IntroductionThe adoption of IFRS will have various impacts on the tax function and planning structure. Some of the components of the tax planning structure that could be affected include tax accounting methods, domestic and international tax planning, cash taxes, and transfer pricing. The effects of the adoption on each of the components are discussed in the present essay.
Impact on Tax Accounting Methods
The adoption of IFRS will have a significant influence on how companies value their inventories, leases, and advance payments. US GAAPs, which are the accounting standards currently in use by most American companies, allows the use of the Last in First out (LIFO) method of inventory valuation as long as the method is utilized in the recording of the statutory accounts, as situation referred to as the book-tax conformity rule. However, IFRS prohibits the use of LIFO in inventory valuation. IFRS will require companies to issue clear statements that describe their inventory purchasing and marketing transactions (Hymers, 2015). According to Elena, Catalina, Stefana, & Niculina (2009), the adoption will make all LIFO reserves to become taxable income.
The adoption will also affect the manner in which companies account for leases and the subsequent tax effects. Currently, companies classify leases according to the forms or rules of contracts. However, IFRS requires companies to classify leases as either operating or capital leases and to carry out a benefit-over-form analysis to determine the benefits and burdens of ownership of the leased asset.
Lastly, the adoption will affect the manner in which companies account for advance payments received. According to PricewaterhouseCoopers (2008), companies currently defer the recognition of advance payments received. IFRS prohibits the deferring of some elements of deferred payments like up-front fees, particularly when there are no uncertainties as to their collection. Therefore, companies will need to recognize advance payments earlier for tax purposes under IFRS.
Impact on Cash Taxes
The adoption of IFRS will affect both US and foreign cash taxes, albeit indirectly. It will influence the manner in which companies determine their taxable incomes. Currently, companies use the book income as the basis for determining the taxable income. However, the adoption might have significant effects on the taxable income. According to Turgeon, Rabinowitz, & Wong (2008), the inability of companies to use LIFO, the changes in accounting for leases and advance payments, as discussed above, could have negative effects on cash taxes. They could significantly increase the taxable income and the subsequent cash taxes.
Impact on Transfer Pricing
According to McGowan & Wertheimer (2009), the adoption of IFRS will affect the development and implementation of transfer pricing policies both positively and negatively. The positive impacts will revolve around the ease of implementing transfer pricing policies due to the ability to prepare necessary documents and expertise that companies will gain under IFRS. The implementation of transfer pricing policies under IFRS will require fewer procedures (Deloitte, 2010). Additionally, the differences in profitability arising from differences in accounting methods will be reduced. On the contrary, the negative impacts will revolve around the effects that the adoption will have on financial accounting measures such as profits and margins on which various tax structures like transfer pricing agreements are based.
The impacts of the adoption of IFRS on tax planning elements have successfully been discussed in the present essay. They include effects on tax accounting methods, cash taxes, and the implementation of transfer pricing policies. The adoption will lead to changes in the accounting practices for leases, advance payments, and the valuation of inventories, thereby increasing the taxable income. It will have both positive and negative impacts on the implementation of transfer pricing policies.
- Deloitte,. (2010). CFO insights: IFRS: Select Tax Considerations (1st ed.). Retrieved from http://www.iasplus.com/en/binary/usa/1012cfotaxconsider.pdf
- Elena, H., Catalina, M., Stefana, C., & Niculina, A. (2009). Some Issues about the Transition from U.S. Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (Ifrs) (1st ed., p. 275287). Retrieved from http://www.oeconomica.uab.ro/upload/lucrari/1120091/28.pdf
- Hymers, R. (2015). IFRS’ Impact on State and Local Taxation (1st ed.). Retrieved from http://www.csun.edu/sites/default/files/15-51-1-PB.pdf
- McGowan, J. & Wertheimer, M. (2009). The Effect of IFRS Implementation on Tax. The Tax Adviser. Retrieved 22 November 2016, from http://www.thetaxadviser.com/issues/2009/dec/theeffectofifrsimplementationontax.html
- PricewaterhouseCoopers,. (2008). Converting to International Financial Reporting Standards (1st ed.). Retrieved from http://www.treasury.nl/files/2008/04/708.pdf
- Turgeon, C., Rabinowitz, S., & Wong, H. (2008). Implications of IFRS Conversion on US Tax Accounting Methods (1st ed.). New York: PricewaterhouseCoopers LLP. Retrieved from http://www.treasury.nl/files/2008/02/725.pdf