11th Annual Domestic Tax Conference - United · PDF file17 May 2016 | Chicago 11th Annual....

Domestic Tax Conference17 May 2016 | Chicago

11th Annual

Accounting for income taxes

Disclaimer

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This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances.

These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.

Today’s presenters

Angela EvansPartner – Co-Director of EY Americas Tax Accounting and Risk Advisory ServicesErnst & Young LLP

Kathy FordPartner, Ernst & Young LLP

Mark ArshonskyPartner, Ernst & Young LLP

Agenda

Accounting standards update FASB projects update Legislative and other developments Trends in accounting for income taxes

Accounting standards update

► FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, that requires the classification of all deferred tax assets and liabilities as noncurrent

► No longer allocate valuation allowances between current and noncurrent

► No change to jurisdictional offsetting requirements

► For public business entities, standard effective for annual periods, and interim periods within those annual periods, beginning after 15 December 2016

► For nonpublic business entities, standard effective for annual periods beginning after 15 December 2017 and interim periods in annual periods beginning after 15 December 2018

► Early adoption permitted for all entities in any interim or annual period

► Entities may elect either a prospective or retrospective transition approach

Balance sheet classification of deferred taxes – final standard

Recognition and measurement of financial assets and financial liabilities – final standard

► FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities

► Measure many equity investments at fair value and recognize changes in fair value in net income unless the investments qualify for practicability exception

► Assess the realizability of a deferred tax asset (DTA) related to an available-for-sale (AFS) debt security in combination with other DTAs ► Use the same four sources of taxable income that are used for other DTAs► Include the expected reversal of unrealized losses on AFS debt securities that an entity has both

the intent and ability to hold until recovery as a component of its overall projection of future taxable income

► May not be able to rely on projections of future taxable income for purposes of evaluating realizability of DTAs if significant negative evidence exists (e.g., cumulative losses in recent years)

Recognition and measurement of financial assets and financial liabilities – final standard (continued)

► No longer separately evaluate the DTAs related to AFS debt securities ► Can not solely rely on intent and ability to hold debt securities with unrealized losses until

recovery, which may not be until maturity, akin to a tax planning strategy


► For nonpublic business entities, standard effective for annual periods beginning after 15 December 2018 and interim periods in annual periods beginning after 15 December 2019► Can early adopt as of effective date for public business entities

► Early adoption permitted for certain provisions (does not include income tax provision)

► Generally apply modified-retrospective approach

► Modifies classification criteria and accounting for sales-type and direct financing leases

► Eliminates leveraged leases prospectively

Leases Final standard – overview

► Requires most leases to be recorded on the balance sheet but expenses are recognized in a manner similar to today (no significant changes to income statement)

Q1 2016Final standard (ASU 2016-02)

2014–2015Re-deliberations on 2nd ED

2011–2013Re-deliberations and 2nd ED

Q3 2010Exposure draft (ED)

► Eliminates real estate-specific provisions► Provides new presentation and disclosure requirements► Changes sale and leaseback criteria and they apply to

lessees and lessors

Key changes affecting lessors

Key changes affecting lessees

Leases Final standard – impact on income tax accounting

► Application of the new guidance results in changes to pre-tax book accounting:► Lessees

► Likely recognize new lease-related assets and liabilities on the balance sheet and may change measurement of other lease-related assets and liabilities

► Lessors► May see a change in the recognition and measurement of lease-related assets and/or

derecognition of underlying assets for certain leases► Timing of recognition of lease income may change for some leases► Special accounting for leveraged leases is eliminated

► These changes affect certain aspects of accounting for income taxes such as:► Recognition and measurement of DTAs and deferred tax liabilities (DTLs)► Assessment of the recoverability of DTAs (i.e., the need for and measurement of a valuation

allowance)

Improvements to employee share-based payment accounting – final standard

► FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting

► Recognize all excess tax benefits and tax deficiencies in the income statement when awards vest or are settled ► Accounted for as discrete items in the interim period in which they occur ► Prospective transition

