction 91
4.2. The process 92
4.3. Calculate current tax for the year 93
4.3.1. Calculate taxable income for the year 93
4.3.1.1. Recognition of current tax liabilities and current tax assets 96
4.3.2. Tax rates 96
4.3.3. Tax incentives 99
4.3.4. Uncertain tax positions 101
4.3.5. Tax loss carry-back claims 103
4.4. Calculate any prior year adjustments 106
4.4.1 Prior year adjustments 106
4.4.2. Change in accounting estimate vs. error 110
4.5. Reconcile tax accounts 113
4.5.1. Introduction 113
4.5.2. Balance sheet classification 115
4.5.3. Discounting 116
4.6. Conclusion 117

Chapter 5: Deferred Taxes 119
Ronel Fourie
5.1. Introduction 119
5.2. Origin of deferred tax assets 120
5.3. Overview of deferred tax assets and liabilities 121
5.3.1. Recognition 121
5.3.2. Measurement 123
5.3.3. Presentation 124
5.4. Practical approach to calculating deferred tax 126
5.5. Basic principles of carrying amount 126
5.6. Tax base as the basis for calculating deferred tax 127
5.6.1. Tax base of an asset 128
5.6.2. Tax base of a liability 130
5.6.3. Tax base of revenue received in advance 132
5.6.4. Uncertainty in determining the tax base 133
5.7. Tax base without a carrying amount 133
5.8. Calculate the temporary differences 135
5.8.1. Temporary difference 135
5.8.2. Taxable temporary differences 136
5.8.2.1. Assets 136
5.8.2.2. Liabilities 137
5.8.2.3. Other examples of taxable temporary differences 137
5.8.3. Deductible temporary differences 138
5.8.3.1. Assets 138
5.8.3.2. Liabilities 139
5.8.3.3. Other examples of deductible temporary differences 139
5.8.4. Other examples of temporary differences 140
5.9. Recognition criteria and initial recognition exemptions 141
5.9.1. Initial recognition exemption 141
5.9.2. Initial recognition of goodwill exempted from deferred tax 146
5.9.3. Exemption from recognizing outside basis deferred tax 146
5.9.4. Exemption from recognition of deferred tax assets 146
5.10. Manner of expected recovery 146
5.10.1. Substantively enacted tax rates 146
5.10.2. Tax rates based on manner of recovery 147
5.10.3. Recovery of investment property 150
5.10.4. Different tax rates for levels of taxable profit 151
5.11. Reconcile movements in deferred tax balances 152
5.11.1. Disclosure of deferred tax movements 152
5.11.2. Accounting for a deferred tax movement 153
5.11.2.1. Deferred tax movements in the income statement 153
5.11.2.2. Deferred tax movements in other comprehensive income 154
5.11.2.3. Deferred tax movements in equity 154
5.11.3. Disallowance of discounting 155
5.11.4. Deferred tax on capital losses 155
5.12. Practical issues 155
5.12.1. Investment tax credits 155
5.12.2. Deferred tax on compound financial instruments 158
5.12.3. Divestments: Rollover relief 158
5.12.4. Intra-group transactions 159
5.12.5. Tax consideration during uncertain times (COVID-19) 161

Chapter 6: Deferred Tax Asset Recognition 163
Marcin Partyka and Jorge Molina
6.1. Introduction 163
6.2. Deferred tax assets 164
6.2.1. Relevant deferred tax assets and GAAPs 164
6.2.2. Recognizing a deferred tax asset 166
6.3. Deferred tax assets on unused tax losses and credits 168
6.3.1. Background 168
6.3.2. The threshold: “Probable” 169
6.3.3. History of recent losses 176
6.3.4. Convincing other evidence 178
6.3.5. Specific tax regimes 180
6.4. Tax rate to be used 182
6.5. Discounting 184
6.6. Netting 185
6.7. The impact of the COVID-19 virus outbreak on the recognition of deferred tax assets as examples
of non-recurrent events that still carry significant uncertainty to the future 186
6.8. Simplified checklist for deferred tax assets recognition 187
6.9. Frequently Asked Questions 188

