IAS 12 exposure draft - international reporting standard on income tax.

• Author: Wielenga, Terilea J.

August 7, 2009

On August 7, 2009, Tax Executives Institute submitted the following comments to the International Accounting Standards Board on an Exposure Draft of International Accounting Standard 12--Accounting for Income Tax. TEI's comments were prepared under the aegis of its Financial Reporting Committee, whose chair is Terilea J. Wielenga of Allergan, Inc. Eli J. Dicker, TEI Chief Tax Counsel, served as legal staff liaison on this project.

As the preeminent association of in-house tax professionals in the world, Tax Executives Institute is pleased to submit comments to the International Accounting Standards Board (IASB) on its Exposure Draft to revise the existing standard for Income Taxes. Our comments focus on four areas in the Exposure Draft: Investments in subsidiaries (Question 4); Uncertain tax positions (Question 7); Allocations of tax to components of comprehensive income and equity (Question 13); and Disclosures (Question 17).

The IASB undertook this project for two reasons: First, to respond to requests for clarification of various aspects of IAS12, and second, to advance the agreement between the IASB and the U.S. Financial Accounting Standards Board (FASB) to consider the accounting for income tax as part of their work to reduce differences (i.e., converge the standards) between IFRS and U.S. generally accepted accounting principles (GAAP).

TEI applauds the IASB for its efforts to narrow the differences between international and U.S. GAAP standards and to move toward a single set of high-quality accounting standards for financial reporting purposes. Convergence of U.S. GAAP and international accounting standards (e.g., in respect of accounting for income taxes) will facilitate those objectives.

Background

Tax Executives Institute was founded in 1944 to serve the professional needs of in-house tax professionals. Today, the organization has 54 chapters in North America, Europe, and Asia, with the majority of our members working for companies resident in the United States. As a broad-based, global organization, TEI has a significant interest in promoting sound tax and regulatory policy, as well as in the fair and efficient administration of the tax laws.

Our 7,000 members represent 3,200 of the largest companies in the world. They are accountants, lawyers, and other employees who are responsible for the tax and financial reporting, compliance, and planning affairs of their employers in executive, administrative, and managerial capacities. As such, they deal with accounting principles in two ways. First, accounting standards promulgated by the FASB and the IASB undergird the books and records that serve as the starting point for tax compliance in the United States and many other countries. Second, tax executives are responsible (alone or in conjunction with other corporate departments) for implementing the specific rules for accounting for income taxes that form a part of the financial statements and required note disclosures.

Summary of Recommendations

With regard to Question 4, "Investment in Subsidiaries," TEI urges that the revised standard should establish a rebuttable presumption that all foreign earnings will be repatriated, provided that the presumption of repatriation must be overcome by sufficient substantive evidence demonstrating that the earnings will be postponed indefinitely. In the area of "Uncertain Tax Positions" (Question 7), TEI recommends that the "probability based recognition threshold" embedded in FIN48 be preserved in the revised IAS12 standard. Regarding

"Allocations of Tax to Comprehensive Income," (Question 13), TEI urges the Board not to adopt a "backwards tracing approach" to tax allocations. And, finally, in the area of "Disclosures," (Question 17), TEI offers recommendations concerning disclosures relating to intercompany transfers, deferred tax reconciliation and effective tax rates.

Question 4: Investments in Subsidiaries, Branches, Associates, and Joint Ventures [BC 39-44]

Under U.S. GAAP, parent companies must record deferred taxes for the unremitted earnings of their foreign subsidiaries under the presumption "that all undistributed earnings of a subsidiary will be transferred to the parent entity." [FASB ASC 740-30-25-3.] That presumption "may be overcome, and no income taxes shall be accrued by the parent entity ... if sufficient evidence shows that the subsidiary has invested or will invest the undistributed earnings indefinitely." [FASB ASC 740-30-2517.] For example, a U.S. parent company includes tax credits related to the undistributed earnings of its foreign subsidiary at the distributed...