whether profits are retained or distributed.
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The IASB previously appeared to regard IAS 12 as favouring the first analysis, while
accepting that the resulting accounting treatment – a cycle of raising full tax provisions
and then reversing them – does not reflect economic reality. Accordingly, the exposure
draft ED/2009/2 proposed that the measurement of tax assets and liabilities should
include the effect of expected future distributions, based on the entity’s past practices
and expectations of future distributions.29 Following the withdrawal of the exposure
draft, the IASB intends to consider this issue further. However, no formal decision has
been taken, nor proposals issued for comment.
8.5.2
Withholding tax or distribution tax?
In practice, it is sometimes difficult to determine whether a particular transaction
should be accounted for under the provisions of IAS 12 relating to different tax rates for
distributed and undistributed profits, or in accordance with the provisions of the
standard relating to withholding taxes.
The classification can significantly affect tax expense, because IAS 12 requires a
withholding tax to be accounted for as a deduction from equity, whereas a higher tax
rate for distributed profits is usually accounted for as a charge to profit or loss.
This issue is discussed further at 10.3 below.
8.6 Discounting
IAS 12 prohibits discounting of deferred tax, on the basis that:
• it would be unreasonable to require discounting, given that it requires scheduling
of the reversal of temporary differences, which can be impracticable or at least
highly complex; and
• it would be inappropriate to permit discounting because of the lack of
comparability between financial statements in which discounting was adopted and
those in which it was not. [IAS 12.53, 54].
Moreover, IAS 12 notes that when deferred tax is recognised in relation to an item that
is itself discounted (such as a liability for post-employment benefits or a finance lease
liability), the deferred tax, being based on the carrying amount of that item, is also
effectively discounted. [IAS 12.55].
8.7
Unrealised intragroup profits and losses in consolidated
financial statements
As noted at 6.2.1 and 6.2.2 above, an unrealised intragroup profit or loss eliminated on
consolidation will give rise to a temporary difference where the profit or loss arises on
a transaction that alters the tax base of the item(s) subject to the transaction. Such an
alteration in the tax base creates a temporary difference because there is no
corresponding change in the carrying amount of the assets or liabilities in the
consolidated financial statements, due to the intragroup eliminations.
IAS 12 does not specifically address the measurement of such items. However, IAS 12
generally requires an entity, in measuring deferred tax, to have regard to the expected
manner of recovery or settlement of the tax. It would be consistent with this
requirement to measure deferred tax on temporary differences arising from intragroup
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transfers at the tax rates and laws applicable to the ‘transferee’ company rather than
those applicable to the ‘transferor’ company, since the ‘transferee’ company will be
taxed when the asset or liability subject to the transfer is realised or sold.
There are some jurisdictions where the tax history of an asset or liability subject to an
intragroup transfer remains with the ‘transferor’ company. In such cases, the general
principles of IAS 12 should be used to determine whether any deferred tax should be
measured at the tax rate of the ‘transferor’ or the ‘transferee’ company in the
consolidated financial statements.
The effect of the treatment required by IAS 12 is that tax income or expense may be
recognised on transactions eliminated on consolidation, as illustrated by
Examples 29.31 and 29.32.
Example 29.31: Elimination of intragroup profit (1)
H, an entity taxed at 30%, has a subsidiary S, which is taxed at 34%. On 15 December 2019 S sells inventory
with a cost of €100,000 to H for €120,000, giving rise to a taxable profit of €20,000 and current tax at 34%
of €6,800. If H were preparing consolidated financial statements for the year ended 31 December 2019, the
profit made by S on the sale to H would be eliminated. However, whilst the carrying value of the inventory
in the consolidated balance sheet is unchanged at €100,000, its tax base in H is now €120,000.
Under IAS 12, a deferred tax asset would be recognised on the unrealised profit of €20,000, based on H’s 30% tax
rate, i.e. €6,000. The additional €800 tax actually paid by S would be recognised in profit or loss for the period
ended 31 December 2019, the accounting entry being:
DR
CR
€
€
Current tax (profit or loss)
6,800
Current tax (statement of financial position)
6,800
Deferred tax (statement of financial position)
6,000
Deferred tax (profit or loss)
6,000
The net €800 tax charge to profit or loss (current tax charge €6,800 less deferred tax
credit €6,000) reflects the fact that, by transferring the inventory from one tax
jurisdiction to another with a lower tax rate, the group has effectively denied itself a tax
deduction of €800 (i.e. €20,000 at the tax rate differential of 4%) for the inventory that
would have been available had the inventory been sold by S, rather than H, to the
ultimate third party customer.
