IFRS – Tackling tax

Link: Tax implications of IFRS

So much so that some large corporations have abandoned plans to restate their subsidiary financial results under IFRS due to the sheer complexity of the taxation issues.

Half of the problem so far has been a lack of knowledge of the subject, with some companies only now realising the difficulty of the task ahead.

‘It has always been there but it has always been put in the too difficult box,’ says PricewaterhouseCoopers’ tax director, Gillian Wild. ‘It will now have to come out of that box.’

Topping the list of complexities are financial instruments, particularly convertible debt. If your organisation deals heavily in financial instruments, then you are likely to have issues around things such as convertible debt.

‘If it was a scale of one to 10 of complexity, then financial instruments would be an 11,’ said Wild. ‘It’s really off the scale. We are seeing people shying away from pushing IFRS down to the subsidiary level, due to the tax implications.’

A stark example of the problems faced by convertible-based business was offered earlier this month when property company Capital & Regional began to buy back its convertible loans in a bid to reduce the corporation tax it would have to pay under IFRS. The practice, it believes, will be banned under IFRS.

In fact, Capital & Regional’s move could be the start of a trend as other companies rush to change their year-end dates and buy back loans in order to save money.

Over the last decade or so, changes to tax law have been introduced to try and align taxable profit more closely with accounting profit. Unfortunately under IAS, much of this tax law would fail and taxable profit would move further away from commercial profit.

One of the starkest examples of this was with the infamous IAS39, which introduces a requirement to carry all derivative contracts at fair value. The problem being that a huge amount of volatility would find its way into taxable profit.

The government’s view is that ‘where the tax treatment of a hedging instrument and of a hedged item are not broadly symmetrical for tax purposes, the tax system should intervene to ensure that there is no undue volatility in profits or losses for tax purposes’.

It is a grey area, and could lead to many long discussions with tax inspectors over the correct amount of taxable profit.

The Inland Revenue, to its credit, has addressed the issue in some considerable length. The department has published a guide on the ‘UK tax implications’ of international accounting standards. It lists each new accounting standard and goes on to detail the impact it will have and the differences from UK GAAP.

One potential problem area, according to PwC’s Wild, could be the amortisation of goodwill, and other intangibles with companies potentially facing the cessation of certain tax relief.

Under international accounting standards the amortisation of goodwill is not permitted, for example, meaning that tax relief on that loss will simply not be available.

It is also worth considering the impact that new standards on revenue recognition and employee incentives and investment properties will have on taxable profit.

Many companies will be ill-prepared in terms of the tax implications of IFRS, so if you are reading this with a rising sense of panic, time has not yet run out. It was only a series of announcements in December’s pre-Budget report that brought the issue into such sharp focus.

See the Inland Revenue’s comprehensive guide to the tax implications of IFRS below.

Link: The Inland Revenue

Link: PwC’s IFRS Resource Centre

Related reading