Governments have announced a range of economic stimulus packages worldwide. Recent government responses to the coronavirus pandemic have included income tax concessions and other rebates. Entities need to consider the impacts of these legislative changes on their accounting for income taxes. IAS 12 Income Taxes requires current tax liabilities and assets for current and prior periods to be measured at the amount expected to be paid to (or recovered from) the taxation authority, using the tax rates and laws that were enacted, or substantively enacted, by the end of the reporting period. Deferred tax assets and liabilities must be measured at the tax rates expected to apply to the period when the asset is realized, or the liability is settled, using the tax rates and laws enacted or substantively enacted by the end of the reporting period.
Some governments might structure their tax relief so it applies only to entities who have been impacted by the coronavirus pandemic based on specific qualifying criteria, for example, only entities in specific sectors or entities of a certain size (e.g., by revenue) or that have suffered a certain amount of economic impact. This may give rise to uncertainty and the need for entities to make judgments and estimates when assessing their income tax position, for example, whether, for that taxation period, the entity will fall below the revenue threshold to receive the tax concession. Entities will need to determine whether it is probable that the taxation authority will accept their position. If not, IFRIC 23 requires entities to assess whether to recognize any additional liability for uncertain tax positions. The exact requirement applies to the recognition of uncertain tax assets.
Tax relief may come in the form of tax credits. Tax credits are not defined within IFRS, and entities need to exercise judgment in determining how the receipt of tax credit should be accounted for, such as a reduction in tax liability under IAS 12 or the receipt of a government grant under IAS 20 when it is structured as a cash payment or has other indicators of a grant such as non-tax related conditions being attached to it (for example, cash spend on approved research and development related activities). A tax credit to be treated by IAS 12 will have indicators such as reducing income taxes payable (being forfeited or deferred if there are low taxes payable) and having a few non-tax conditions attached. A tax credit to be treated by IAS 20 will often be directly settled in cash in the case of low taxes payable and have non-tax conditions attached. In any case, all facts and circumstances relating to the specific relief need to be considered in assessing the substance of the arrangement.
Many governments have announced tax stimulus packages in early 2020. This would not impact the measurement of current tax balances and deferred tax balances as of 31 December 2019. Some tax concessions, such as tax rate reductions, could relate to prior years. Because IAS 12 states that these balances are to be measured by the rates and laws that had already been substantively enacted as of reporting date, any impacts relating to prior taxation years would only be recorded in the financial period in which the amending legislation was substantively enacted. Entities with reporting periods ending or ending in 2020 need to consider if the tax concessions announced are substantively enacted before the reporting period ends. As noted earlier, entities must consider what is generally understood as ‘substantively enacted’ in their jurisdiction. If determined to be substantively enacted by reporting date, then-current and deferred tax balances would be measured based on the tax incentives, including reduced tax rates under the stimulus package. In cases where the tax concessions are staggered over several years, such as incremental tax rate reductions, the expected timing of the reversal of deferred tax balances will also need to be assessed.
In addition to subsequent event disclosures, the following will also be relevant for entities impacted by the coronavirus pandemic: an explanation of changes in the applicable tax rate compared to the prior period; the amount and expiry date of any carry forward tax losses; and the nature of the evidence supporting the recognition of deferred tax assets when the entity has suffered a loss in the current period. The entity should also consider disclosing the nature of any significant judjudgments estimates made when determining the appropriate accounting for the abovementioned matters. Such judgments may include whether the tax laws were substantively enacted as of reporting date and the determination of the accounting for income tax credits.
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- Deloitte. (2022). IAS 12 — Income Taxes. https://www.iasplus.com/en/standards/ias/ias12
- Ernest & Young. (2021). Applying IFRS IFRS accounting considerations of the Coronavirus pandemic.