Accounting for Outside Basis Differences in
Description: Accounting for Outside Basis Differences in Foreign Investments Bob Gabriel Deloitte Tax LLP Trisha Hobler Deloitte Tax LLP Tax Executives Institute May 2, 2017 Houston, Texas Agenda Overview Basis differences in individual assets and
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slide1. Accounting for Outside Basis Differences in Foreign Investments Bob Gabriel – Deloitte Tax LLP
Trisha Hobler – Deloitte Tax LLP
Tax Executives Institute
May 2, 2017
Houston, Texas<br>
slide2. Agenda<br>
slide3. Overview<br>
slide4. Basis differences in individual assets and liabilities Inside basis differences Each entity has an inventory of temporary differences (differences between financial reporting and tax basis in assets and liabilities) called “inside” basis differences (e.g., PP&E, accruals, bad debt reserves, intangibles)<br>
slide5. Basis differences in investments Outside basis differences Note: * The stock held by the parent is one of its “inside” assets that can have a different basis for financial reporting and tax and hence represents a temporary difference. The “outside” basis in the investee is the “inside” basis in the hands of the parent. Parent has a basis difference associated with its “outside” basis in its investments
Special rules may apply to outside basis differences
The “outside” basis difference must be considered even though the investee has already provided deferred taxes on its inside basis differences *<br>
slide6. Illustrative items that may impact book and/or tax basis Outside basis differences Note: * An entity can have Subpart F income and no book earnings<br>
slide7. Specific guidance Outside basis differences<br>
slide8. Overview ASC 740-30 and unremitted earnings General rule — requires a presumption that all undistributed earnings will be repatriated (ASC 740-30-25-3)
This is consistent with the broader presumption that all assets will be recovered and liabilities settled at their financial statement reported amount.
The presumption may be rebutted provided “sufficient evidence shows that the subsidiary has invested or will invest the undistributed earnings indefinitely” (ASC 740-30-25-17) Note: Although ASC 740-30 repeatedly uses the phrase “unremitted earnings” when discussing the indefinite reversal criterion, ASC 740-30-25-6 and other similar references to “an excess of the amount for financial reporting over the tax basis of an investment” make it clear that the exception applies to the entire outside basis difference (this includes CTA)<br>
slide9. Overview Applying the ASC 740-10-25-3 exception ASC 740-10-25-3 provides an exception to recognizing a deferred tax liability with respect to an excess of the book over the tax basis of an investment in a foreign subsidiary or certain foreign corporate joint venture unless it becomes apparent that the basis difference will reverse in the foreseeable future
Therefore, it is necessary to conclude as to whether it is apparent that the outside basis difference will reverse or “close” in the foreseeable future or whether such basis difference is indefinite as to its reversal
ASC 740-30 (which includes the codification of APB 23) provides a framework (i.e., operating rules) used to determine whether the outside basis difference will reverse or “close” in the foreseeable future
ASC 740-30-25-18 (indefinite reinvestment exception) is not an election, rather, it is a conclusion based on facts, circumstances, and intent<br>
slide10. General rules ASC 740-30 and unremitted earnings Commitment to offshore investment must be supported by “evidence of specific plans for reinvestment of undistributed earnings of a subsidiary which demonstrate that remittance of earnings will be postponed indefinitely” (ASC 740-30-25-17)
Plans must be specific and identifiable
Plans must be viable
Plans must be in writing
If circumstances change and it becomes apparent that some or all of the undistributed earnings of a subsidiary will be remitted in the foreseeable future (but income taxes have not been recognized), taxes attributable to that remittance should be accrued as an expense in the current period
Indefinite reinvestment exception is not “an all or nothing” proposition
A portion of unremitted earnings may be “indefinitely reinvested”
Specific amounts of earnings may be designated as indefinitely reinvested<br>
slide11. Considerations ASC 740-30 and unremitted earnings ASC 740-30-05-4 provides the following list of factors entities should consider in determining whether to repatriate earnings
Financial requirements of the parent company
Financial requirements of the subsidiary
Operational and fiscal objectives of the parent company, both long-term and short-term
