IFRS Carries Global Tax Implications

The shift to International Financial Reporting Standards (IFRS) will affect the full range of corporate processes. The multinational behemoths that the SEC announced will be permitted to start reporting using IFRS in two years time may face significant tax ramifications that will affect them in each country where they operate -- and the big accounting firms have been carefully studying the possible impact.

Accounting firms are advising tax departments to assess the benefits of the transition while managing the attendant risks inherent in the differences between IFRS and tax reporting rules. In a nutshell, there may be an immediate impact on certain aspects of foreign tax reporting with a corresponding effect on the overall effective tax rate for those U.S. multinationals that rely on reducing foreign taxes to maintain their effective tax rate, according to a Deloitte report.

The report recommends that companies operating in countries requiring or moving toward the use of IFRS-should be aware of possible changes in the following areas:

Retained earnings: Convergence activities may change retained earnings and have a related effect on a subsidiary's ability to deduct interest for tax purposes.

Equity: The FASB proposed a narrow definition of equity that would limit the ability to classify certain financial instruments as equity, which is still under discussion. For countries that use IFRS as the basis for statutory reporting, changes to the characterization of an instrument from equity to debt may trigger interest expense limitation rules.

A change in the definition of equity arising from a change in accounting standards may unexpectedly eliminate the tax benefits of hybrid instruments since the income may be treated as interest rather than a dividend.

Foreign currency gains/losses: Such gains and losses recorded in the income statement may cause fluctuations in the effective tax rate due to differences in the rates applied to record the income and those used to calculate the related tax impact.

Amortization and other deductions: Amortization deductions for goodwill and other intangible assets can have a material impact on the global effective tax rate.

Transfer pricing: Wider adoption of IFRS could have both positive and negative effects on the development and implementation of transfer pricing policies. In one respect, implementing transfer pricing policies may eventually become easier.

Share-based compensation: Share-based compensation rules vary greatly under local GAAP, IFRS, U.S. GAAP, and local tax rules. An updated tax planning methodology should consider the interplay between local tax rules and corporate recharge, reimbursement, and transfer pricing arrangements for share-based compensation.

Repatriation strategies: Companies may have opportunities to revise cash repatriation strategies as a result of both changes in earnings available to be repatriated under local rules, and in multi-tiered structures, the tax characterization of distributions in the hands of the parent company, such as dividends versus return of capital.

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