NewsAlert Tax Accounting Services

NewsAlert
Tax Accounting Services
Tax Management and Accounting Services
April 2, 2012
Key tax accounting considerations of further reductions to the United Kingdom's
main corporate tax rate
In summary
The UK has announced further amendments to the main corporate tax rate:
o the rate applicable from April 1, 2012 to March 31, 2013 will be reduced from 25% to 24%; and
o a further rate reduction to 23% will be applicable from April 1, 2013.
The timing of Substantive Enactment (the required threshold for accounting under IFRS) is:
o March 26, 2012 for the reduction to 24%; and
o upon passage of the third reading of Finance Bill 2012 for the reduction to 23% (which is
expected in June or July 2012).
Enactment (the required threshold for accounting under US GAAP) for both changes will take place
upon Royal Assent of Finance Bill 2012 as Finance Act 2012; this is expected to be in July 2012, but
may be delayed until October 2012.
The last in the UK's series of tax rate changes which is expected to be enacted next year would now
lower the main corporate tax rate to 22% by April 1, 2014.
Multinational groups with UK entities are encouraged to assess the tax accounting implications of
these tax rate changes.
Background & timing
The main rate of UK corporate tax for the year to March 31, 2012 is 26%. Finance Act 2011 had reduced
the rate for the year from April 1, 2012 to March 31, 2013 from 26% to 25%. However, in the 2012
Budget held on March 21, 2012, the UK Government announced that the main rate of UK corporate tax
for the year from April 1, 2012 to March 31, 2013 will now be 24%, not the previously enacted rate of
25%. The amendment to 24% was passed by a resolution under the Provisional Collection of Taxes Act
1968 ("PCTA 1968") on March 26, 2012. A resolution made in this way is, in effect, a temporary
enactment of a tax law change which only becomes permanent once it is enacted in a Finance Act.
As a result of this change, the further announced UK tax rate reductions for years beginning April 1,
2014 and April 1, 2015 will be reduced to 23% and 22%, respectively. The reduction to 23% will be
included in Finance Bill 2012 and will be substantively enacted upon third reading of the Bill in the
House of Commons. It will be enacted when the Bill receives Royal Assent as Finance Act 2012. The
reduction to 22% for the year beginning April 1, 2014 is expected to be included in Finance Act 2013
and be substantively enacted and enacted next year.
In previous years, following the UK Budget in February or March, any proposals to be included in the
current year's Finance Act would first be included in a Finance Bill. The Finance Bill would follow the
various stages of the legislative process over the next few months and reach third reading in the House
of Commons in June or July. Any changes not passed (and thus not substantively enacted) earlier
under the PCTA 1968 would be substantively enacted at this point. Shortly thereafter, the Finance Bill
would receive Royal Asset as a Finance Act which would mark enactment. Thus the entire legislative
process would take place before the Parliament broke for summer recess.
However, this year, in order to facilitate the move to fixed term parliaments, there have been some
changes to the UK parliamentary timetable. This means that, while the provisions of Finance Bill 2012
which were not passed under the PCTA 1968 on March 26, 2012 should still pass third reading in the
House of Commons and so be substantively enacted in June or July 2012, it is possible that Royal
Assent may not take place until October 2012. Although inquiries indicate it is still likely that Royal
Assent will be given in July 2012 (in line with previous years), that may prove too difficult.
General rules on accounting for tax law changes
Under US GAAP, Accounting Standards Codification (ASC) 740 requires companies to use the tax law
in effect at the balance sheet date of the relevant reporting period. Companies therefore need to assess
the impact of any enacted tax law changes on existing deferred tax balances and include the impact as a
discrete item in the interim period in which the changes are enacted. The effects, both current and
deferred, are reported as part of the tax provision attributable to continuing operations, regardless of
the category of income in which the underlying pre-tax income or expense or deferred tax asset or
liability was or will be reported. In addition, the estimated annual effective tax rate (ETR) to be applied
to the results of any period should incorporate the impact of any enacted tax law changes, to the extent
that the changes apply during that period.
Under International Accounting Standard (IAS) 12, companies are also required to use the tax law in
effect at the balance sheet date of the relevant reporting period. However tax law changes only need to
have been substantively enacted by the balance sheet date for deferred tax balances to be adjusted, or
for the impact to be reflected in the annual ETR, if applicable. Unlike US GAAP, under IFRS,
companies should backwards trace the effects of a law change upon existing deferred tax balances in
order to determine the portion of the adjustment that is recognized as part of the tax provision
attributable to continuing operations or otherwise recognized as part of the tax provision that is
allocable to other comprehensive income or equity. (For example, a reduction due to a rate change to a
deferred tax asset related to accrued pension costs that was previously recorded in other comprehensive
income should likewise be recorded in other comprehensive income).
Both GAAPs may require a detailed analysis of the effect of the reduction in tax rates to determine when
the temporary differences existing at the enactment date are expected to reverse.
