• General deferred tax accounting
• General UTP accounting
• The new UTP schedule required by the IRS
• Recent China Tax Law Updates
- Cir 698 – Taxation on oversea indirect equity transfer
Agenda
- Cir 698 – Taxation on oversea indirect equity transfer - Cir 157 – CIT treatment for NHTEs
- Cir 59 & Public Notice 4 – CIT treatment for corporate restructuring
• IFRS & CAS status updates
• SEC Recent Comment on income tax disclosure
General Deferred Tax Accounting
December 1, 2010
Top restatement Issues for FY’10
Depreciation, Depletion, … Financial Instruments
Income Taxes Liabilities, Payables, Re…
Revenue Recognition Stock Compensation Accounts/Loans … Affiliate Transactions Balance Sheet … Cash Flows Consolidation, Foreign … Debt, Warrants & Equity Depreciation, Depletion, …
Mechanics of Tax Provision
+
=
Deferred Tax Provision (changes in net deferred taxes including changes in VA) Current Tax Provision (Tax Return) and changes in ASC 740-10 (FIN 48) liabilities Income Tax Expense (F/S Provision)Deferred Tax Asset or Liability (Balance Sheet) Current Taxes Payable or Receivable/Non-current Taxes Payable (Balance Sheet) Income Statement Current Provision Total Provision Deferred Provision December 1, 2010 5
Tax Provision Process
Adjust pretax income for permanent differences.
Identify all temporary differences and carryforwards.
Calculate the current income tax expense or benefit.
Step 2
Step 3 Step 1
expense or benefit.
Recognize deferred tax assets and liabilities.
Evaluate the need for a valuation allowance for gross deferred tax Step 5
Step 6 Step 4
Assess and adjust for changes in ASC 740-10 (FIN 48) reserve.
Overview of Deferred Tax
It is important to identify any basis differences that may exist between US GAAP and Tax. This is why basis difference analyses are often performed in two steps:
- Identify US GAAP-to-Local GAAP basis differences - Identify Local GAAP-to-Tax basis differences
- Identify Local GAAP-to-Tax basis differences
US
GAAP
Local
GAAP
Local
Tax
December 1, 2010 7Deferred tax - Permanent Differences Vs. Temporary Differences
• Excessive entertainment expenses • Employee commercial insurance
• Staff welfare expenses and labor union fees above deductible limit
• Excessive advertisement expenses • Depreciation of fixed assets
• Amortisation of intangible assets • Accrued expenses / contingent
Permanent Differences (not exhaustive)
Temporary Differences (not exhaustive)
fees above deductible limit • Non-deductible penalties
• Donation to non-charity organization or charitable donations above deductible limit
• Sponsor fee
• Management Fee
• Accrued expenses / contingent liabilities
• Provisions
• Deductible assets losses
• Staff education expenses above deductible limit
• Assets carried at fair value (e.g. financial assets)
Facts:
• At December 31, 2010, a building used in a company’s manufacturing operations has:
- Net book value: $1,000
- Net tax value: $600
Deferred Taxes – Balance Sheet Approach & Inherent
Assumption Illustrated
- Fair market value: $3,000
a)
What is the amount of deferred tax asset or liability that the
company should record for the building (assuming 25% statutory
tax rate)?
b)
Would the answer be different if the company asserts that it plans
to sell the building in the near future?
Questions
December 1, 2010
Answers:
a) The amount of deferred tax liability that the company should record is $100, or the difference between the net book and tax value times the statutory tax rate of 25%
Deferred Taxes – Balance Sheet Approach & Inherent
Assumption Illustrated (cont.)
b) No, the answer would not be different
ASC 740-10-25-20 (FAS 109, 11), states in part: An assumption inherent in an entity's
statement of financial position prepared in accordance with generally accepted
accounting principles (GAAP) is that the reported amounts of assets and liabilities will be recovered and settled, respectively. Based on that assumption, a difference between the tax basis of an asset or a liability and its reported amount in the statement of
Changes in Tax Laws and Rates
• Companies must recognize the effects of tax law or rate changes in income tax from continuing operations in the period that includes the enactment date
• If changes are enacted after year-end but before issuance of financial statements, consideration should be given to disclosing the effect on existing deferred tax assets and deferred tax liabilities in the year-end existing deferred tax assets and deferred tax liabilities in the year-end financial statements
• Important to have a process for tracking changes
• Financial statement tax impact of any changes may be well in advance of impact on current tax
December 1, 2010
What is the Appropriate Accounting for a Tax Holiday?