Example 29.32: Elimination of intragroup profit (2)
H, an entity taxed at 34%, has a subsidiary S, which is taxed at 30%. On 15 December 2019 S sells inventory
with a cost of €100,000 to H for €120,000, giving rise to a taxable profit of €20,000 and current tax at 30%
of €6,000. If H were preparing consolidated financial statements for the year ended 31 December 2019, the
profit made by S on the sale to H would be eliminated. However, whilst the carrying value of the inventory
in the consolidated balance sheet is unchanged at €100,000, its tax base in H is now €120,000.
In this case, the consolidated financial statements would record current tax paid by S of €6,000 and a deferred
tax asset measured at H’s effective tax rate of 34% of €6,800, giving rise to the following entry:
DR
CR
€
€
Current tax (profit or loss)
6,000
Current tax (statement of financial position)
6,000
Deferred tax (statement of financial position)
6,800
Deferred tax (profit or loss)
6,800
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In this case there is a net €800 tax credit to profit or loss (current tax charge €6,000 less
deferred tax credit €6,800). This reflects the fact that, by transferring the inventory from
one tax jurisdiction to another with a higher tax rate, the group has put itself in the
position of being able to claim a tax deduction for the inventory of €800 (i.e. €20,000 at
the tax rate differential of 4%) in exc
ess of that which would have been available had the
inventory been sold by S, rather than H, to the ultimate third party customer.
8.7.1
Intragroup transfers of goodwill and intangible assets
It is common in some jurisdictions to sell goodwill and intangible assets from one entity
in a group to another in the same group, very often in order either to increase tax
deductions on an already recognised asset or to obtain deductions for a previously
unrecognised asset. This raises the issue of how the tax effects of such transactions should
be accounted for in the financial statements both of the individual entities concerned and
in the consolidated financial statements, as illustrated by Example 29.33 below.
Example 29.33: Intragroup transfer of goodwill
A parent company P has two subsidiaries – A, which was acquired some years ago and B, which was acquired
during the period ended 31 December 2018 at a cost of €10 million. For the purposes of this discussion, it is
assumed that B had negligible identifiable assets and liabilities. Accordingly, P recorded goodwill of
€10 million in its consolidated financial statements.
During 2019, B sells its business to A for its then current fair value of €12.5 million. As the goodwill inherent
in B’s business was internally generated, it was not recognised in the financial statements of B. Hence, the
entire consideration of €12.5 million represents a profit to B, which is subject to current tax at 20% (i.e.
€2.5 million). However, as a result of this transaction, A will be entitled to claim tax deductions (again
at 20%) for its newly-acquired goodwill of €12.5 million. The deductions will be received in ten equal annual
instalments from 2019 to 2027. For the purposes of this discussion, it is assumed that A will have sufficient
suitable taxable profits to be able to recover these deductions in full.
8.7.1.A
Individual financial statements of buyer
The buyer (A) accounts for the acquisition of B’s business. As the business still has
negligible identifiable assets and liabilities, this gives rise to goodwill of €12.5 million
within A’s own financial statements. A has acquired an asset for €12.5 million with a tax
base of the same amount. There is therefore no temporary difference (and thus no
deferred tax) to be accounted for in the financial statements of A.
8.7.1.B
Individual financial statements of seller
As described above, the individual financial statements of the seller (B) reflect a profit
of €12.5 million and current tax of €2.5 million.
8.7.1.C
Consolidated financial statements
In the consolidated financial statements of P, the sale of the business from B to A will
be eliminated on consolidation. However, the €2.5 million current tax suffered by B will
be reflected in the consolidated financial statements, since this is a transaction with a
third party (the tax authority), not an intragroup transaction. The question is what, if
any, deferred tax arises as the result of this transaction.
One analysis would be that the tax base of consolidated goodwill has effectively been
increased from nil to €12.5 million. Compared to its carrying amount of €10 million, this
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creates a deductible temporary difference of €2.5 million on which a deferred tax asset
at 20% (€500,000) may be recognised. It could also be argued that there is an analogy
here with the general treatment of deferred tax on intragroup profits and losses
eliminated on consolidation (see Examples 29.31 and 29.32 above).
Under this analysis, the consolidated income statement would show a net tax charge of
€2.0 million (€2.5 million current tax expense arising in B, less €0.5 million deferred tax
income arising on consolidation). However, this is arguably inconsistent with the fact
that the entity is not in an overall tax-paying position (since it has incurred a current tax
loss of €2.5 million, but expects to receive tax deductions of the same amount over the
next ten years). Clearly, there is an economic loss since the entity has effectively made
an interest free loan equal to the current tax paid to the tax authority, but this is not
relevant, since tax is not measured on a discounted basis under IAS 12 (see 8.6 above).