► Eliminates requirement that excess tax benefits not be recognized until they are realized (i.e., through a reduction in income taxes payable)► Modified retrospective transition with a cumulative catch-up adjustment to retained earnings for

excess tax benefits not previously recognized ► Any valuation allowance recorded against those deferred tax assets also recorded in transition

in retained earnings

Improvements to employee share-based payment accounting – final standard (continued)

► Present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity► Retrospective or prospective transition


► For nonpublic business entities, standard effective for annual periods after 15 December 2017 and interim periods in annual periods beginning after 15 December 2018

► Early adoption permitted for all entities in any interim or annual period► All guidance must be adopted in the same period► If early adopt in an interim period, reflect any adjustments as of the beginning of the fiscal year

that includes that interim period

Revenue recognition

► FASB and IASB issued converged new revenue recognition standards on 28 May 2014

► The standards replace nearly all existing US GAAP and IFRS guidance on revenue recognition

► Virtually every industry is affected

► Standards require entities to make more estimates and use more judgment than under current guidance

► The effects on financial statements, business processes and internal controls will be significant for some entities

► FASB/IASB Joint Transition Resource Group for Revenue Recognition (TRG) and other implementation resource groups are discussing various implementation issues

Revenue recognitionEffective date and transition

► FASB finalized a one-year deferral of the effective date ► New effective date is for annual periods beginning after 15 December 2017

(1 January 2018 for calendar-year public entities) ► There is an optional one-year deferral for non-public entities► Early adoption is allowed for US GAAP preparers – using original public entity

effective date (annual periods beginning after 15 December 2016)

► IASB also deferred the effective date of its standard by one year► New effective date is 1 January 2018► Early adoption is permitted for IFRS preparers

Revenue recognitionTransition methods

Full retrospective

Modified retrospective

Financial statements

Financial statements

Note disclosures

Note disclosures

New GAAP New GAAP New GAAP

New GAAPLegacy GAAP Legacy GAAP

Legacy GAAP + New GAAP

ASC 250 disclosures + New GAAP

Cumulative catch-up adjustment at 1/1/2016 *

20182016 2017

Cumulative catch-up adjustment at 1/1/2018 *

*Based on an effective date of 1 January 2018 for a calendar-year end public company (assumes no early adoption)

New GAAP New GAAP

Legacy GAAP Legacy GAAP

Effective date and transitionAdoption methods available

Key considerations Full retrospective approach(excludes practical expedients) Modified retrospective approach

Apply to which periods presented? All periods presented Only the most current period presented

Apply to which contracts?All contracts that would have existed during all periods presented if the new standard had been applied from contract inception

Any contracts existing as of effective date (as if new standard had been applied since inception of contract), as well as any new contracts from that date forward

Recognition of the effect of adoption in the financial statements?

Follow requirements of ASC 250, cumulative effect of changes to periods prior to periods presented is reflected in opening balance of retained earnings

Cumulative effect of changes is reflected in the opening balance of retained earnings in the most current period presented

Adoption disclosure requirements?

Follow requirements of ASC 250, including disclosure of the reason for the change and the method of applying the change

In the year of adoption, disclose the amount each financial statement line item was affected as a result of applying the new standard and an explanation of significant changes (effectively requires two sets of books during the year of adoption)

Revenue recognitionAdditional considerations for public entities

► Public entities that choose the full retrospective approach may elect not to recast periods prior to 2016 for their selected financial data tables

► Staff Accounting Bulletin (SAB) Topic 11.M requires disclosure of the effects of recently issued accounting standards► Disclosures are expected to evolve as more information about the effects are

known (including the chosen transition method)

2014 2015 2017

Final revenue standard

Prior periods presented

2018

Effective

Modified retrospective

application date (public entity)

2016Retrospective application date (public entity)

SEC five-year table

SAB Topic 11.M (SAB 74)

2019Modified retrospective application date (nonpublic entity)