Chapter 7: Tax Exposures 191
Koen De Grave, Scott Miller and Paul Pellegrine
7.1. Introduction 191
7.2. Basic theory and technical guidance 193
7.2.1. Identification of uncertain tax treatments 194
7.2.1.1. What are uncertain tax treatments? 194
7.2.1.2. To consider uncertain tax treatments separatelyor together (determine unit of account) 196
7.2.2. Recognition 198
7.2.2.1. Evidence to support recognition 200
7.2.2.2. Detection risk 201
7.2.2.3. Tax opinions 202
7.2.2.4. Uncertainties related to valuation 203
7.2.2.5. Temporary differences 204
7.2.3. Measurement 205
7.2.3.1. Measurement under IFRS – Expected value method 206
7.2.3.2. Measurement under IFRS – Most likely amount method 207
7.2.3.3. Measurement under US GAAP 208
7.2.3.4. Examples of US GAAP and IFRS recognition and measurement 209
7.2.3.4.1. Example of transfer pricing-related uncertain tax position 209
7.2.3.4.2. Binary tax position 212
7.2.4. Subsequent events 213
7.2.5. Effective settlement and statute of limitations 215
7.2.6. Interest and penalties 218
7.2.6.1. Accounting policy election under US GAAP 218
7.2.6.2. Judgement under IFRS 220
7.2.7. Presentation in the statement of financial position 221
7.2.8. Financial statements disclosures 221
7.3. Conclusion 223

Chapter 8: Disclosure Notes 225
Patrick van Gerven and Frank Imming
8.1. Introduction 225
8.2. Presentation versus disclosure 226
8.3. Presentation and disclosure requirements IAS 12 230
8.3.1. Introduction 230
8.3.2. Presentation 231
8.3.2.1. Offsetting current taxes 231
8.3.2.2. Offsetting deferred taxes 233
8.3.2.3. Tax expense 234
8.3.2.4. Exchange differences on deferred foreign tax liabilities or assets 234
8.3.3. Disclosure 236
8.3.3.1. Total tax expense (income) 237
8.3.3.2. Effective tax rate reconciliation 239
8.3.3.3. Tax rates 242
8.3.3.4. Tax via equity and other comprehensive income 244
8.3.3.5. Overview of tax losses/non-recognized deferred tax assets 246
8.3.3.6. Investments in subsidiaries, branches and associates and interests in joint arrangements 247
8.3.3.7. Deferred taxes 249
8.3.3.8. Discontinued operations 253
8.3.3.9. Income tax consequences of dividends 255
8.3.3.10. Business combinations 259
8.3.3.11. Future taxable income 260
8.3.3.12. Tax contingencies and events after the reporting period 262
8.4. Non-IAS 12 presentation and disclosure requirements 265
8.4.1. Introduction 265
8.4.2. IAS 1: Presentation of financial statements 265
8.4.3. IAS 7: Statement of cash flows 274
8.4.4. IAS 10: Events after the reporting period 277
8.4.5. IFRS 3: Business Combinations 278
8.4.6. IFRS 8: Operating Segments 278
8.5. Conclusion 281

