1. Group International Taxation
Dr Clive Vlieland-Boddy

2. Contents Introduction – Main types of taxation
Corporate income tax and dividends
Deferred taxation
International taxation
Transfer pricing
Tax havens

3. Main types of taxation Taxation as a costs to the business
Social security charges
Local/regional taxes
Municipal taxes
National corporate income taxes
Taxation on behalf of a third party
Value added tax (sales Tax)

4. Introduction to accounting for Income or Corporation taxes
Profit for taxation purposes is known as taxable profit
Accounting profit is based on applying accounting standards and conventions
Tax expense for accounting purposes calculated after applying relevant accounting standards
Income or Corporation tax payable is based on taxable profit derived by the entity applying the rules of taxation law
The difference between tax expense and income tax payable creates ‘temporary differences’

5. Corporate income tax
Taxable profit is not usually equal to accounting profit. WHY?
Differences?
Some expenses are not allowed tax-wise (entertaining, fines, excess depreciation, excess provisions, etc.)
Special tax allowances (for capital investment, environmental protection, Tax holidays in emerging countries. etc.)
Income that is non-taxable
Deferred taxes arise from these differences

6. Some differences between accounting and tax rules
Item
Generally accepted accounting rule
Tax rule
Many accrued expenses (e.g. long-service leave, warranty costs)
An expense when accrued
Recognised as a tax deduction when paid
Many prepaid expenses (e.g. prepaid rent)
Initially an asset—expensed when economic benefits used
Typically a tax deduction when paid
Revenue received in advance (e.g. rental revenue)
Treated as a liability and recognised as revenue when earned
Typically taxed when received
Entertainment and goodwill impairment
Treated as an expense
Not a tax deduction in current or subsequent periods
Doubtful debts
Treated as an expense when recognised
Treated as a tax deduction when debtor is actually written off in subsequent period
Development expenditure
Often capitalised and subsequently amortised
Typically a tax deduction when paid for

7. Value added tax (Sales Tax)
Imposed on customers at each stage of a product’s value-added chain, based on the value added at that point
Gross amount of VAT on sales and on purchases is netted in the accounting system and net amount is paid periodically to the tax authorities
Not part of revenue or expenses, but included in receivables and payables (cash flow effect)
VAT is now in every EU country and many other countries are adopting similar indirect tax structures.

8. Revaluation of non-current assets
Revaluations of non-current assets can create temporary differences
When non-current assets are revalued, the revaluation increment is not deductible for tax purposes, even though depreciation for accounting purposes will be based on the revalued amount
The tax base is not affected by the revaluation because depreciation for tax purposes will be based on the original cost of the asset
Any increase in the carrying value of a non-current asset through a revaluation implies an expected increase in the future flow of economic benefits
This increase can be taxable and can lead to a deferred tax liability if the carrying amount is greater than the tax base

9. Taxable profit - Example
Accounting profit before tax ,000,000
Add back:
Disallowed expenses ,000
Deduct: special tax allowances
and non-taxable income (100,000)
= Taxable profit 9,050,000

10. Deferred Tax

11. Example

12. Example – Tax deductible accelerated depreciation
Purchase of a fixed asset (€10,000) with tax incentive (accelerated depreciation) in 20X1
Useful life = 2 years and no residual value
Depreciation
Financial statements: 5,000 in 20X1 and in 20X2
Tax calculation: 10,000 in 20X1 and 0 in 20X2
Pre-tax profit of 20,000 in 20X1 and 20X2 and tax rate of 50 per cent

13. Deferred taxes
Income statement: deferred tax cost (or benefit) complements current tax cost. The charge for tax on profits are at a set rate. However, there may well be timing differences that enable the tax liability to be increased or reduced.
Balance sheet: deferred tax assets and deferred tax liabilities reflect future tax consequences of transactions that were not treated identically for taxation and financial reporting purposes

14. Income statement perspective on deferred taxes
Two types of differences:
Permanent differences
Timing differences
Timing differences arise because the timing of income and expenses in the income statement occurs in different period from taxable profit
Timing differences arise in one period and reverse in one or more subsequent periods

15. Deferred Tax on Acquisitions
To the extent that the seller accepts common stock rather than cash or debt in exchange for the assets, the sellers may not have to pay taxes until a later date when the shares accepted are sold.
When the acquirer has inherited the book values of the assets for tax purposes but has recorded market values for reporting purposes, a deferred tax liability needs to be recognized.