Issues to consider:
• What period to account for the effect of the holiday period
- When an application is filed if approval is not needed/assured under the law and steps required are perfunctory
- When a formal letter is received because approval process is subjective
• What tax rate to apply to temporary differences that reverse during the holiday period
period
- Use the enacted tax rate expected to apply and consider any contingent requirements (e.g., retroactively revoking benefits if failed to maintain requirements)
• How to account for NOLs during the holiday period
- The rate to apply to the NOLs depends on the particular laws in the jurisdiction
- Use the normal rate for the NOLs expected to be utilized before the start of the holiday period
Valuation Allowance
• The “more likely than not” standard (i.e. > 50% probability) applies when considering the realizability of deductible temporary differences or tax attributes
• Judgmental weighing of positive and negative evidence is necessary
December 1, 2010
ASC 740-30-25 (APB 23)
• Presumes unremitted earnings will be repatriated
• Repatriation of earnings – account for a temporary difference unless the
Presumption of repatriation
• Repatriation of earnings – account for a temporary difference unless the investment can be recovered on a tax-free basis
• May overcome presumption
Asserting Indefinite Reversal under ASC 740-30-25
(APB 23)
• Sufficient evidence must show that the subsidiary has invested or will invest the undistributed earnings indefinitely or that the earnings will be remitted in a tax-free manner
• Assertion must be applied on an entity-by-entity basis
• Specific plans that support the assertion must be documented and
• Specific plans that support the assertion must be documented and maintained
• Not sole responsibility of tax department – requires involvement of treasury, controller, and senior financial management
December 1, 2010
Common areas overlooked in tax accounting
• Provision to return adjustments
• Lack of detailed deferred tax analysis when a company has surplus tax losses
• Acquisition accounting G A A P ?
Balance Sheet basis
• Applicable tax rate
• Central journals & GAAP adjustments – tax effecting adjustments • Impairment G A A P Income Statement basis Adjustments
General UTP Accounting
December 1, 2010
• The current guidance, issued in June of 2006 as ASC 740-10 (FIN
48), prescribed a comprehensive accounting model standardizing how entities should recognize, measure, classify, and disclose uncertain tax positions
• Effective dates:
- Public companies – effective for fiscal years beginning after December 15, 2006
Uncertain Tax Positions – Current Accounting
15, 2006
- Non-public companies – deferral available for certain entities to years beginning after December 15, 2008
• The guidance for benefits related to UTPs under ASC 740-10 (FIN 48) applies to “taxes based on income” only
• Applicable to business entities, not-for-profit organizations and pass-through entities
• Applicable to all tax positions taken or expected to be taken on tax returns
Uncertain Tax Positions – Scope
• Applicable to all tax positions taken or expected to be taken on tax returns (including amended returns and refund claims) in all taxing jurisdictions (federal, state and foreign)
• Exposures related to non-income taxes, such as property, VAT and sales taxes should continue to be accounted for under ASC 450
December 1, 2010
• A tax benefit is recognized only if a tax position is MLTN of being sustained solely on its technical merits
• A tax benefit is recognized at the largest amount that is MLTN to be realized (probability analysis)
• Benefits not recognized are generally recorded as a liability for financial reporting purposes
“Basics” to Remember – Uncertain Tax Benefits
reporting purposes
• Be attentive of differences related to interplay between deferred tax assets and valuation allowances
• Subsequent recognition, derecognition and measurement is based on management's best judgment given the facts, circumstances, and information available at the reporting date
Uncertain Tax Positions – Six Steps
Measure benefit to be
Step 3
Determine classification Step 4
Accrue interest
and penalties Step 5
Prepare disclosures Step 6
Identify tax positions and
determine unit of account Step 1 Evaluate tax position
