Embed Size (px)
Citation preview
ACCOUNTING FOR ACCOUNTING FOR
TAXES ON INCOMETAXES ON INCOME
June 20, 2008June 20, 2008
AGENDAAGENDA
The old story Deferred tax: mandatory recognition? Losses and deferred taxation Tax holidays Tax losses under “Capital Gains” Deferred tax and MAT Deferred tax and amalgamations Income statement Vs. balance sheet approach Measurement Disclosures International GAAP
THE OLD STORYTHE OLD STORY
ACCRUAL/MATCHING CONCEPTS
INTER PERIOD TAX ALLOCATION
TAXABLE Vs. ACCOUNTING INCOME
TIMING Vs. PERMANENT DIFFERENCES
Contd…..
THE OLD STORY THE OLD STORY ….contd….contd
GUIDANCE NOTE- Accounting for Taxes on Income
- Effective 1991
- Recommended: Tax Effect Accounting Method
- Permitted: Taxes Payable Method
- Withdrawn: effective Apr 2001
ACCOUNTING STANDARD - Accounting for Taxes on Income
- Tax Effect Accounting Method
- Effective Apr 2001
DEFERRED TAXATION: MANDATORY RECOGNITION?DEFERRED TAXATION: MANDATORY RECOGNITION?
ACCOUNTING STANDARD
- Recognize DT for all timing differences
- Consideration of prudence for DTA
BASIS
- Concept of “Full Provision” and not “Partial Provision”
Contd…..
DEFERRED TAXATION: MANDATORY RECOGNITION?DEFERRED TAXATION: MANDATORY RECOGNITION?Contd…Contd…
FULL PROVISION
- Recognize tax effect of all transactions
- Whether current or deferred tax
PARTIAL PROVISION
- Excludes tax effect of timing differences which may not reverse for a considerable period
Contd…..
DEFERRED TAXATION: MANDATORY RECOGNITION? DEFERRED TAXATION: MANDATORY RECOGNITION? Contd...Contd...
PARTIAL PROVISION
- Involves subjective judgments Future time frame Future liability estimation Future profitability Future capital expenditure
- Rejected internationally
LOSSES AND DEFERRED TAXATIONLOSSES AND DEFERRED TAXATIONa judgmental calla judgmental call
INDICATORS
- History of recent losses
- Existence of carried forward tax losses….
RECOGNITION
- Recognize deferred tax assets if:Virtual certaintySupported by convincing evidence
Contd…..
LOSSES AND DEFERRED TAXATION….contdLOSSES AND DEFERRED TAXATION….contda judgmental calla judgmental call
CONCEPT- Virtual certainty: an Indian concept
x Forecast of performance? Convincing evidence: a matter of fact Not a matter of perception
CONCLUSION- Check existence of deferred tax liabilities
- Recognize deferred tax assets: if supportable convincing evidence or only to the extent of deferred tax liabilities
PRACTICALLY TOO RESTRICTIVE
AT THE TIME OF REVERSAL, DTL WOULD LEAD TO TAXABLE INCOME
DEFERRED TAXATION AND TAX HOLIDAYSDEFERRED TAXATION AND TAX HOLIDAYS
TIMING DIFFERENCES REVERSING DURING TAX HOLIDAY
- No recognition
- Do not meet the criteria of asset/liability
- Probably, will not be realized/settled
TIMING DIFFERENCES REVERSING AFTER TAX HOLIDAY
- Recognize, when they originate
Contd…..
DEFERRED TAXATION AND TAX HOLIDAYS contd…DEFERRED TAXATION AND TAX HOLIDAYS contd…
DEDUCTION AVAILABLE (SAY U/S 80IA/IB)- Permanent difference
DIFFERENT TAX TREATMENT OF ITEMS- Timing difference
DURING TAX HOLIDAY- Current tax may be nil
- Deferred tax exists (to reverse after tax holiday)
DIFFERENCES WHICH ORIGINATE FIRST ARE CONSIDERED TO REVERSE FIRST
TAX LOSSES: “CAPITAL GAINS”TAX LOSSES: “CAPITAL GAINS”
LOSSES UNDER THE HEAD CAPITAL GAINS- Timing difference: if not set off and carried forward
- Normally not due to operating activities
- Timing difference only for max. 8 years
BEING A CRRIED FORWARD LOSS- Consideration of prudence
- Virtual certainty with convincing evidence, e.g., Sale of asset after balance sheet date Binding sale agreement
Contd…..PRACTICALLY TOO RESTRICTIVE
TAX LOSSES: “CAPITAL GAINS” contd….TAX LOSSES: “CAPITAL GAINS” contd….
MEASUREMENT
- Long term loss (requires long term gain)
- Short term loss
- Set off principles
DEFERRED TAX AND MATDEFERRED TAX AND MAT
IF TAXES UNDER 115 JB
- Measure DT at regular rates
IF REVERSALS EXPECTED IN PERIOD COVERED BY 115 JB
- Measure DT at regular rates
Contd…..
DEFERRED TAX AND MAT contd…DEFERRED TAX AND MAT contd…WHY NOT USE MAT RATE?WHY NOT USE MAT RATE?
