ACCOUNTING ADVISORY SERVICES IICA ICAI Workshop on IFRS Issues in Transition Session II Taxation Issues September 27, 2010 ADVISORY 1
Contents 1. Taxation issues on transition 2. International experience International ), 2010 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. a Swiss entity. All rights reserved. 22
Taxation issues on transition - Overview Starting point for taxable income: - Profit per Ind-AS or profits per old Indian standards - Phased approach to transition Implications if Ind-AS is accepted for taxation - Additional adjustments required to Ind-AS profits - Other comprehensive income - One-time adjustments on transition - Minimum Alternate Tax (MAT) International ), a Swiss entity. All rights reserved. 3
Need for additional adjustments - Illustrative areas Revenue recognition Deferral of sales for: - Delivery - Multiple-elements (installation, upfront fees, loyalty programs) - Extended credit, retention money Financial instruments: - Unrealized gains/losses on derivatives and investments - Notional adjustments (security deposits, intercompany loans) - Preference dividend and premium on redemption Share-based payments: - Fair value based cost International ), a Swiss entity. All rights reserved. 4
Other Comprehensive Income - Illustrative areas Changes in fair value of available-for-sale securities Translation gains and losses Actuarial gains/losses Hedge accounting International ), a Swiss entity. All rights reserved. 5
One-time adjustments All one-time adjustments on the transition date would be adjusted in the opening retained earnings. Illustrative areas: - Impact on depreciation on application of component accounting in property, plant and equipment would be adjusted in opening retained earnings. - Impact of recognition of financial instruments at fair value would be adjusted in opening retained earnings Possible tax treatments : - One time transition adjustments taxed in the year of transition - One time transition adjustments taxed in the subsequent year of transition (say over 5 years) - One-time transition adjustments will not to be taxed International ), a Swiss entity. All rights reserved. 6
MAT considerations Currently, MAT is payable on the book profit Additional adjustments to book profits for MAT International ), a Swiss entity. All rights reserved. 7
Likely impact on GST Illustrative areas Revenue recognition could be different from the invoice date/invoice value: - Dispatch v. delivery - Deferred payment terms - Multiple-elements (installation, upfront fees, loyalty programs) - Barter transactions - Notional income (lease deposits and lease income) - Public-private partnership arrangements International ), a Swiss entity. All rights reserved. 8
International experience Countries United Kingdom Tax implications on IFRS transition The UK tax code was amended such that the tax computation can be prepared using IFRS accounts. Taxation of accounting adjustments on first time adoption of IFRS - taxed in the year of transition. The UK tax code now prescribes that certain tax adjustments (such as those relating to the change in the fair market value of certain financial instruments) which arise on transition to IFRS be spread over a ten year period Germany Luxembourg Spain The German tax laws do not accept IFRS accounts for tax purposes. New tax rules were introduced that prescribe the maintenance of an income tax register to reconcile the tax bases under German GAAP and the tax laws The tax laws do not accept IFRS accounts for the preparation of tax computation. However, there is a mechanism whereby tax payers may enter into an advance agreement, in relation with the transition to IFRS, with the tax authorities. In such cases, the tax authorities examine the associated tax issues and prescribe the tax treatment of the adjustments and the period over which such adjustments could be spread. The tax laws do not accept IFRS accounts for tax purposes. However, a new Spanish GAAP was introduced with effect from January 1, 2008 that enshrined the principles of IFRS. The transition to this new Spanish GAAP was intended to be tax neutral, accordingly, IFRS transition adjustments did not have any impact for corporate income tax purposes. France The tax administrative guidelines have been issued (to mitigate the impact of such new accounting rules) which prescribe that the consequent tax effect be spread over a five year period. International ), a Swiss entity. All rights reserved. 9
& Answers Questions International ), 2009 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent mem ber firms affiliated with KPMG International, a Swiss a Swiss entity. All rights reserved. cooperative. All rights reserved. 10
in.kpmg.com Thank you Jamil Khatri Executive Director & Head of Accounting Advisory Services KPMG in India Phone: +91 (22) 30901660 Email: jkhatri@kpmg.com Delhi Mumbai Bangalore Hyderabad Chandigarh Building No.10, Tower B, 8th Floor, DLF Cyber City, Phase II Gurgaon 122002 Haryana Tel +91 124 3074000 Fax +91 124 2549101 Lodha Excelus, Apollo Mills Compound NM Joshi Marg Mahalaxmi Mumbai 400 011 Tel +91 22 3983 6000 Fax +91 22 24913132 Solitaire 139/26, 3rd Floor, Inner Ring Road, Koramangala Bangalore 560 071 Telephone: +91 80 4176 6000 Fax: +91 80 4176 6999 8-2-618/2 Reliance Humsafar, 4th Floor Road No. 11, Banjara Hills Hyderabad 500 034 Tel +91 40 6630 5000 Fax +91 40 6630 5299 First Floor, SCO 22-23 Sector 8C, Madhya Marg Chandigarh - 160019 Tel: +91 172 3935777/78/79/81 Fax: +91 172 3935781 Chennai Kolkata Pune Kochi No. 10 Mahatma Gandhi Road, Nungambakam, Chennai 600 034 Tel +91 40 3914 5000 Fax +91 40 3914 5999 Infinity Benchmark, Plot No.G-1, 10th floor, Block - EP & GP, Sector - V, Salt Lake City Kolkata 700091 Tel: +91 33 44034066 Fax: +91 33 4403 4199 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3058 5764/ 65 Fax: +91 20 30585775 4.F, Palal Towers, M.G. Road, Ravipuram, Kochi, Kerala 682016 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no 2010 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information 2010 without KPMG, appropriate an Indian professional Partnership advice and a member after a thorough firm of the KPMG network KPMG of independent and the KPMG member logo firms are registered affiliated with trademarks KPMG of International KPMG International, Cooperative a Swiss ( KPMG Cooperative International ), a Swiss entity. examination of the particular situation. All rights reserved.