for recognition Step 2 Measure benefit to be
recognized Step 3
December 1, 2010
A company takes a UTP in its tax return for a deduction of $100. The
positions meets the MLTN recognition threshold. The company
determines the following possible outcomes and the probability of
each
:
Uncertain Tax Positions – Cumulative Probability
Amount of tax
benefit
Individual
probability
Cumulative
probability
$100
15%
15%
$100
15%
15%
$80
20%
35%
$60
20%
55%
$40
30%
85%
$20
15%
100%
Uncertain Tax Positions – Disclosures
740-10-50-15 (a) Tabular reconciliation of UTBs at the beginning and end of the year
740-10-50-15 (b) Amount of UTBs that would impact the effective tax rate
740-10-50-15 (c) Amount of interest and penalties recognized in the income statement
and balance sheet
Uncertain tax benefits (UTBs) related disclosures [ASC 740-10-50-15]
740-10-50-15 (d) Amount of UTBs that may significantly change within 12 months of
the reporting date (“early warning disclosure”)
740-10-50-15 (e) Description of open tax years by major jurisdiction
740-10-50-19 Policy on classification of interest and penalties
Note: Accounting Standards Update (“ASU”) 2009-6 provides that non-public companies are not subject to disclosures required
by ASC 740-10-50-15(a) and (b)
December 1, 2010
UTB – Tabular Reconciliation
740-10-50-15 (a) A tabular reconciliation of the total amounts of unrecognized tax
benefits at the beginning and end of the period, which shall include:
740-10-50-15 (a)(1) The gross amounts of the increases and decreases in unrecognized
tax benefits as a result of the tax positions taken during a prior period
740-10-50-15 (a)(2) The gross amounts of increases and decreases* in unrecognized tax
benefits as a result of tax positions taken during the current period The amounts of decreases in the unrecognized tax benefits relating
Uncertain tax benefits (UTBs) related disclosures [ASC 740-10-50-15(a)]
740-10-50-15 (a)(3) The amounts of decreases in the unrecognized tax benefits relating
to settlements with taxing authorities
740-10-50-15 (a)(4) Reductions to unrecognized tax benefits as a result of a lapse of the
applicable statute of limitations
• An entity shall recognize the benefit of a tax position that was previously not recognized if :
1.
the MLTN recognition threshold is met by the reporting date
2.
the tax position is effectively settled through examination, negotiation
or litigation
Uncertain Tax Positions – Changes in Recognition and
Measurement
or litigation
3.
the statute of limitation for the relevant taxing authority to examine and
challenge the tax position has expired
• A benefit previously recognized should be derecognized in the first period in which it no longer meets the MLTN recognition threshold
December 1, 2010
• Three conditions must exist for a tax position to be considered effectively settled:
- The taxing authority has completed its examination procedures including all appeals and administrative reviews that the taxing authority is required and expected to perform for the tax position
- The enterprise does not intend to appeal or litigate any aspect of the tax
Effectively Settled – ASC 740-10-25-10 (FIN 48 10(b))
- The enterprise does not intend to appeal or litigate any aspect of the tax position included in the completed examination
- It is remote that the taxing authority would examine or reexamine any aspect of the tax position presuming it has full knowledge of all relevant information
• A tax position that meets the recognition threshold
- Requires the existence of new information for the associated tax benefit to be remeasured (ASC 740-10-25-14 (FIN 48 12)
- Does not need to be effectively settled to be remeasured
• A remeasurement should not occur on the basis of a new evaluation or new interpretation by management of information
New Information vs. Change in Judgment
- That was available in a previous financial reporting period,
- Nor should it occur solely on the basis of the taxing authority not reviewing a specific tax position during the examination
• Of course, the effective settlement of those tax positions that meet the recognition threshold would constitute new information for purposes of remeasurement
December 1, 2010
The New UTP Schedule
Required by the IRS
JAN 2010 FEB 2010 MAR 2010 APR 2010 MAY 2010 JUN 2010 JUL 2010 AUG 2010 SEP 2010