FASB projects update

► Proposal would eliminate exception that requires deferral of the income tax effects of intercompany sales/transfers of assets ► Would recognize income tax expense in the period of the sale/transfer► Would recognize deferred tax effects of difference between the tax basis of the asset in the

buyer’s jurisdiction and its book basis after elimination of the intercompany profit► For public business entities (PBEs), FASB expects proposed amendments effective for annual

periods, and interim periods within those annual periods, beginning after 15 December 2016► For nonpublic business entities, FASB expects proposed amendments effective for annual periods

beginning after 15 December 2017 and interim periods in annual periods beginning after 15 December 2018► Early adoption permitted, but not before the effective date for PBEs

► Modified retrospective transition approach

► In October, FASB asked its staff to research the costs and benefits of deferring the income tax effects only for intercompany inventory transactions

FASB income taxes simplification project Proposal – intercompany scope exception

FASB government assistance disclosure projectProposal

► FASB proposal would require for-profit entities to make certain disclosures about assistance they receive from legally enforceable agreements with governments: ► The nature of the assistance, including a general description of the significant

categories and the form in which the assistance has been received

► The accounting policy used to account for the government assistance

► The line items on the balance sheet and income statement that are affected by government assistance and the amounts

► The amounts of government assistance received that are not directly recorded in the financial statements (e.g., loan guarantees, loans with below-market rates, tax abatements) unless impracticable to do so

FASB government assistance disclosure projectProposal (continued)

► The disclosure requirements would apply to certain arrangements accounted for under the income tax guidance in addition to grants, loan guarantees and other types of government assistance

► The guidance would be applied prospectively to all agreements existing at the effective date and those entered into after the effective date

► Entities would be permitted to apply the guidance retrospectively

► FASB is currently redeliberating the proposal and will determine the effective date based upon feedback received during the comment period

FASB income taxes disclosure projectInitial deliberations – foreign earnings

► FASB tentatively decided to require additional disclosures for all entities related to foreign earnings and indefinite reinvestment assertions:► Pre-tax income (loss) disaggregated between domestic and foreign earnings

► Income tax expense (benefit) disaggregated between domestic and foreign

► The amount of and explanation for a change in assertion about the temporary difference for the cumulative amount of investments associated with undistributed earnings that are (1) asserted to be essentially permanent in duration, or (2) no longer asserted to be essentially permanent in duration

► Foreign earnings that are indefinitely reinvested for any country that represents at least 10% of the entity’s total foreign earnings that are indefinitely reinvested

FASB income taxes disclosure projectInitial deliberations – uncertain tax positions

► FASB tentatively decided to add requirements that public entities disclose as part of the tabular rollforward of unrecognized tax benefits the following: ► Settlements disaggregated between those that are cash and noncash (e.g., an

existing net operating loss carryforward used to settle with the taxing authority)

► A breakdown of the total amount of unrecognized tax benefits by the balance sheet line item in which the amounts are presented

► FASB also tentatively decided to eliminate for all entities the requirement to disclose certain information when it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date

FASB income taxes disclosure projectInitial deliberations – other (continued)

► FASB also made tentative decisions for other income tax disclosures that would require public entities to disclose:

► Income tax rate reconciliations► Individual reconciling items of more than 5% of amount of pretax income times applicable

federal statutory income tax rate ► A qualitative description of items that have caused a significant change in the rate

► An explanation of the nature and amounts of valuation allowances recorded and released during the reporting period

► The amounts and expiration dates of tax carryforwards recorded on the tax return (not tax effected) and in the financial statements (tax effected) and the total amount of unrecognized tax benefits that offsets carryforwards


► The FASB also made tentative decisions for other income tax disclosures that would require all entities to disclose:

► Information about an enacted change in tax law if it is probable that the change will affect the entity in a future period

► Income taxes paid disaggregated between domestic and foreign► Foreign income taxes paid to any country that are significant relative to total income

taxes paid


► FASB tentatively decided to require prospective transition for all income tax disclosures

► FASB asked its staff to perform outreach on the operability of requiring companies to disclose cash and cash equivalents, marketable securities and loans underlying undistributed earnings that are indefinitely reinvested

► After the outreach is complete, FASB plans to issue an exposure draft on the proposal

Legislative and other developments

Legislative and other developments

Federal legislation enacted in 2015 with effects in 2016 and later years

► On 18 December 2015, President Obama signed into law the Consolidated Appropriations Act, 2016 (the Act) reinstating retroactively certain tax benefits and credits (collectively, tax extenders) that had expired. The Act made a number of the provisions permanent and extended the others for two or five years.