Remittance restrictions imposed by governments
Remittance restrictions imposed by lease or financing agreements of the subsidiary
Tax consequences of the remittance<br>
slide12. Considerations Documenting the reinvestment assertion An entity’s documented plan for reinvestment of foreign earnings would enable it to overcome the presumption that all undistributed earnings of a foreign subsidiary will be transferred to the parent entity (ASC 740‐30‐25‐17)
An entity should demonstrate that the foreign subsidiary has both the intent and ability to indefinitely reinvest undistributed earnings
Past experience with the entity, in and of itself, would not be sufficient for an entity to overcome the presumption
In documenting its written plan, an entity should consider all facts and circumstances, including factors provided in ASC 740-30-05-4<br>
slide13. Documentation ASC 740-30 and unremitted earnings Examples of documentation to support the ASC 740-30 position[1]
Management intentions[2]
Past experience
Working capital forecasts
EBITDA or cash flow projections by location
Long-term liquidity plans
Capital improvements plans
Merger and acquisition plans
Investment plans Notes
[1] ASC 740-10-25-3(a) and ASC 740-30 are not elections
[2] Supporting facts and circumstances regarding management’s intent requires representation in order to evidence that intent<br>
slide14. Change in management’s plans Indefinite reinvestment assertion<br>
slide15. Illustration – Change in management’s plans Indefinite reinvestment assertion Assumptions
Entity A has one subsidiary, B, a wholly owned subsidiary in foreign jurisdiction X
Subsidiary B has $500,000 in undistributed earnings, which represents the entire outside basis difference in B
On the basis of available evidence, A has historically concluded that no part of this basis difference was expected to reverse in the foreseeable future and that, therefore, the indefinite reversal criteria were met in accordance with management’s intent and the associated facts and circumstances
Consequently, A has not historically recorded a DTL on its book-over-tax basis difference in its investment in B Example 1
In the CY, B has net income of $300,000 and declares a one-time dividend for the full $300,000
Subsidiary B has no plans to declare or pay future dividends, and there are no other changes in facts or circumstances to suggest that the indefinite reversal assertion on the existing $500,000 outside basis difference would be inappropriate
Further, the one-time circumstances that led to the distribution of the $300,000 are not expected to reoccur
Example 2
Assume the same facts, except that the dividend was declared as a result of projected shortfalls in A’s working capital requirements during the coming year<br>
slide16. Calculating the DTL<br>
slide17. Considerations Calculating the deferred tax liability Depending upon the facts and circumstances, including management’s intent and long-term plans with respect to the investment, the tax consequences of the reversal of the outside basis difference may differ and the measurement of the DTL may represent
The expected tax consequences of selling the shares of the subsidiary at book value, or
The expected residual tax that will be payable (or “refundable”) upon repatriation of undistributed foreign earnings
In either case, this involves a hypothetical FTC calculation
Generally, if it is apparent the outside basis difference in the subsidiary will reverse in the foreseeable future (i.e., earnings are not indefinitely reinvested), the expected US residual tax consequences are computed on the repatriation of such subsidiary’s earnings<br>
slide18. Bottoms up Calculating the deferred tax liability Consider all entities in the organization chart
Essentially start with the lowest tier entity in the organization chart and determine whether such entity’s consolidating shareholder has a higher financial reporting carrying amount than tax basis
After considering the consequences of that level, move up the chain to the next highest entity and so on until reaching the reporting entity
Consider whether the particular subsidiary and its consolidating shareholder are residents of the same country for income tax purposes to determine whether to apply the literature applicable to foreign or domestic subsidiaries
Consider withholding tax that would be applicable in distributing unremitted earnings of a foreign subsidiary to its consolidating shareholder<br>
slide19. Step 1
Determine the hypothetical repatriation amount (the amount of the outside basis difference that will reverse)
Book earnings or tax E&P or something else?
Step 2
Determine the resulting taxable income inclusion
Book earning or tax E&P or something else?
