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The new standard of taxation

The impact on company tax of international financial reporting standards,
which listed companies across Europe must adopt from the beginning of this year
for their consolidated accounts.

In countries such as the UK, where accounts form the starting point for tax
calculations and individual companies are allowed to use IFRS in their accounts,
the impact could be significant.

At the other end of the spectrum, there could be little or no impact. In
Germany, for example, accounts based on national GAAP will still be used as the
basis for tax computations.

Many countries fall in between. In Italy, although tax computations start
with the accounts and IFRS can be adopted, the tax laws have largely been
rewritten to neutralise much of the effect. France requires national GAAP for
tax purposes, but its IFRS convergence policy has itself had some tax impact.

Some tax authorities, such as the UK and Ireland, have been consulting on
each other’s approach. Part of the challenge is that some very complex
accounting rules have to be digested first. Where tax authorities have decided
to draft tax laws or rules to adjust for the IFRS impact (as HMRC has been doing
with financial instruments), the results again can be extremely complex.

“This has raised the whole issue of how dependent we are on financial
statements for tax,” says Gillian Wild, tax director at PricewaterhouseCoopers.
“Is it becoming too complicated?”

? Accounts prepared under IFRS are acceptable for tax purposes
? Under fair value rules companies will pay tax on uncrystallised gains
? There is still some confusion as to the impact on corporate tax bills
“The Irish legislation published in the Finance Act 2005 regarding the tax
implications of IFRS was generally very broad,” says Seamus Hand, a KPMG tax
partner in Ireland. “The Revenue is now finalising guidelines on the application
of that legislation. One of the main implications of IFRS generally, is to
increase volatility in the accounts, which will have a tax impact.”

? Tax basis is derived from statutory accounts which must stick with French GAAP

? But French accounting rules are converging with IFRS, thus impacting tax bills

? “Neutrality principle” applied to negate impact
? Tax-to-book differences allowed
? Where impact of the first application of the new rules exceeds €150,000, it
will be split over five years
“The ‘convergence principle’ resulted in major changes for the definition of
assets and liabilities, depreciation, booking of mergers, etc,” says Michel
Taly, partner at Landwell. “The introduction of IFRS impacted the tax basis less
dramatically than one could have feared.”

? IFRS rules apply only to consolidated accounts of listed companies and for
individual and consolidated accounts of banks
? Tax derived from individual accounts, so there is little impact
? Only banks will be affected
Ernst & Young Spain says that the solution for the banks will be to generate
one set of accounts based on Spanish GAAP for tax purposes and another set under

? Annual accounts are the basis for tax computations and UK companies
have option of IFRS at entity level
? Time limits on elections to amortise goodwill
? Impact from timing differences in recognition of income or expense
particularly for telecoms, utilities and leasing
“The most important area of change is probably in relation to financial
instruments,” says Sarah Lane, a tax partner at KPMG. The Revenue has said the
tax on transitional adjustments on financial instruments will largely be
deferred until 2006 and then spread over 10 years.

? Accounts form the starting point for tax computations
? All types of companies (listed and unlisted) have option to use IFRS in annual
? Impact on tax payments is therefore likely
? Concept of ‘goed koopmansgebruick’ or ‘good housekeeping’ applies to accounts

? Being in line with accounting standards is an indication of this
? But IFRS adoption creates uncertainty over what is considered ‘good
housekeeping’ “Accounts can be challenged for tax purposes if they are not in
line with good housekeeping,” says Deloitte tax partner John Cullinane.

? Poland allowing IFRS to be applied in the annual accounts of listed companies

? Polish Corporate Income Tax (CIT) law has extensive classification rules for
taxable income and taxallowable costs
? Rules result in significant differences in comparison to Polish Accounting
Regulations ? Adoption of IFRS likely to further increase the complexity of CIT
computations According to PricewaterhouseCoopers Poland, no changes to the CIT
law have been made as a result of the adoption of IFRS. It is also unlikely that
any changes that sanction the use of IFRS to measure taxable income will be made
in the foreseeable future.

? IFRS not allowed in individual company accounts (except for
information purposes) ? Basis for computation of taxes will remain financial
statements under German GAAP ? German tax administration has not adopted any
IFRS measures PricewaterhouseCoopers Germany says it is fair to assume that the
German tax administration will closely watch the application of IFRS in
consolidated financial statements, as these may provide valuable information,
which may be used in tax field audits.

? Company accounts form starting point for tax calculations
? Listed companies and those subject to a regulatory authority such as the Bank
of Italy have option of using IFRS in individual entity accounts
? From 2006 same companies must adopt IFRS
? Companies allowed to make an adjustment to negate elimination of goodwill
amortisation under IFRS
? Manufacturing companies will suffer when first adopting IFRS because it uses
FIFO to value stock whereas Italian GAAP allows LIFO
“The tax rules have been largely rewritten to neutralise the effect of IFRS,”
says David Nickson, a partner at Ernst & Young.

? Individual entity accounts used for Belgian tax based on Belgian
accounting standards ? IFRS forum established to work on framework to enable
Belgian GAAP to converge with IFRS
According to Deloitte Belgium, research indicates that adopting IFRS for entity
accounts would cause greater profit and tax volatility. Construction and
automotive vehicles sectors could be taxed harder than others.

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Philip Hammond