IRS Schedule UTP - Timeline
January 26, 2010
IRS releases Announcement 2010-9
March 5, 2010
IRS releases Announcement
March 29 June 1, 2010
April 19, 2010 IRS releases: Deadline extended for comments
IRS releases:
• Announcement 2010-30 • Draft Schedule UTP
• Draft Schedule UTP instructions
September 9, 2010
IRS issued Notice of Proposed Rulemaking
June 1, 2010
Comment period ends
September 24, 2010
IRS issued:
• Final Schedule UTP and final instructions
• Announcement 2010-75 — Overview of changes from draft instructions to final instructions • Announcement 2010-76 — Expansion of IRS policy of restraint
• Directive to IRS field personnel setting forth the IRS’s planned treatment of Schedule UTP by examiners and other IRS personnel
December 1, 2010
Who Must File Schedule UTP
A company
• Files one of the following forms:
- Form 1120, U.S. Corporation Income Tax Return
- Form 1120 F, U.S. Income Tax Return of a Foreign Corporation
- Form 1120 L, U.S. Life Insurance Company Income Tax Return
- Form 1120 PC, U.S. Property and Casualty Insurance Company Income Tax Return
• Has assets equal to or exceeding
A company must file if it:
• Has assets equal to or exceeding
- TY2010 $100 million
- TY2012 $ 50 million
- TY2014 $ 10 million
• Issued (or a related party issued) audited financial statement (including those filed under U.S. GAAP and IFRS) that covers all or a portion of the company’s operations for the company’s tax year
What Uncertain Tax Positions Must Be Disclosed?
• No reporting if tax position is immaterial or
sufficiently certain under applicable
financial accounting standards
Recorded a
reserve in audited
financial
statements
• Tax position taken on a return – would result in adjustment to a line item on that return if not sustained
‒ Based on the unit of account used to prepare the audited financial statements
‒ If multiple tax positions affect a single line on the return, each position must be reported separately
• Probability of settling with the IRS is <50%
• Intend to litigate
• MLTN to prevail on merits in litigation
No reserve
recorded because
company expects
to litigate position
December 1, 2010 31Elements of Disclosure
Timing Pass through EIN Major tax position Ranking TransferUTP
disclosure
Code section Timing Codes Transfer pricing or other Concise descriptionRecent China Tax Law Updates
December 1, 2010
PRC Taxation on Overseas Indirect Equity Transfers
Guoshuihan [2009] No. 698 (“Circular 698”):
• The State Administration of Taxation (“SAT”) issued Circular 698 on December 10, 2009 to scrutinize indirect transfers by non-PRC Tax Resident Enterprises (“Non-TREs”) of their equity interests in PRC
companies by disposing the shares in offshore Special Purpose Vehicles companies by disposing the shares in offshore Special Purpose Vehicles (“”SPVs”).
• Circular 698 imposes a reporting obligation on certain indirect transfers.
• It stipulates how to apply General Anti-Avoidance Rule (“GAAR”)
provisions based on the assessment of the documents and information reported by the Non-TRE investors.
Jiangdu Case - Observations
The Jiangdu Case:
• A local-level state tax bureau in Jiangdu (“Jiangdu STB”) of Jiangsu
Province collected a significant amount of PRC tax (RMB 173 million) on the transfer gain derived by a Non-TRE investor from indirectly transferring the equity of a PRC joint venture company (“JV”) through disposing its
shares in a Hong Kong intermediate holding company. shares in a Hong Kong intermediate holding company.
• The first published case of a successful attack by the PRC tax authorities on indirect transfer since the issuance of Circular 698.
• Largest single sum of PRC withholding income tax collected by the PRC tax authorities of such nature.
• This shows that the PRC tax authorities are taking an aggressive approach to detect the indirect transfer and assess the “commercial purpose” and “substance” of such a transfer. Public announcements and media
coverage are a few of the sources where tax authorities can collect information from.
December 1, 2010
Observations:
• It might be necessary to review the current ASC 740-10 (FIN 48) reserve to determine if any adjustments need to be made in light of the Jiangdu Case.
Circular 698 and Jiangdu Case – Tax Accounting
Considerations
Case.