Step 3
Determine the applicable FTC
Actual tax credit pool
What about deferred taxes? Steps Components of the deferred tax liability calculation<br>
slide20. Deferred Tax Liability Computation Assumptions
Irish CFC has an originating deductible temporary difference, for Irish tax purposes only, of $400K that is expected to reverse in Year 2 and will not be replaced by a new originating difference
USP has no FTC limitation
USP has determined that it will need to repatriate $500K of Irish CFC’s earnings at the EOY 2 in order to make a balloon payment due on a note it issued
Question
What is the DTL indicated and US residual tax incurred? Example 100% Cash $10M Stock USP Irish CFC 12.5%<br>
slide21. Deferred Tax Liability Computation Example (cont.) Answer — Reporting date<br>
slide22. Deferred Tax Liability Computation Example (cont.) Answer — Year of distribution<br>
slide23. Deferred Tax Liability Computation Impact of E&P and foreign tax pools E&P and the available FTC pool must be considered in determining the amount of DTL to provide on the portion of the outside basis difference determined to not be indefinitely reinvested
The amount of book>tax basis difference expected to close via a distribution is considered a dividend to the extent of E&P
If E&P < (book>tax) basis difference expected to reverse, the amount considered a dividend is limited to E&P; as any distribution in excess of E&P will reduce tax basis and not close the book/tax basis difference and all of the tax pool will be lifted
If E&P > (book>tax) basis difference expected to reverse, the amount considered a dividend is limited to the book/tax basis difference and only a portion of the tax pool is lifted<br>
slide24. Deferred Tax Liability Computation Reasons DTL might not be representational Differences between US GAAP books and E&P
Unfavorable permanent items and temporary differences (increasing E&P) will reduce the FTC “lift” and, generally, increase the amount of taxes payable on the remittance
Favorable permanent items and temporary differences (decreasing E&P) will increase the FTC “lift” and, generally, decrease the amount of taxes payable on the remittance
Differences between US GAAP books and local tax
Unfavorable permanent items and temporary differences will increase local current taxes payable, the FTC to be “lifted” and, generally, decrease the taxes payable on the remittance
Favorable permanent items and temporary differences will decrease local current taxes payable, the FTC to be “lifted” and, generally, increase the taxes payable on the remittance<br>
slide25. Explanation of terms (terms are not “technical” but illustrative only) Deferred tax liability computation<br>
slide26. Disclosure of the outside basis difference<br>
slide27. ASC 740-30-50-2 Disclosure of the outside basis difference The following information shall be disclosed whenever a deferred tax liability is not recognized because of the exceptions to comprehensive recognition of deferred taxes related to subsidiaries or corporate joint ventures
A description of the types of temporary differences for which a deferred tax liability has not been recognized and the types of events that would cause those temporary differences to become taxable
The cumulative amount of each type of temporary difference
The amount of the unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries and foreign corporate joint ventures that are essentially permanent in duration if determination of that liability is practicable or a statement that determination is not practicable
The amount of the deferred tax liability for temporary differences other than those in (c) (that is, undistributed domestic earnings) that is not recognized in accordance with the provisions of paragraph 740-30-25-18<br>
slide28. Illustrative SEC comments (emphasis added) Indefinite reinvestment of foreign earnings Please tell us how your disclosure of the indefinite reinvestment of your foreign subsidiaries’ undistributed earnings in the first paragraph of page [X] complies with paragraphs 50-1 and 50-2 of FASB ASC 740-30.
We note your disclosure on page [X] that you provided U.S. tax on approximately $[X] million of your non-U.S. earnings which you expect to repatriate in the future. Please explain these facts and circumstances in further detail, including what drove the decision of expected repatriation, and specifically tell us whether this is a change from a prior conclusion of indefinite reinvestment.
