1. The Advanced Program in Accounting and Auditing Regulation Module 22 General Purpose of Financial Statements and Tax Reporting Stefano Marchese FEE Vice-President in charge of taxation Chairman of FEE Direct Tax Working Party

2. Outline of the Presentation  Approaches used in different EU Members  The issues of Tax/Accounting Dependency in the EU  Impact of the adoption of IFRS  Possible solutions

3. The issues of Tax /Accounting Dependency Linkage between Accounting and Tax varies amongst EU Member States In the past the general trend was Accounting dependent from Tax

4. Tax /Accounting Dependency According to FEE survey, today 3 kinds of Accounting / Tax relationships: 1.Independence or Low dependence (e.g.: DK, NL) 2.Dependence of Tax from Accounting or ‘reverse dependency’ (most countries, e.g.: Austria, Belgium, Germany, France, Italy, Spain, UK) 3.Dependence of Accounting from Tax (e.g.: Greece)

5. Independence of Tax from Accounting  Commercial accounting separate from Tax accounting  Calculation of the taxable base without links to the financial result  Need of a set of rules for the calculation of the taxable base  Need of reconciliation of the two results

6. Dependence of Tax from Accounting  The financial result as a starting point for calculation of the taxable base  Positive and negative adjustments to the financial result  Need of a set of rules for adjustments  Risk of « tax pollution » of the Accounts

7. The issue of IFRSs  common Accounting Standards (IFRS);  common Auditing Standards (ISAs). But NO common Tax Standards Currently NO Tax Consolidation for groups at EU level (only AU, DK,IT recent models). At EU level: in the past difficulties to achieve harmonisation of the tax base

8. Issues with a direct link to IFRS  not all IFRS compatible with tax principles  IFRS evolve and change (amendments of IAS / IFRS and new IFRS)

9. Issues with a direct link to IFRS IFRSTax Investor orientedStatutory Compliance Maximisation of Profits Minimisation of Profits Fair ValueOnly realised gains and losses are taxed Substance over Form (eg: IAS 17: leases capitalised as asset) Form prevails in some cases (e.g.: only owned items capitalised)

10. How to reconcile Tax and IFRS? Solution 1: a IFRS based taxable income  Start from net profit according to F/S for accounting purposes, i.e. according IFRS  Adjust it for tax purposes according to tax rules (taxable base)  Need of a set of tax adjustment rules

11. Problems of solution 1  Difficult to manage: too many adjustments needed  Risk of tax pollution of IFRS accounts  Need of continuous and immediate update of the adjustment rules because of the changes in the IFRS environment

12. Solution 2: complete independence of the Tax base from IFRS accounts  A (stable) set of rules for the calculation of the taxable base  No link with accounts (e.g.: costs deductible even if not included in the Income Statement)  No influence of IFRS changes  Need of a separate set of records for assets and liabilities

13. The Tax Balance Sheet  Assets and liabilities are indicated at their tax value (usually historical cost less depreciations)  Taxable capital gains and losses are calculated taking into account the tax value  Differences between the tax and the accounting value of assets and liabilities will generate anticipated and deferred taxes to be included in IFRS accounts as assets and liabilities

14. Issues related to the taxation of Dividends Need to avoid that dividends are distributed (exemption “de facto”) without an appropriate taxation of the underlying income: taxation of dividend is drafted considering that the income out of which dividends are distributed has been taxed

15. Solution  Calculation of the (gross) difference between IFRS equity and tax equity (Tax balance Sheet)  Deduction from such difference of provisions for deferred taxes in IFRS accounts (net difference)  Rule according to which in case of distribution of such net difference, company income tax will be levied on the distributed amount

16. Conclusions  A trend from Tax /Accounting dependency to Tax /Accounting independence  Different accounting and tax values of assets and liabilities (Tax Balance Sheet)  Provisions to avoid the distribution of untaxed incomes  Stability of the tax system  CCCTB will solve many problems and will be likely inspired by such principles