IFRS update December 2005 – Tax

As if the transition to international financial reporting standards was not
trouble enough, finance directors now have to deal with a further level of
complexity: how to arrange their
tax affairs under
the new regime.

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What would seem a simple tax is complicated by the fact that, although the
rules came into effect for listed companies across the EU from the start of this
year, companies can still opt to report their subsidiaries under the generally
accepted accounting principles that prevailed in EU states before IFRS took

Not all EU states pose a problem. Gillian Wild, tax director at PwC, says:
‘There is a lack of consistency around the EU. In Germany and France, company
subsidiaries are forbidden from reporting under IFRS.

But in the UK, Spain, Italy and Denmark you can choose. In the Netherlands it
doesn’t matter, since the tax base is calculated in a completely independent

That means a multinational operating in the UK, Spain, Italy and Denmark has
a whole host of difficult decisions to make. In theory, there should not be much
difference, but there is a great deal of nervousness.

Before IFRS was introduced, experts were predicting that the shift at group
level would bring a windfall of billions for the exchequer, so the accounting
changes could have significant implications for corporates.

But it is unclear what the impact will be. ‘The fear, for tax authorities and
for taxpayers, is the unknown impact,’ Wild says.

Though groups have no choice but to pay the extra sums ­ if IFRS does,
indeed, have that effect ­ at entity level they have to make the difficult
choice of guessing whether their liabilities will be bigger under IFRS or the
various European GAAPs.
The permanence of the decision does not help. ‘When you decide to go to IFRS, it
is irreversible,’ Wild says.

One particularly noteworthy issue has been impairment losses for banks. The
methodology that IFRS forces banks to adopt for recognising the losses makes
them more deductible against tax, which makes IFRS look more attractive.

But there are other issues that make IFRS look less attractive. Take the IFRS
rules which prevent goodwill amortisation. Under UK GAAP tax rules, the
amortisation of goodwill is tax-deductible. But under IFRS, the goodwill does
not amortise but freezes in the accounts, and so is not deductible.

The biggest issue with IFRS and tax has been deferred tax liabilities ­
businesses have to recognise their potential liabilities for tax if they sell
assets that they have revalued. However, Wild points out that this has no cash
impact. ‘It’s a purely accounting issue,’ she says. ‘It might affect a company’s
ability to pay a dividend, but it will not generate a cash tax bill.’

Perhaps more troubling is a lack of clarity over the rules. Roger Muray, an
IFRS tax expert at Ernst & Young, says: ‘The tax rules are a complete
disaster at the moment. The transition to IFRS for companies came on 1 January,
and we still have no workable rules going forward to govern the transition.’

Nor is there any date by which people must move to one system or another.
Will companies continue to use IFRS at group level and GAAP at entity level?

‘If a reluctance to use IFRS becomes a permanent feature, we will have to ask
ourselves what should we be doing about that,’ Wild says.

But with each EU state pursuing its own line on the issue, the decisions do
not look like getting much easier.

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