We see on page [X] that your U.S. operations have historically generated net losses and on page [X] that you intend to indefinitely reinvest undistributed earnings of your foreign subsidiaries. Please quantify for us the amount of cash, cash equivalents and investments held by foreign subsidiaries that would be subject to a potential tax impact associated with the repatriation of undistributed earnings on foreign subsidiaries. Please also tell us your consideration of providing enhanced liquidity disclosures to describe these amounts that would be subject to potential repatriation of undistributed earnings taxes to illustrate that some cash and investments are not presently available to fund domestic operations such as corporate expenditures or acquisitions without paying a significant amount of taxes upon their repatriation. We refer you to Item 303(a)(1) of Regulation S-K and Section IV of SEC Release 33-8350.<br>
slide29. Assumptions
USP has concluded that it does not intend to “close” the outside basis difference in CFC1 or CFC2
Question
What amounts should be disclosed?
Answer
Temporary difference = $200
Unrecognized DTL = $70 Example — Flat structure Disclosure of the outside basis difference T>B basis $100 B>T basis $200 Earnings = 200
Tax pool = 0 Loss = (100)
Tax pool = 0 CFC 1 USP
Tax rate = 35% CFC 2<br>
slide30. Assumptions
USP has concluded that the outside basis difference in CFC1 is indefinitely reinvested
Question
What amounts should be disclosed?
Answer
Temporary difference = $100 and unrecognized DTL = $35 Example — Tiered structure Disclosure of the outside basis difference Loss = (100)
Tax pool = 0 B>T basis $100 Earnings = 200
Tax pool = 0 USP CFC 1 CFC 2<br>
slide31. Disclose (all entities)
Amount of undistributed foreign earnings for which there is a change in assertion during the period regarding indefinite reinvestment of such earnings and explain circumstances that caused such assertion change*
The aggregate of cash, cash equivalents, and marketable securities held by foreign subsidiaries* Proposed ASU — Indefinitely reinvested foreign earnings Income tax disclosures Note: * Commonly requested in SEC comments<br>
slide32. Disclose (all entities)
Pretax income (or loss) from continuing operations disaggregated by foreign and domestic amounts*
Disaggregation of income tax expense (benefit) between foreign and domestic jurisdictions*
Disaggregation of the income taxes paid between foreign/domestic jurisdictions
Foreign income taxes paid further disaggregated for any country significant to total Proposed ASU — Disclosures about foreign and domestic amounts Income tax disclosures Note: * Existing requirement in SEC regulations<br>
slide33. Transition guidance
The proposed amendments would be applied on a prospective basis
Effective date
An effective date will be determined after consideration of all stakeholder feedback
Comment period
The proposed ASU comment period ended on September 30, 2016 Proposed ASU — Income tax disclosures Income tax disclosures<br>
slide35. Bob is a Tax Partner in the Business Tax Services practice and has more than 15 years of experience in public accounting providing services to public and private clients in a variety of industries including integrated energy, oilfield service, engineering and construction, and manufacturing and distribution.
Bob specializes in accounting for income taxes and assists clients with tax process and systems improvements and global tax provision issues including tax basis balance sheet analysis, currency issues, and uncertain tax positions.
Bob has been an instructor and speaker at internal and external tax training sessions relating to income tax accounting issues including the Tax Executive Institute and Deloitte’s Financial Reporting of Taxes Dbrief Series for Tax Executives.
Bob received a Bachelor of Business Administration degree and a Masters in Professional Accounting from the University of Texas at Austin.
rgabriel@deloitte.com Bob Gabriel<br>
slide36. Trisha Hobler, a managing director in Deloitte Tax LLP’s international tax practice, has more than 12 years of experience providing tax services to publicly held and privately owned multinational companies covering industry sectors such as oil and gas, oilfield services, telecommunications, manufacturing, and others. Trisha’s experience spans both US inbound and outbound investments and includes tax planning, tax accounting, and tax reporting obligations associated with their international footprint.
She has significant experience with ASC 740 in an international context, managing large ASC 740 and financial reporting engagements. She also leads Deloitte’s national internal ASC 740 training efforts for its international tax practice.
