Deferred taxes related to foreign interest – what you should consider under IAS 12

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Deferred taxes related to foreign interest – what you should consider under IAS 12

fotoflexer-photodeferredtaxes.jpg

Investing in subsidiaries, branches or associates, as well as having interest in a joint venture, would trigger some consequences from a deferred tax standpoint.

These consequences are:

  • The existence of undistributed profits of subsidiaries, branches, associates and joint ventures;

  • Differences in foreign exchange rates when a parent and its subsidiary are based in different countries; and

  • A reduction in the book value of an investment (the application of the accounting method of fair value under IFRS 9 may result in a reduction of the book value of an investment)

From an International Financial Reporting Standards (IFRS) perspective, particularly International Accounting Standard (IAS)-12 – Income Taxes -, these items may cause a difference between the book value (either individual or consolidated) of the investment and its tax base (typically the original cost of the equity).

This temporary difference is known as outside basis and is given in the tax jurisdiction of the parent company, for example, in case of having a distribution of profits from a foreign investment, a tax liability should arise for the parent entity.

Even so, IAS -12 includes some cases by which the tax liability may not be recognised by the parent entity when:

  • the parent or investor is able to control the timing of the reversal of the temporary difference; and

  • it is probable that the temporary difference will not be reversed in the near future.

In this regard, a detailed analysis is required by all consolidation levels in a group to conclude if the parent entity must recognise a tax liability for outside basis in its financial statements.

Taking this into account, different perspectives may be found between US-GAAP [Generally Accepted Accounting Principles] and IFRS when the outside basis is analysed. For instance:

From a US-GAAP perspective, the outside basis is focused on undistributed profits, and the only exception to recognising a deferred tax liability in the parent company is to demonstrate a higher income tax rate in the foreign country where the subsidiary (which distributes the profit) is located. A full tax credit for the income tax paid abroad may be applied by the parent company therefore.

From an IFRS perspective a deeper analysis must be done to conclude if the outside basis may cause a deferred tax asset or a deferred tax liability. Some items under analysis are, in the case of a deferred tax liability to demonstrate:

  • that the parent company has effective control of the dividends policy upon the subsidiaries; and

  • the dividends will not be distributed in the foreseeable future.

In the case of a deferred tax asset:

  • to demonstrate http://bit.ly/15sL2oFenough taxable income in future years.

In the case of having a deferred tax asset related to outside temporary differences, further analysis must be done to come to a conclusion regarding its recognition in the financial statements. This analysis includes basically the ability of the parent entity to generate future taxable income.

Lessons

  • The outside basis conclusion may be different from a US-GAAP perspective concerning IFRS –IAS-12.

  • This analysis should be made from bottom to top of all consolidation levels to have full documentation regarding foreign interest, including full control in the parent company upon undistributed dividends in all subsidiaries, and joint ventures.

José Abraján (jose.abrajan@mx.ey.com), Senior Manager – Tax Accounting, EY Mexico

Guadalupe García (guadalupe.garcia@mx.ey.com), Senior – Tax Accounting, EY Mexico

Gustavo Gómez (gustavo.gomez@mx.ey.com), Partner – Corporate Taxes, EY Mexico

more across site & shared bottom lb ros

More from across our site

It should be easy for advisers to be transparent about costs, Brown Rudnick partner Matthew Sharp said in response to exclusive ITR in-house data
The sprawling legislation phases out Joe Biden-era green tax incentives for businesses; in other news, the UK will reportedly maintain its DST despite US pressure
New French legislation should create a more consistent legal environment for taxing gains from management packages, say Bruno Knadjian and Sylvain Piémont of Herbert Smith Freehills Kramer
The South Africa vs SC ruling may embolden the tax authority to take a more aggressive approach to TP assessments, an adviser tells ITR
Indirect tax professionals now rate compliance as a bigger obstacle than technology and automation; in other news, Italy approved a VAT cut on art sales
AI-powered tax agents are likely to be the next big development in tax technology, says Russell Gammon of Tax Systems
FTI Consulting’s EMEA head of employment tax and reward tells ITR about celebrating diversity in the profession, his love of musicals, and what makes tax cool
Canadian Prime Minister Mark Carney and US President Donald Trump have agreed that the countries will look to conclude a deal by July 21, 2025
The firm’s lack of transparency regarding its tax leaks scandal should see the ban extended beyond June 30, senators Deborah O’Neill and Barbara Pocock tell ITR
Despite posing significant administrative hurdles, digital services taxes remain ‘the best way forward’ for emerging economies, says Neil Kelley, COO of Ascoria
Gift this article