The Relationship between Corporate Income Tax Reporting and IFRS: The U.K. experience Wayne Weaver 14 March 2006

©2004 Deloitte & Touche LLP 2 Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006 Historical background –corporate income tax in the UK Patchwork of regimes —business profits —tax depreciation for plant and equipment —savings and investment income —income from land and buildings —capital gains Key concepts —the schedular system —capital v. revenue —trading v. non-trading —no tax consolidation (but special group rules)

©2004 Deloitte & Touche LLP 3 Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006 Business profits Inherently uncertain base Courts emphasis on accountancy evidence —Gallagher v Jones —Britannia Airways —Herbert Smith v Honour

©2004 Deloitte & Touche LLP 4 Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006 Impact of macroeconomic change since 1979 Abolition of exchange control: 1979 Big bang and financial liberalisation Growth of UK capital markets and the City Development of financial instruments

©2004 Deloitte & Touche LLP 5 Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006 Use of financial reporting measures in recent UK tax legislation Marine Midland and HMRC statements on forex: 1987 FOREX and financial instruments rules: corporate and government debt rules: 1996 reform of treatment of land etc income: 1998 business profits and GAAP: 1998 local currency treatment: 2000 reform of debt and derivatives rules: 2002 intangibles: 2002 management expenses: 2004 IFRS reforms:

©2004 Deloitte & Touche LLP 6 Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006 Changes in UK legislative approach 1993 FOREX legislation – highly prescriptive 1996 (loan relationships) architecture – “authorised” methods 1998 use of GAAP for business profits 2002 reforms – rationalisation of regimes, reduced use of elections in legislation 2004 and 2005 reforms – income as recognised for accounting purposes

©2004 Deloitte & Touche LLP 7 Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006 UK government policy HMRC website statement ( ) “There is merit in aligning…” —“But…departures” Corporate income tax and financial reporting: goal congruence —descriptive —alignment with stakeholders —administrative simplicity Fundamental difference – tax concept is normative, not merely descriptive

©2004 Deloitte & Touche LLP 8 Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006 UK government policy: departures from financial reporting Approximately 200 deviations from financial reporting Differing objectives —public policy —symmetry —avoidance —transfer pricing —fiscal incentives —capital items —structural e.g. debt/equity divide The cash context – realisability and tax capacity Importance of continuity: change brings complexity

©2004 Deloitte & Touche LLP 9 Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006 Adoption of IFRS for corporate income tax reporting: the UK experience to date Focus for debate regarding the interface of financial and corporate income tax reporting Extensive consultation Rationalisation and reform Continuity

©2004 Deloitte & Touche LLP 10 Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006 Rationalisation and reform Designation of IFRS as acceptable GAAP for corporate income tax purposes —anti-arbitrage rule where different GAAPs used in a group Debt and derivatives rules – computation in accordance with “ correct” accounts, profits and losses as recognised for accounting purposes Functional currency rules modified Retain value of R&D tax credits

©2004 Deloitte & Touche LLP 11 Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006 IFRS issues with limited UK tax implications Accounting changes but special UK tax rules apply e.g. pensions, share options, insurance, investment properties Limited accounting changes (from UK GAAP) or changes seen as acceptable for UK tax purposes e.g. business combinations, intangibles, leases, revenue recognition, provisions

©2004 Deloitte & Touche LLP 12 Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006 Continuity “True reflection”: e.g. inclusion for tax purposes of movements in equity statements —effectively not following the accounts, triggering (largely avoidable) complexity Maintenance of previous hedging rules for tax purposes —Some (but not all) cashflow and fair value hedges —net investment hedges Special rules to address embedded derivatives e.g. convertible bonds Initial resistance to defining transitional rules

©2004 Deloitte & Touche LLP 13 Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006 UK outcomes Volume of change Extreme complexity – unavoidable? Highly prescriptive rules Loss of control? —legislative process —planning —compliance Uncertainty —e.g. regarding the financial impact, state of tax law Increased compliance Cash tax volatility Transitional issues

©2004 Deloitte & Touche LLP 14 Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006 Further help on IAS: Deloitte website Wayne Weaver +44 (0)

©2004 Deloitte & Touche LLP 15 Adoption of IFRS_the UK experience_worldbank_ vienna_march 2006 Deloitte & Touche LLP A member firm of Deloitte Touche Tohmatsu