Trisha received a Bachelor of Science in Accounting and a Master of Science in Taxation from Texas A&M University. She is a licensed Certified Public Accountant in Texas and is a member of the American Institute of Certified Public Accountants.
thobler@deloitte.com Trisha Hobler<br>
slide37. This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.<br>
Trisha Hobler – Deloitte Tax LLP
Tax Executives Institute
May 2, 2017
Houston, Texas<br>
slide2. Agenda<br>
slide3. Overview<br>
slide4. Basis differences in individual assets and liabilities Inside basis differences Each entity has an inventory of temporary differences (differences between financial reporting and tax basis in assets and liabilities) called “inside” basis differences (e.g., PP&E, accruals, bad debt reserves, intangibles)<br>
slide5. Basis differences in investments Outside basis differences Note: * The stock held by the parent is one of its “inside” assets that can have a different basis for financial reporting and tax and hence represents a temporary difference. The “outside” basis in the investee is the “inside” basis in the hands of the parent. Parent has a basis difference associated with its “outside” basis in its investments
Special rules may apply to outside basis differences
The “outside” basis difference must be considered even though the investee has already provided deferred taxes on its inside basis differences *<br>
slide6. Illustrative items that may impact book and/or tax basis Outside basis differences Note: * An entity can have Subpart F income and no book earnings<br>
slide7. Specific guidance Outside basis differences<br>
slide8. Overview ASC 740-30 and unremitted earnings General rule — requires a presumption that all undistributed earnings will be repatriated (ASC 740-30-25-3)
This is consistent with the broader presumption that all assets will be recovered and liabilities settled at their financial statement reported amount.
The presumption may be rebutted provided “sufficient evidence shows that the subsidiary has invested or will invest the undistributed earnings indefinitely” (ASC 740-30-25-17) Note: Although ASC 740-30 repeatedly uses the phrase “unremitted earnings” when discussing the indefinite reversal criterion, ASC 740-30-25-6 and other similar references to “an excess of the amount for financial reporting over the tax basis of an investment” make it clear that the exception applies to the entire outside basis difference (this includes CTA)<br>
slide9. Overview Applying the ASC 740-10-25-3 exception ASC 740-10-25-3 provides an exception to recognizing a deferred tax liability with respect to an excess of the book over the tax basis of an investment in a foreign subsidiary or certain foreign corporate joint venture unless it becomes apparent that the basis difference will reverse in the foreseeable future
Therefore, it is necessary to conclude as to whether it is apparent that the outside basis difference will reverse or “close” in the foreseeable future or whether such basis difference is indefinite as to its reversal
ASC 740-30 (which includes the codification of APB 23) provides a framework (i.e., operating rules) used to determine whether the outside basis difference will reverse or “close” in the foreseeable future
ASC 740-30-25-18 (indefinite reinvestment exception) is not an election, rather, it is a conclusion based on facts, circumstances, and intent<br>
slide10. General rules ASC 740-30 and unremitted earnings Commitment to offshore investment must be supported by “evidence of specific plans for reinvestment of undistributed earnings of a subsidiary which demonstrate that remittance of earnings will be postponed indefinitely” (ASC 740-30-25-17)
Plans must be specific and identifiable
Plans must be viable
Plans must be in writing
If circumstances change and it becomes apparent that some or all of the undistributed earnings of a subsidiary will be remitted in the foreseeable future (but income taxes have not been recognized), taxes attributable to that remittance should be accrued as an expense in the current period
Indefinite reinvestment exception is not “an all or nothing” proposition
A portion of unremitted earnings may be “indefinitely reinvested”
Specific amounts of earnings may be designated as indefinitely reinvested<br>
slide11. Considerations ASC 740-30 and unremitted earnings ASC 740-30-05-4 provides the following list of factors entities should consider in determining whether to repatriate earnings
Financial requirements of the parent company
Financial requirements of the subsidiary
Operational and fiscal objectives of the parent company, both long-term and short-term
Remittance restrictions imposed by governments