• Review the tax treatments in their respective home jurisdictions and determine if PRC tax so paid will be eligible for the foreign tax credits or deductions in the home jurisdictions. It is possible that the tax paid may be regarded as “voluntary tax” and thus not be eligible for the foreign tax
credit or deduction in the home jurisdiction of a Non-TRE.
Guoshuihan [2010] No. 157 (“Circular 157”)
• It was issued in April 2010 to clarify the CIT treatments of tax incentives available to old enterprises established prior to promulgation of the new CIT law, especially those New/High Technology Enterprises (“NHTEs”) .
Transitional CIT Treatments for New/High Technology
Enterprises
CIT law, especially those New/High Technology Enterprises (“NHTEs”) .
• The Circular clarified the applicable CIT rate for NHTEs as well as preferential tax rate for certain projects under CIT regime.
December 1, 2010
Observations:
• It is important for old NHTEs to review and assess their eligibility for the transitional tax treatments or preferential tax treatment under the new Circular to determine the appropriate tax rate.
CIT Treatments for NHTEs – Tax Accounting
Considerations
Circular to determine the appropriate tax rate.
• A tax resident enterprise that does not qualify as an NHTE may receive income from certain preferential projects. The enterprise shall separately account for the current and deferred income taxes for these projects using the applicable tax rate for each project.
PRC Corporate Income Tax (“CIT”) Treatments for
Corporate Restructuring
Caishui [2009] No. 59 (“Circular 59”):
• The SAT and Ministry of Finance (“MOF”) jointly issued Circular 59 in April 2009
• Setting out the framework and rules for CIT treatments in relation to corporate restructuring
• A number of unclear issues, both technical and procedural
December 1, 2010
PRC Corporate Income Tax (“CIT”) Treatments for
Corporate Restructuring
Guojiashuiwuzongjugonggao [2010] No. 4 (“Public Notice 4”):
• It was issued on July 26, 2010, under the title of “The Administrative
Measures of Corporate Income Tax Treatments for Corporate Restructuring” which was effective from January 1, 2010
which was effective from January 1, 2010
• Public Notice 4 provides:
- Detailed guidance on documentation and procedural requirements for all types of corporate restructuring under both the general tax treatments (“GTT”) and special tax treatments (“STT”) – tax deferral treatment
- Transitional requirements for corporate restructuring which took place in 2008, 2009 and up to the time of the release of the Notice
Observations:
• It is imperative to assess the ASC 740-10 (FIN 48) implications of any
transactions with STT election in light of new record-filing requirements and “confirmation” process by in-charge tax authorities.
Circular 59 & Public Notice 4 – Tax Accounting
Considerations
• For transactions qualify as STT, it is important to determine the tax accounting implications including determination of beginning deferred tax
balances, applicable tax rate, accounting for unused incentives and limitation on the utilization of tax loss carryforward.
• It is important to determine the tax accounting treatment of GTT transactions including step-up of tax basis.
December 1, 2010
IFRS Adoption and Conversion – Key Asian Regions –
Local GAAP to IFRS Timeline
Asian Pacific regions already adopted 2011 2012 2013 2014 2015 and beyond TAIWAN Phase 1 companies (e.g. listed companies & financial institutions supervised by the FSC) starting on
JAPAN
Proposed adoption for listed companies from 2015/2016. KOREA Full adoption on or after 1 January 2011. THAILAND SET50 companies • Australia • Fiji • Hong Kong • Iraq • Kuwait • Lebanon FSC) starting on 1 January 2013. Phase 2 companies (e.g. unlisted
companies and credit card
companies), optional early adoption from 1 January 2013. THAILAND
SET100 companies must adopt on or after 2013. TAIWAN Phase 2 companies starting on 1 January 2015. SET50 companies must adopt on or after 2011. INDIA Certain listed companies and companies with turnover over of US$200m must adopt on or after 2011. • Lebanon • Mongolia • Nepal • New Zealand • Oman • The People’s Republic of China* • … and more
* The China Accounting Standards for listed companies are similar to IFRS but with a number of differences to reflect specific circumstances in the People’s Republic of China.