Chapter 9: Special Items 283
Mark Koek and Tjeerd van den Berg
9.1. Introduction 283
9.2. Initial recognition 283
9.2.1. General rule of initial recognition 284
9.2.2. Mergers 287
9.2.3. Assets carried at fair value 290
9.2.4. Change in tax status of the entity 290
9.2.5. Migration of an entity 292
9.2.6. Subsequent changes in value: Impact on the initial recognition exemption 293
9.3. Outside basis differences 294
9.3.1. What is an outside basis difference? 294
9.3.2. Calculating deferred taxes on outside basis differences 297
9.3.2.1. Impact of local legal requirements 298
9.3.2.2. Impact of local tax treatment of the shareholder 298
9.3.2.3. Impact of tax treaties 300
9.3.3. Deferred tax assets in relation to unremitted retained earnings 301
9.3.3.1. Withholding taxes and deferred tax assets on unremitted retained earnings 301
9.3.3.2. Impairment of investments and deferred tax assets on unremitted retained earnings 303
9.4. Business combinations 304
9.4.1. Basic principles 304
9.4.2. Acquisition method 306
9.4.2.1. Identify the acquirer 307
9.4.2.2. Determine the acquisition date 307
9.4.2.3. Recognize and measure assets and liabilities 308
9.4.2.4. Recognizing and measuring goodwill or bargain purchase 309
9.4.3. Examples of business combination 310
9.4.3.1. Examples of purchase price allocation 310
9.4.3.2. Example of deferred tax in a share deal 311
9.4.3.3. Example of deferred tax in an asset deal 314
9.4.3.4. Example: Asset deal and share deal in one transaction 317
9.4.3.5. Example: Identifiable assets – Fair value, no tax basis 319
9.4.3.6. Example: Net operating losses or tax credits in a business combination 321
9.4.4. Specific disclosures for business combinations 323
9.5. Share-based payments 324
9.5.1. Different share-based payment transactions 324
9.5.2. Objective and examples of share-based payment accounting (IFRS 2) 326
9.5.2.1. Significant dates 327
9.5.2.2. Equity-settled share-based payment transactions 327
9.5.2.3. Cash-settled share-based payment transactions 330
9.5.3. Tax accounting consequences of share-based payment transactions 332
9.5.3.1. Tax accounting paragraphs 333
9.5.3.2. Tax accounting: Share-based payment transactions – Examples 334
9.5.3.3. Cash-settled share-based payments: Example 339
9.6. Other comprehensive income and discontinued operations 340
9.6.1. Other comprehensive income 340
9.6.1.1. Components of other comprehensive income 341
9.6.1.2. Changes in revaluation surplus 342
9.6.2. Discontinued operations 345
9.6.2.1. Definition and rationale 345
9.6.2.2. Scope 345
9.6.2.3. Measurement 346
9.6.2.4. Presentation and disclosures 348
9.7. Interim reporting 350
9.7.1. Interim reporting and accounting for income taxes 350
9.7.2. Determination of estimated weighted average tax rate 354
9.7.3. One-time events or discrete items 356
9.7.4. COVID-19 impact 361
9.8. Convergence of US GAAP and IFRS; existing differences in accounting for income taxes 362
9.8.1. Background of convergence 362
9.8.2. Differences in basic model 362
9.8.3. Differences in recognition and measurement 363
9.8.4. Differences with regard to specific items 364
9.8.4.1. Intra-group transactions 364
9.8.4.2. Revaluations of property, plant and equipment 366
9.8.4.3. Backward tracing 366
9.8.4.4. Foreign exchange differences on remeasurement 367
9.8.4.5. Unremitted retained earnings 367
9.8.4.6. Share-based payments 368
9.8.4.7. Uncertain tax positions 368
9.8.5. Differences in presentation 369

Chapter 10: Banks and Other Financial Institutions 371
Young Hwa An
10.1. Introduction 371
10.2. Specific tax accounting issues faced by banks 373
10.2.1. Branch structures 373
10.2.2. Financial instruments 375
10.2.2.1. Background 375
10.2.2.2. Asset accounting 376
10.2.2.3. Liability accounting 380
10.2.2.4. Example 381
10.3. Specific tax accounting impact of regulatory regimes for banks 382
10.3.1. Historical reference 382
10.3.2. Role of the regulators 383
10.3.3. Overview of capital requirements under the Basel Accords 385
10.3.4. The application of the Basel III Framework 386
10.3.5. Basel IV 388
10.3.6. Treatment of deferred tax assets under the Basel Accords 389
10.3.7. US adoption of Basel III 395
10.3.8. European adoption of Basel III 395
10.3.9. Summary 396
10.4. Specific tax accounting impact of regulatory regimes for insurance companies 397
10.4.1. Introduction 397
10.4.2. Insurance liabilities 398
10.4.3. Role of the regulators 399
10.4.4. Treatment of deferred taxes under Solvency II 400
10.4.5. Impact of COVID-19 408
10.4.6. Conclusion 409

Chapter 11: Case Study 411
Heather Jurek

Background 411
Additional information 411
ABC Foreign Subsidiary (FS) 413
ABC Global, Inc. consolidated financials 438