Remittance restrictions imposed by lease or financing agreements of the subsidiary
Tax consequences of the remittance<br>
slide12. Considerations Documenting the reinvestment assertion An entity’s documented plan for reinvestment of foreign earnings would enable it to overcome the presumption that all undistributed earnings of a foreign subsidiary will be transferred to the parent entity (ASC 740‐30‐25‐17)
An entity should demonstrate that the foreign subsidiary has both the intent and ability to indefinitely reinvest undistributed earnings
Past experience with the entity, in and of itself, would not be sufficient for an entity to overcome the presumption
In documenting its written plan, an entity should consider all facts and circumstances, including factors provided in ASC 740-30-05-4<br>
slide13. Documentation ASC 740-30 and unremitted earnings Examples of documentation to support the ASC 740-30 position[1]
Management intentions[2]
Past experience
Working capital forecasts
EBITDA or cash flow projections by location
Long-term liquidity plans
Capital improvements plans
Merger and acquisition plans
Investment plans Notes
[1] ASC 740-10-25-3(a) and ASC 740-30 are not elections
[2] Supporting facts and circumstances regarding management’s intent requires representation in order to evidence that intent<br>
slide14. Change in management’s plans Indefinite reinvestment assertion<br>
slide15. Illustration – Change in management’s plans Indefinite reinvestment assertion Assumptions
Entity A has one subsidiary, B, a wholly owned subsidiary in foreign jurisdiction X
Subsidiary B has $500,000 in undistributed earnings, which represents the entire outside basis difference in B
On the basis of available evidence, A has historically concluded that no part of this basis difference was expected to reverse in the foreseeable future and that, therefore, the indefinite reversal criteria were met in accordance with management’s intent and the associated facts and circumstances
Consequently, A has not historically recorded a DTL on its book-over-tax basis difference in its investment in B Example 1
In the CY, B has net income of $300,000 and declares a one-time dividend for the full $300,000
Subsidiary B has no plans to declare or pay future dividends, and there are no other changes in facts or circumstances to suggest that the indefinite reversal assertion on the existing $500,000 outside basis difference would be inappropriate
Further, the one-time circumstances that led to the distribution of the $300,000 are not expected to reoccur
Example 2
Assume the same facts, except that the dividend was declared as a result of projected shortfalls in A’s working capital requirements during the coming year<br>
slide16. Calculating the DTL<br>
slide17. Considerations Calculating the deferred tax liability Depending upon the facts and circumstances, including management’s intent and long-term plans with respect to the investment, the tax consequences of the reversal of the outside basis difference may differ and the measurement of the DTL may represent
The expected tax consequences of selling the shares of the subsidiary at book value, or
The expected residual tax that will be payable (or “refundable”) upon repatriation of undistributed foreign earnings
In either case, this involves a hypothetical FTC calculation
Generally, if it is apparent the outside basis difference in the subsidiary will reverse in the foreseeable future (i.e., earnings are not indefinitely reinvested), the expected US residual tax consequences are computed on the repatriation of such subsidiary’s earnings<br>
slide18. Bottoms up Calculating the deferred tax liability Consider all entities in the organization chart
Essentially start with the lowest tier entity in the organization chart and determine whether such entity’s consolidating shareholder has a higher financial reporting carrying amount than tax basis
After considering the consequences of that level, move up the chain to the next highest entity and so on until reaching the reporting entity
Consider whether the particular subsidiary and its consolidating shareholder are residents of the same country for income tax purposes to determine whether to apply the literature applicable to foreign or domestic subsidiaries
Consider withholding tax that would be applicable in distributing unremitted earnings of a foreign subsidiary to its consolidating shareholder<br>
slide19. Step 1
Determine the hypothetical repatriation amount (the amount of the outside basis difference that will reverse)
Book earnings or tax E&P or something else?
Step 2
Determine the resulting taxable income inclusion
Book earning or tax E&P or something else?