December 1, 2010
R e g u la to ry t im e li n e 2010: SEC begins work on workplan for moving forward with IFRS in the U.S.
2011: SEC to decide whether to mandate IFRS If a company converts at December 31, 2015: January 1, 2013 Beginning of the first comparative IFRS year If mandated: December 31, 2015 annual financial statements issued using IFRS 2010 2011 2012 2013 2014 2015
Representative U.S. Timeline*
R e g u la to ry t im e li n e 2010 2011 2012 2013 2014 2015
transition date reporting date U.S. GAAP financial statements (through third-quarter 2015)
IFRS financial statements
Dual reporting period
IFRS Adoption and Conversion –
SEC Publishes Progress Report on IFRS Work Plan
SEC published the first draft progress report on its Work Plan for global accounting standards on October 20, 2010.
• Observations
- SEC is in the process of evaluating comprehensiveness and comparability of IFRS;
- SEC is analyzing the feedback received from public comments to understand - SEC is analyzing the feedback received from public comments to understand
the impact on issuers;
- Plan to meet with accounting firm, foreign regulators and others to
understand the potential impact on audit quality, cost and competitiveness.
• What’s next?
- SEC expects to continue to report periodically on the status of the Work Plan until its expected decision in 2011.
December 1, 2010
IASB - Accounting for Income Taxes
2002- Joint “Limited Scope” Income Tax Accounting project added to agenda of both FASB and IASB
July 2010 – IASB
decides to expose an exception for R/E measured at fair value, other
October 2009 - IASB
discusses comments received on the IAS 12 exposure draft, many critical of proposals.
value, other
proposals to follow
2008- FASB ceases working on the project
March 2009 - IASB issued an exposure draft to
replace IAS 12 to improve and partially converge with U.S. GAAP
critical of proposals. Decides not to proceed with proposals in ED.
March 2010 - IASB adds limited scope project
to address practice issues and to consider some proposals from ED that were positively received
New CAS by Foreign Investment Enterprises
• New China Accounting Standards (“CAS”) issued by the Ministry of Finance (“MOF”) on 15 February 2006
• Application Guidance issued on 30 October 2006
• Accounting Standard Interpretation No.1 to 4 issued from November
• Accounting Standard Interpretation No.1 to 4 issued from November 2007 to August 2010
• Implementation Guidance of Accounting Standards issued on
December 2008 and the Opinions of the Expert Task Force on the implementation of CAS.
December 1, 2010
Timetable of Adopting CAS by Foreign Investment
Enterprise (“FIE”)
• No specific timetable from the MOF as of today
• Shanghai Municipal Bureau of Finance
“All of the non-listed medium and large enterprise in Shanghai should adopt CAS no later than 2011. In addition, at least 50% of them shall adopt CAS no later than 2011. In addition, at least 50% of them shall adopt CAS from 2010.”(Hucaikuai[2010]No 8)
SEC Recent Comment on Income
Tax Disclosure
December 1, 2010
SEC Recent Comment on Income Tax Disclosure
• Income taxes have been identified as the primary source of material weaknesses by the SEC for US listed groups
• Assess the recoverability of deferred tax assets
• Effective tax rate (ETR) reconciliation and forecast
• The SEC continue to focus on the transparency of disclosures by listed company
SEC Recent Comment on Income Tax Disclosure (cont.)
• On November 12, an SEC official said that the SEC is monitoring public company tax disclosures involving pretax foreign and domestic income and effective rate reconciliations and is finding some irregularities.
- Regulation S-X of the Securities and Exchange Act of 1934 requires that a company's pretax income be divided between domestic and foreign income
- However, not all companies are providing that information in a transparent
- However, not all companies are providing that information in a transparent manner (that investors should be able to determine the tax provision that corresponds with foreign income and the provision that corresponds with domestic income)
- In its review of effective tax rate reconciliation disclosures, the commission has frequently seen a large item identified as a "tax rate differential" in public company financial statements – resulting in comment letters where
companies are asked what financial items are included in that caption --whether it refers to a tax rate differential between foreign and domestic income, or if it includes other items as well
December 1, 2010