Application under US GAAP
The passing of a resolution under PCTA 1968 does not constitute enactment for US GAAP purposes.
The reduction in the main UK corporate tax rate to 24% will therefore only be treated as enacted for US
GAAP purposes once Finance Act 2012 receives Royal Assent. As noted above, this is likely to be in July
2012, but may not be until October 2012. As it is expected that the enactment of the reduction to 23%
will also take place with Royal Assent of Finance Act 2012, both of these changes will need to be taken
into account when re-measuring deferred taxes in the period which includes the enactment date. If
material, scheduling of the reversal of temporary differences may be required to determine the amounts
expected to reverse before April 1, 2013 which should be recognized at 24%, and those expected to
reverse after April 1, 2013 which should be recognized at 23%. As the 24% should be effective for
PwC
2
current tax purposes by the time that Finance act 2012 is enacted, the estimated annual ETR used to
calculate the current tax charge will also need to reflect this rate for the relevant proportion of the
period for which it applies, as well as any other enacted rates applicable during that period.
The further reduction to 22% is not expected to be enacted until 2013, possibly as late as October 2013
in line with the timetable expected to apply in 2012. The reduction should only be reflected in deferred
tax calculations and the estimated annual ETR used for current tax calculations once enactment has
taken place. For current tax calculations, care should also be taken that the reporting period includes
the fiscal year for which the rate applies (i.e., from the year starting April 1, 2014).
Application under IFRS
As the passing of a resolution under PCTA 1968 is treated as substantive enactment for IFRS purposes,
the reduction in the main UK corporate tax rate to 24% will need to be applied when calculating
deferred tax balances in IFRS accounts with an interim or final balance sheet date that includes March
26, 2012. The estimated annual ETR applied in current tax calculations will not need to be adjusted to
reflect the impact of this change for periods that end before April 1, 2012 as the new rate is only
effective for current tax from this date.
The further reductions to 23% and 22% are not expected to be substantively enacted until June or July
2012 and 2013 respectively and should not be reflected in deferred tax calculations under IFRS until
that time. As with US GAAP, scheduling may also be required to ensure that the appropriate rates are
applied in line with the expected reversal period. The new rates should also only be reflected in the
annual estimated ETR applied to current tax calculations when the reporting period also includes the
fiscal year for which they apply (i.e., the years starting April 1, 2013 and April 1, 2014 respectively).
Financial statement disclosures
Companies should consider disclosure in their financial statements of the impact of each of these
changes in tax law. Even if the tax rate reductions have only been proposed before a balance sheet date,
the impact of these changes needs to be disclosed under US GAAP and IFRS if that impact is material.
This is also required once the changes have been enacted (for US GAAP) or substantively enacted (for
IFRS). IFRS also requires disclosure of the allocation of the impact between the Income Statement,
Other Comprehensive Income and Equity if this is considered to have a material impact on the financial
statements.
Once the changes have been enacted for US GAAP, the current year’s reconciliation of the ETR should
also include a reconciling item for the effect of this enacted law change if the effect is considered
“significant.” Significant is defined by Rule 4-08(h) of SEC Regulation S-X as an individual item that is
more than 5 percent of the amount computed by multiplying pre-tax income by the statutory tax rate.
There is a similar requirement for IFRS accounts once the changes are substantively enacted and if the
impact is considered to be a major component of the tax expense.
Companies should also consider whether enhanced disclosures over and above the required minimums
should be made to assist users of accounts in understanding the implications of the changes.
PwC
3
Contacts
PwC clients that have questions about this Tax Accounting Services NewsAlert should contact their
engagement partner or the primary authors of this NewsAlert who welcome any questions about this
topic:
Ken Kuykendall
Partner
Global and US Tax Accounting Services Leader
(312) 298-2546
[email protected]
Andrew Wiggins
Partner
UK Tax Accounting Services Leader
(44) (121) 232-2065
[email protected]
Juliette Wynne-Jones
Director
Global & US Tax Accounting Services
(312) 298-4170
[email protected]
pwc.com/us/tas
This document is provided by PricewaterhouseCoopers LLP for general guidance only, and does not
constitute the provision of legal advice, accounting services, investment advice, or professional
consulting of any kind. The information provided herein should not be used as a substitute for
consultation with professional tax, accounting, legal, or other competent advisors. Before making any
decision or taking any action, you should consult a professional advisor who has been provided with all
pertinent facts relevant to your particular situation. The information is provided 'as is', with no
assurance or guarantee of completeness, accuracy, or timeliness of the information, and without
warranty of any kind, express or implied, including but not limited to warranties of performance,
merchantability, and fitness for a particular purpose.
Solicitation
©2012 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to
PricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the context requires, the
PricewaterhouseCoopers global network or other member firms of the network, each of which is a
separate and independent legal entity.
PwC
4