An alternative analysis might therefore be to argue that the goodwill reflected in the
consolidated statement of financial position still has no tax base. Rather, the tax base attaches
to the goodwill recognised in the separate financial statements of A, which is eliminated on
consolidation, and therefore has no carrying amount in the consolidated financial statements.
Thus, applying the general principle illustrated in Examples 29.31 and 29.32 above, there is a
deductible temporary difference of €12.5 million, being the difference between the carrying
value of the goodwill (zero in the consolidated statement of financial position) and its tax
base (€12.5 million). Alternatively, as noted at 6.1.4 above, certain items may have a tax base,
but no carrying amount, and thus give rise to deferred tax.
This analysis would allow recognition of a deferred tax asset of €2.5 million on a
temporary difference of €12.5 million, subject to the recognition criteria for deferred
tax assets. This would result in a net tax charge of nil (€2.5 million current tax expense
arising in B less €2.5 million deferred tax income arising on consolidation).
In our view, there are arguments for either analysis and entities need to take a view on
their accounting policy for such transactions and apply it consistently.
8.7.1.D
When the tax base of goodwill is retained by the transferor entity
In May 2014, the Interpretations Committee considered another example involving
the internal reorganisation of a previously acquired business, as set out in
Example 29.34 below.30
Example 29.34: Intragroup transfer of goodwill when tax base is retained by
transferor
A parent company, H, recognised goodwill that had resulted from the acquisition of a group of assets
(Business C) that meets the definition of a business in IFRS 3 – Business Combinations. Entity H
subsequently recorded a deferred tax liability relating to goodwill deducted for tax purposes. Against this
background, Entity H effects an internal reorganisation in which:
• Entity H set up a new wholly-owned subsidiary (Subsidiary A);
• Entity H transfers Business C, including the related (accounting) goodwill to Subsidiary A;
• However, for tax purposes, the (tax) goodwill is retained by Entity H and not transferred to Subsidiary A.
How should Entity H calculate deferred tax following this internal reorganisation transaction in its
consolidated financial statements in accordance with IAS 12?
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The Interpretations Committee noted that when entities in the same consolidated
group file separate tax returns, separate temporary differences will arise in those
entities. Consequently, when an entity prepares its consolidated financial statements,
deferred tax balances would be determined separately for those temporary differences,
using the applicable tax rates for each entity’s tax jurisdiction. [IAS 12.11]. The
Interpretations Committee also noted that w
hen calculating the deferred tax amount
for the consolidated financial statements:
(a) the amount used as the carrying amount by the ‘receiving’ entity (in this case,
Subsidiary A that receives the (accounting) goodwill) for an asset or a liability is
the amount recognised in the consolidated financial statements; and
(b) the assessment of whether an asset or a liability is being recognised for the first
time for the purpose of applying the initial recognition exception (see 7.2 above)
is made from the perspective of the consolidated financial statements.
The Interpretations Committee noted that transferring the goodwill to Subsidiary A
would not meet the initial recognition exception in the consolidated financial
statements. Consequently, deferred tax would be recognised in the consolidated
financial statements for any temporary differences arising in each separate entity by
using the applicable tax rates for each entity’s tax jurisdiction (subject to meeting the
recoverability criteria for recognising deferred tax assets described at 7.4 above).
To the extent that there is a temporary difference between the carrying amount of the
investment in Subsidiary A and the tax base of the investment (a so-called ‘outside basis
difference’) in the consolidated financial statements, deferred tax for such a temporary
difference would also be recognised subject to the limitations and exceptions discussed
at 7.5.2 and 7.5.3 above.
The Interpretations Committee also noted that transferring assets between the entities
in the consolidated group would affect the consolidated financial statements in terms
of recognition, measurement and presentation of deferred tax, if the transfer affects the
tax base of assets or liabilities, or the tax rate applicable to the recovery or settlement
of those assets or liabilities. Such a transfer could also affect:
(a) the recoverability of any related deductible temporary differences and thereby
affect the recognition of deferred tax assets; and
(b) the extent to which deferred tax assets and liabilities of different entities in the
group are offset in the consolidated financial statements.
9
UNCERTAIN TAX TREATMENTS
The terms ‘uncertain tax treatment’ or ‘uncertain tax position’ refer to an item, the tax
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 486