16. Example – Income tax calculation
Pre-tax profit
(includes depreciation expense)
20,000
Timing difference
(accelerated depreciation)
- 5,000
+ 5,000
Taxable profit
15,000
25,000
Tax due at 50%
7,500
12,500

17. Example – Income statement effect without deferred taxes
2011
2012
Pre-tax profit
20,000
Corporate income taxes due
- 7,500
- 12,500
Net profit after tax
12,500
7,500

18. Illustration – Income statement effect including deferred taxes
2011
2012
Pre-tax profit
20,000
Total tax expense:
°Taxes due
°Deferred tax expense
°Deferred tax income
7,500
2,500
12,500
+2,500
Net profit after tax
10,000

19. Illustration - Tax deductible accelerated depreciation (repeat)
2011
2012
(a) Accounting balances
Asset carrying amount 1 January
Additions
Accounting depreciation
Asset carrying amount 31 December
10,000
-5,000
5,000
(b) Tax values
Asset tax base 1 January
Tax depreciation
Asset tax base 31 December
-10,000
(c) Temporary differences

20. Presentation of deferred taxes in financial statements
Separate presentation of deferred tax assets (liabilities) in balance sheet
Classified as non-current balance sheet items
Tax expense (income) related to ordinary activities presented on the face of the income statement
Additional disclosures in the notes:
Details on major components of tax expense
Numerical explanation of relationship between tax expense and accounting profit
Details on temporary differences and related deferred tax assets and liabilities

21. International Taxation

22. International taxation
Taxation is administered on a company-by-company basis and calculated on individual subsidiaries’ accounts
International taxation presents both threats and opportunities
Structuring of international transactions in the most tax efficient way
Avoiding double taxation (double tax treaties)
Transfer Pricing.

23. Transfer pricing
Transfer prices are the prices at which goods and services change hands between subsidiaries of a group
Artificially fixing transfer prices is a way of determining where profits are taxed
Double tax treaties usually state that transfer prices must be “at arms’ length” or at market rates
Intra-group charges (like royalties for use of intellectual property and interest charges) are also usually structured according to a tax treaty

24. Tax havens
Tax havens typically offer low tax or flat rate tax for companies which are resident but whose activities are external to the haven (‘off-shore’)
Much pressure to restrict these and restrict tax avoidance.
CSR sees fair play. Companies should not structure their arrangemnets solely to minimise tax.
Also these havens have been misused to launder money.

25. Offshore financial centres
Near relatives of a tax haven, but benefit from double tax treaties with major trading countries
The corporate tax they levy is sufficiently high for developed countries not to treat them as a tax haven, but sufficiently low so as still to be attractive to companies

26. Transfer of tax losses to other entities within a group
Transfer of tax losses within a group or economic entity is permitted in many.
This means that if you have a loos making company in the group, its losses can be surrendered to another group company.
Often an incentive for M&A can be the tax losses held by the target company. However, there will normally be some restrictions in these circumstances.

27. Tax Holidays
Often emerging countries will try to stimulate international trade by offering tax incentives.
These are often for a period of years whilst the business is established.
This is normally a permeant deferral.

28. Taxation of the consolidated entity
Consolidated Return
No tax on separate books
Tax based on “consolidated net income”
Inter-co profits have been eliminated - not taxed
Allocate tax back to Parent & Sub books
Separate Returns
Each firm paid tax on their reported income
Parent may pay (and /or accrue) “secondary tax” on share of sub income
Intercompany profits have been taxed - requires deferral
Tax allocation techniques are employed

29. Summary
Taxable profit and accounting profit will often be different because expense and recognition rules used in accounting are often different from those applied for taxation purposes
The difference between carrying amounts and tax bases leads to either deductible temporary differences or taxable (assessable) temporary differences—multiplying these differences by the tax rate gives rise to either a deferred tax asset or deferred tax liability

30. I’m ready for some leisure time.
Bye for now!
I’m ready for some leisure time.
Please ensure you
Prepare for next session 30