Step 3
Determine the applicable FTC
Actual tax credit pool
What about deferred taxes? Steps Components of the deferred tax liability calculation<br>
slide20. Deferred Tax Liability Computation Assumptions
Irish CFC has an originating deductible temporary difference, for Irish tax purposes only, of $400K that is expected to reverse in Year 2 and will not be replaced by a new originating difference
USP has no FTC limitation
USP has determined that it will need to repatriate $500K of Irish CFC’s earnings at the EOY 2 in order to make a balloon payment due on a note it issued
Question
What is the DTL indicated and US residual tax incurred? Example 100% Cash $10M Stock USP Irish CFC 12.5%<br>
slide21. Deferred Tax Liability Computation Example (cont.) Answer — Reporting date<br>
slide22. Deferred Tax Liability Computation Example (cont.) Answer — Year of distribution<br>
slide23. Deferred Tax Liability Computation Impact of E&P and foreign tax pools E&P and the available FTC pool must be considered in determining the amount of DTL to provide on the portion of the outside basis difference determined to not be indefinitely reinvested
The amount of book>tax basis difference expected to close via a distribution is considered a dividend to the extent of E&P
If E&P < (book>tax) basis difference expected to reverse, the amount considered a dividend is limited to E&P; as any distribution in excess of E&P will reduce tax basis and not close the book/tax basis difference and all of the tax pool will be lifted
If E&P > (book>tax) basis difference expected to reverse, the amount considered a dividend is limited to the book/tax basis difference and only a portion of the tax pool is lifted<br>
slide24. Deferred Tax Liability Computation Reasons DTL might not be representational Differences between US GAAP books and E&P
Unfavorable permanent items and temporary differences (increasing E&P) will reduce the FTC “lift” and, generally, increase the amount of taxes payable on the remittance
Favorable permanent items and temporary differences (decreasing E&P) will increase the FTC “lift” and, generally, decrease the amount of taxes payable on the remittance
Differences between US GAAP books and local tax
Unfavorable permanent items and temporary differences will increase local current taxes payable, the FTC to be “lifted” and, generally, decrease the taxes payable on the remittance
Favorable permanent items and temporary differences will decrease local current taxes payable, the FTC to be “lifted” and, generally, increase the taxes payable on the remittance<br>
slide25. Explanation of terms (terms are not “technical” but illustrative only) Deferred tax liability computation<br>
slide26. Disclosure of the outside basis difference<br>
slide27. ASC 740-30-50-2 Disclosure of the outside basis difference The following information shall be disclosed whenever a deferred tax liability is not recognized because of the exceptions to comprehensive recognition of deferred taxes related to subsidiaries or corporate joint ventures
A description of the types of temporary differences for which a deferred tax liability has not been recognized and the types of events that would cause those temporary differences to become taxable
The cumulative amount of each type of temporary difference
The amount of the unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries and foreign corporate joint ventures that are essentially permanent in duration if determination of that liability is practicable or a statement that determination is not practicable
The amount of the deferred tax liability for temporary differences other than those in (c) (that is, undistributed domestic earnings) that is not recognized in accordance with the provisions of paragraph 740-30-25-18<br>
slide28. Illustrative SEC comments (emphasis added) Indefinite reinvestment of foreign earnings Please tell us how your disclosure of the indefinite reinvestment of your foreign subsidiaries’ undistributed earnings in the first paragraph of page [X] complies with paragraphs 50-1 and 50-2 of FASB ASC 740-30.
We note your disclosure on page [X] that you provided U.S. tax on approximately $[X] million of your non-U.S. earnings which you expect to repatriate in the future. Please explain these facts and circumstances in further detail, including what drove the decision of expected repatriation, and specifically tell us whether this is a change from a prior conclusion of indefinite reinvestment.