► On 2 November 2015, President Obama signed into law legislation introducing a new audit system and income tax liability rules for certain partnerships. The Bipartisan Budget Act of 2015 repealed the prior audit system and income tax liability rules for certain partnerships. The changes are effective for tax years beginning after 31 December 2017.

Legislative and other developments(continued)

Significant legislation enacted since 1 January 2016 – US ► Delaware — enacted legislation phasing in a single-sales factor apportionment formula

by 2020. Asset management companies, telecommunication companies and companies whose principal headquarters are in Delaware may continue to use either a single-sales factor or an equally weighted three-factor apportionment formula. The changes are effective for tax years beginning on or after 1 January 2017.

► Louisiana – enacted permanent (rather than temporary) limit on net operating loss (NOL) usage to 72% of taxable income. Effective 1 January 2016. Other changes include:► Require use of NOLs in order of newest to oldest (effective 1 January 2017)► Require adjustment to state taxable income to add back certain related party interest expenses,

intangible expenses and management fees deducted for federal income tax purposes (applies tax years beginning on or after 1 January 2016)

► Also enacted legislation changing the order in which companies may claim tax credits. Change effective upon enactment.


Significant legislation enacted since 1 January 2016 – US

► Mississippi — enacted a tax exemption for income received by members of the automotive and other manufacturing industries, provided they meet certain requirements. Certain companies may also be entitled to use a single-sales factor for apportioning income to the state. The changes, among others, are effective 8 February 2016.


Significant legislation enacted in since 1 January 2016 – International► Chile — enacted legislation restricting eligibility for reduced withholding tax rates on

certain dividends. From 1 January 2017 to 1 January 2020, shareholders resident in countries that have signed a tax treaty with Chile will be subject to the same tax treatment on dividend distributions applicable to shareholders resident in treaty countries, even though the treaty is not yet ratified (e.g., the US – Chile treaty).Other changes include modifying the:► Rules for determining the tax treatment applicable to dividend distributions from

1 January 2017► Thin capitalization rules► Foreign tax credit (FTC) rules so Chilean companies can recognize an indirect tax credit

under certain circumstances► Rules for determining when the passive income of a CFC is subject to current taxation, and ► Limiting the general anti-avoidance rules to transactions executed after 30 September 2015

The changes are effective upon enactment.


Significant legislation enacted since 1 January 2016 – International

► Israel — enacted legislation reducing both its corporate income tax rate and its withholding tax rate on interest, royalties and capital gains related to corporate investors to 25% from 26.5%. The changes are retroactively effective 1 January 2016.

► Turkey — enacted legislation extending the current taxation of income and capital gains from sales of marketable securities for five years to 31 December 2020.


Other considerations – US Federal

► The Government revised the text of the model treaty used to negotiate tax treaties with other countries. The revised model treaty would allow treaty benefits for certain interest and dividends paid by members of a multinational corporation and deny benefits in other cases. It also would allow the US or its treaty partner to terminate certain benefits if domestic tax rates changed after the treaty partners signed the treaty.