CONCEPT OF FULL PROVISION METHOD
- Measure all timing differences
- Avoid substantial assumptions: Timing differences that may not reverse for a long period Future time frame Future liability estimation Future profitability Future capital expenditure
DEFERRED TAX AND AMALGAMATIONSDEFERRED TAX AND AMALGAMATIONS
ACCOUNTING STANDARD 14
NO SPECIFIC GUIDANCE ON DT
Contd…..
ALLOCATION OF CONSIDERATION
- Basis fair value
VALUATION FOR TAXATION
- No change (base as applicable to transferor)
FAIR VALUE ALLOCATION
- Akin to revaluation for taxation
- Constitute permanent difference
INCOME STATEMENT APPROACH
DEFERRED TAX AND AMALGAMATIONS contd…DEFERRED TAX AND AMALGAMATIONS contd…
Contd…..
(A) AMALGAMATION IN THE NATURE OF PURCHASE
ALLOCATION OF CONSIDERATION: BASIS FAIR VALUESBASIS FAIR VALUES
- treatment at the time of amalgamation?
- in first annual accounts after amalgamation?
- in subsequent periods?
ASSUMPTION: BENEFIT OF DTA IS IN BUILT IN PURCHASE CONSIDERATION
DEFERRED TAX AND AMALGAMATIONS contd…DEFERRED TAX AND AMALGAMATIONS contd…When DTA not recognized by transferorWhen DTA not recognized by transferor
Contd…..
(B) AMALGAMATION IN THE NATURE OF PURCHASE
ALLOCATION OF CONSIDERATION: BASIS BOOK VALUESBASIS BOOK VALUES
- treatment at the time of amalgamation?
- in first annual accounts after amalgamation?
- in subsequent periods?
ASSUMPTION: BENEFIT OF DTA IS IN BUILT IN PURCHASE CONSIDERATION
DEFERRED TAX AND AMALGAMATIONS contd…DEFERRED TAX AND AMALGAMATIONS contd…When DTA not recognized by transferorWhen DTA not recognized by transferor
Contd…..
(C) AMALGAMATION IN THE NATURE OF MERGER
ASSETS AND LIABILITIES AT BOOK VALUESBOOK VALUES
- treatment at the time of amalgamation?
- in first annual accounts after amalgamation?
- in subsequent periods?
ASSUMPTION: MERGED ENTITIES CONTINUING SINCE BEGINNING
DEFERRED TAX AND AMALGAMATIONS contd…DEFERRED TAX AND AMALGAMATIONS contd…When DTA not recognized by transferorWhen DTA not recognized by transferor
“BLOCK OF ASSETS” CONCEPT
- Depreciation on WDV of block
- Reduction of sale proceeds from block
- Results in timing difference
REVALUATION: THRU BALANCE SHEET
- Additional depreciation from revaluation reserve
- Results in timing difference
IFRS AND US GAAP
- Balance sheet approach
INCOME STATEMENTINCOME STATEMENTVs.Vs.
BALANCE SHEET APPROACHBALANCE SHEET APPROACH
TAX RATES
- “Enacted” or “substantively enacted”
- Announcements by the Govt may lead to substantive effect
AVERAGE RATE
- If different tax rates for different income levels
MEASUREMENTMEASUREMENT
Contd…..
DISCOUNTING TO PRESENT VALUE
- Neither required nor permitted
- Reliable determination of reversal: Subjective Impracticable Complex
- if permitted but not required: May lose comparability
MEASUREMENT contd….MEASUREMENT contd….
SCHEDULE VI PART I
- Balance sheet format
- As near thereto as circumstances admit
- Flow not entirely on liquidity basis
DISCLOSE SEPARATELY FROM CURRENT ASSETS/LIABILITIES
DISCLOSURESDISCLOSURES
Contd…..
DEFERRED TAX ASSETS
- Normally more liquid compared to fixed assets/investments
- Less liquid compared to current assets
- Show after investments
DEFERRED TAX LIABILITIES
- Show after unsecured loans
DISCLOSE COMPONENTS
DISCLOSURES contd…DISCLOSURES contd…
APPROACH
- Income statement: focus timing differences
- Balance sheet: focus temporary differences
- Certain differences may be “temporary” but not “timing”
Say revaluation of fixed assets
INTERNATIONAL GAAPINTERNATIONAL GAAP
IFRS/US: BALANCE SHEET APPROACH
INDIA: INCOME STATEMENT APPROACHContd…..
LEVEL OF CERTAINTY
- Reasonable/virtual certainty
- Probable
- More likely than not
INTERNATIONAL GAAP contd…INTERNATIONAL GAAP contd…
LEVEL OF CERTAINTY
- Reasonable/virtual certainty INDIA
- Probable IFRS
- More likely than not USA
AGENDAAGENDA
Background and the old story Deferred tax: mandatory recognition? Losses and deferred taxation Tax holidays Tax losses under “Capital Gains” Deferred tax and MAT Deferred tax and amalgamations Income statement Vs. balance sheet approach Measurement Disclosures International GAAP (a broad view)
THANK YOU FOR YOUR KIND ATTENTIONTHANK YOU FOR YOUR KIND ATTENTION
PRESENTOR: Kaushal KishorePRESENTOR: Kaushal Kishore
EMAIL: EMAIL: [email protected]
PHONE: +91 9811103133PHONE: +91 9811103133