We see on page [X] that your U.S. operations have historically generated net losses and on page [X] that you intend to indefinitely reinvest undistributed earnings of your foreign subsidiaries. Please quantify for us the amount of cash, cash equivalents and investments held by foreign subsidiaries that would be subject to a potential tax impact associated with the repatriation of undistributed earnings on foreign subsidiaries. Please also tell us your consideration of providing enhanced liquidity disclosures to describe these amounts that would be subject to potential repatriation of undistributed earnings taxes to illustrate that some cash and investments are not presently available to fund domestic operations such as corporate expenditures or acquisitions without paying a significant amount of taxes upon their repatriation. We refer you to Item 303(a)(1) of Regulation S-K and Section IV of SEC Release 33-8350.<br>
slide29. Assumptions
USP has concluded that it does not intend to “close” the outside basis difference in CFC1 or CFC2
Question
What amounts should be disclosed?
Answer
Temporary difference = $200
Unrecognized DTL = $70 Example — Flat structure Disclosure of the outside basis difference T>B basis $100 B>T basis $200 Earnings = 200
Tax pool = 0 Loss = (100)
Tax pool = 0 CFC 1 USP
Tax rate = 35% CFC 2<br>
slide30. Assumptions
USP has concluded that the outside basis difference in CFC1 is indefinitely reinvested
Question
What amounts should be disclosed?
Answer
Temporary difference = $100 and unrecognized DTL = $35 Example — Tiered structure Disclosure of the outside basis difference Loss = (100)
Tax pool = 0 B>T basis $100 Earnings = 200
Tax pool = 0 USP CFC 1 CFC 2<br>
slide31. Disclose (all entities)
Amount of undistributed foreign earnings for which there is a change in assertion during the period regarding indefinite reinvestment of such earnings and explain circumstances that caused such assertion change*
The aggregate of cash, cash equivalents, and marketable securities held by foreign subsidiaries* Proposed ASU — Indefinitely reinvested foreign earnings Income tax disclosures Note: * Commonly requested in SEC comments<br>
slide32. Disclose (all entities)
Pretax income (or loss) from continuing operations disaggregated by foreign and domestic amounts*
Disaggregation of income tax expense (benefit) between foreign and domestic jurisdictions*
Disaggregation of the income taxes paid between foreign/domestic jurisdictions
Foreign income taxes paid further disaggregated for any country significant to total Proposed ASU — Disclosures about foreign and domestic amounts Income tax disclosures Note: * Existing requirement in SEC regulations<br>
slide33. Transition guidance
The proposed amendments would be applied on a prospective basis
Effective date
An effective date will be determined after consideration of all stakeholder feedback
Comment period
The proposed ASU comment period ended on September 30, 2016 Proposed ASU — Income tax disclosures Income tax disclosures<br>
slide35. Bob is a Tax Partner in the Business Tax Services practice and has more than 15 years of experience in public accounting providing services to public and private clients in a variety of industries including integrated energy, oilfield service, engineering and construction, and manufacturing and distribution.
Bob specializes in accounting for income taxes and assists clients with tax process and systems improvements and global tax provision issues including tax basis balance sheet analysis, currency issues, and uncertain tax positions.
Bob has been an instructor and speaker at internal and external tax training sessions relating to income tax accounting issues including the Tax Executive Institute and Deloitte’s Financial Reporting of Taxes Dbrief Series for Tax Executives.
Bob received a Bachelor of Business Administration degree and a Masters in Professional Accounting from the University of Texas at Austin.
rgabriel@deloitte.com Bob Gabriel<br>
slide36. Trisha Hobler, a managing director in Deloitte Tax LLP’s international tax practice, has more than 12 years of experience providing tax services to publicly held and privately owned multinational companies covering industry sectors such as oil and gas, oilfield services, telecommunications, manufacturing, and others. Trisha’s experience spans both US inbound and outbound investments and includes tax planning, tax accounting, and tax reporting obligations associated with their international footprint.
She has significant experience with ASC 740 in an international context, managing large ASC 740 and financial reporting engagements. She also leads Deloitte’s national internal ASC 740 training efforts for its international tax practice.
Trisha received a Bachelor of Science in Accounting and a Master of Science in Taxation from Texas A&M University. She is a licensed Certified Public Accountant in Texas and is a member of the American Institute of Certified Public Accountants.
thobler@deloitte.com Trisha Hobler<br>
slide37. This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.<br>