Other considerations – International► European Union – On 28 January 2016, the European Commission released an anti-

tax avoidance package designed to provide uniform implementation of Base Erosion and Profit Sharing (BEPS) measures and minimum standards across Member States. The package includes:► A proposed European Union (EU) anti-tax avoidance directive that addresses interest deductibility,

a general anti-abuse rule, controlled foreign company rules, and a framework to take hybrid mismatches

► A proposed directive that requires Member States to implement the exchange of Country-by-Country (CbC) reporting in relation to multinational enterprises for fiscal years beginning on or after 1 January 2016;

► A communication proposing a framework for a new EU external strategy for effective taxation

► A recommendation on the implementation of measures against tax treaty abuse


Other considerations – International► OECD – Organisation for Economic Co-operation and Development (OECD) issued final reports on

all 15 focus areas in its BEPS project. Reports recommend international tax changes, including transfer pricing rules, deductibility of interest expense, permanent establishment concept, limitations on treaty benefits, and new country-by-country reporting requirement.

► OECD indicated process will be finalized in 2016 for final reports issued in October 2015. ► BEPS Actions 8-10 entitled “Aligning Transfer Pricing Outcomes with Value Creation” contains

revisions to existing OECD Transfer Pricing guidelines; become part of guidelines once formally adopted by OECD council.

► As a non-government organization, OECD actions are not legislative, however, some laws refer directly to OECD guidelines.► Countries that explicitly incorporate the OECD transfer pricing guidelines (e.g., Hungary, Mexico,

Norway)► Countries that need to act to incorporate the OECD transfer pricing guidelines (e.g., UK, Ireland,

Australia)


Other considerations – InternationalEU state aid► In June 2014, the European Commission (EC) began formal State aid investigations on whether tax authorities in

Ireland, Netherlands, and Luxembourg had complied with European Union (EU) state aid rules in tax rulings with certain named multinational companies. Inquiry extended to all Member States in December 2014.

► In February 2015, EC opened in-depth state aid investigation into Belgium’s excess profit tax regime.► State aid is defined as: “The selective granting of an advantage/award to a specific undertaking or specific

undertakings which is capable to distort trade between EU Member States.”► Considered incompatible with EU’s common market because it distorts competition

► On 21 October 2015, EC releases that selective tax advantages for Fiat in Luxembourg and Starbucks in Netherlands are illegal state aid.

► On 11 January 2016, EC announces its decision that Belgium’s excess profit tax regime is illegal under EU state aid rules.► EC held that Belgium’s tax rulings granted a selective advantage to multinationals by allowing their corporate tax

base to be reduced by the excess profits that allegedly resulted from being part of a multinational group.► EC decision is against the Belgian state, however enforcement is against the taxpayer.

► EC ordered Belgian government to recover approximately 700m Euros of corporate taxes from approximately 35 multinational companies.


Proposals – US Federal

► President Barack Obama’s fiscal year 2017 budget tax proposals — the Obama Administration proposed several tax law changes that would affect businesses. The proposals, most of which appeared in the fiscal year 2016 budget, include: ► Imposing a 19% minimum tax on foreign income ► Imposing a one-time 14% tax on previously untaxed foreign income ► Making the CFC look-through exception for Subpart F permanent► Limiting the ability of domestic companies to expatriate (i.e., corporate inversions)► Limiting the shifting of income through intangible property transfers► Restricting use of certain arrangements that create “stateless” income► Repealing the last-in, first-out and the lower-of-cost-or-market inventory accounting

methods


Proposals – US Federal

► Business tax reform — Rep. Devin Nunes (R-CA) introduced a bill that would tax the net business income of both corporations and owners of unincorporated businesses at a top rate of 25%. The bill would also allow businesses to fully deduct for tax purposes all capital expenditures. Other changes include: ► Allowing corporations and unincorporated businesses to use the cash method of accounting► Replacing the current worldwide international tax system with a territorial system that would only

tax income from business activities within the US ► Eliminating the deductibility of interest expenses► Repealing the corporate alternative minimum tax (AMT) (but no refunds for corporate AMT credits)► Allowing business to carry back net operating losses (NOLs) up to five years (subject to certain

conditions)► Allowing unlimited NOL carryforwards (subject to certain conditions)► Imposing a 5% tax on certain foreign earnings► Repealing the anti-deferral rules under Subpart F without replacing them with a minimum tax or

anti-base erosion measures

Trends in accounting for income taxes

Deferred tax accounting

44%

Acquisitions/dispositions

16%

Valuationallowance

11%

Other 16%

Stock-basedcompensation

8%

Classificationerrors

5%

Tax restatements increased past three years common errors

► Generally, three most common causes of restatements are:► Deferred tax accounting► Accounting for acquisitions/dispositions (specifically

purchase accounting and goodwill impairment calculations)► Valuation allowance adjustments

► During 2015, issues relating to stock-based compensation arose more frequently

► Improper classification of current and non-current deferred tax assets also commonly cited

► “Other” errors often cited:► Errors relating to intercompany activities ► Treatment of federal and state carryforwards► Foreign taxes (foreign tax credits, currency translation

adjustments)► Capitalization/depreciation/amortization of tangible and

intangible assets purposes► Pension plan accounting (foreign and domestic)

Material weaknessesCauses

► Primary causes fall in three general areas:► People► Processes and controls► Accounting errors (valuation allowances, NOLs, pensions

state taxes, leases, impairment mentioned in 2015)

► People issues are typically described as:► Personnel with insufficient technical knowledge, experience,

training in tax accounting► Lack of investment, resources and focus in tax reporting

► Process and control issues include:► Lack of adequate policies and procedures to ensure the

completeness, accuracy, preparation and review of the income tax provision

► Lack of documentation► Lack of timely reconciliation of tax accounts► Inadequate monitoring of significant transactions and new

reporting requirements► Financial close and work compressions► Improper segregation of duties

Improper treatment40%

Segregation of duties 6%

People 31%

Documentation6%

Review procedures17%

Tax provision process recommendations

► Refresh internal controls for income taxes ► Develop work plan for enhancements and remediation items and assign tasks► Prepare tax basis balance sheets to prove cumulative deferred taxes by entity► Assign technical tax accounting white papers for issues and judgments► Accelerate work during quarters and interim to avoid surprises:

► Evaluate and record return-to-provision adjustments► Prove out deferred tax assets/liabilities, current taxes payable/receivable

► Leverage tax provision-to-return process for completed tax returns► Document/analyze state tax rates, including apportionment changes and the impact on deferred taxes, and foreign

tax rates for changes► Document outside basis differences, including indefinite reinvestment assertions and prepare outside basis

difference calculations (consider previously taxed income and unrecaptured Subpart F income)► Document valuation allowance considerations (four sources of taxable income) and prepare position paper► Document uncertain tax positions

► Consider tool to improve efficiency and accuracy of computations

Tax provision process recommendations(continued)

► Analyze and document unique transactions and events and effects on tax provision, unremitted earnings assertions, uncertain tax positions and valuation allowances(e.g., acquisitions, dispositions, financing, internal restructuring, cash flowforecasts, etc.)

► Evaluate intercompany transactions and tax provision effects► Ensure tax accounting judgments align with business results and disclosures and update

disclosures of factors that influenced judgments ► Review for consistency with tax and non-tax disclosures

► Liquidity (foreign reinvestment and parent or domestic cash requirements)► Commitments and contingencies► Acquisitions/dispositions► Cash flow► Equity movements► Share-based payments► Management discussion and analysis (MD&A)

Tax provision process recommendations(continued)

► Institute regular meetings with external auditors regarding contemporaneous issues (significant transactions, changes in business, etc.)

► Challenge annually prior-year processes to identify areas for improvement► Simplify and standardize existing Excel templates► Address technical issues early and prepare white papers for consideration by

management and external audit► Implement standardized global procedures► Consider the tax provision process a year-round area of continued focus► Identify a third-party to assist with preparation or review the provision (pre-audit review)

or co-source/out-source to free-up internal time for review► Obtain assistance researching and documenting issues or preparing white papers on tax

accounting positions

Domestic Tax Conference17 May 2016 | Chicago

11th Annual

11th Annual Domestic Tax Conference - United · PDF file17 May 2016 | Chicago 11th Annual....

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