Chapter 16: Income Taxes
- Page ID
- 97952
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)Double Irish with a Dutch Sandwich
In October 2014, readers of business periodicals may have wondered if the headlines were describing the writers' lunch orders. However, the news about the "Double Irish" and the "Dutch Sandwich" dealt with the more complicated issue of multinational tax avoidance. In October 2014, the government of Ireland announced changes to legislation that would effectively phase out the "Double Irish" tax-planning structure favoured by many American technology companies such as Apple, Google, LinkedIn, IBM, Yahoo, and Microsoft. The structure, while perfectly legal, was criticized because it resulted in American corporations paying very little tax on their operations outside of the United States. Some critics have claimed that these types of structures allow multinational companies to avoid paying an equitable share of the tax burden.
The structure required the incorporation of two Irish companies, one of which was considered by Irish law as being resident of an offshore, low-tax jurisdiction (typically countries like Bermuda or the Bahamas). Through a series of arrangements and transactions involving the licensing of intellectual property, the parent company could essentially move profits out of a high-tax jurisdiction to a low-tax jurisdiction. The "Dutch Sandwich" involves the addition of another subsidiary incorporated in the Netherlands, which takes advantage of the European Union (EU) rules that allow tax-free transfers between companies resident in EU countries.
The legislation introduced by the Irish government will eliminate the effectiveness of the structure because new companies registered in Ireland will now also have to be resident in Ireland. Critics have noted, however, that the legislation only applies to newly incorporated companies and that existing companies will have until 2020 to comply with the rules. It was also noted that, at the same time, the Irish government introduced a "knowledge development box," which would essentially allow for a lower tax rate on profits derived from intellectual property. Other critics observed that eliminating the "Double Irish" structure might simply result in EU-based tax havens such as Malta becoming more popular.
Although the effects of the new legislation have yet to be fully realized, the long time-frame allowed in the grandfather clause will likely mean that companies will simply find other ways to minimize their tax payments. The fact that companies invested substantial resources in the planning and development of these tax structures should make it clear that income taxes are a significant issue for company management. Income taxes can be a material expense item on many companies' income statements, so the use of these types of tax structures should not be surprising.
(Source: The Economist, 2014)
After completing this chapter, you should be able to:
- Explain the relationship between taxable profit and accounting profit and calculate current taxes payable.
- Explain what permanent and temporary differences are and describe the deferred tax effects of those differences.
- Calculate the deferred tax effects of temporary differences and record the journal entries for current and deferred taxes.
- Determine the effect of changes in tax rates and calculate current and deferred tax amounts under conditions of changing rates.
- Analyze the effect of tax losses and determine the appropriate accounting of those losses.
- Explain the rationale for the annual review of deferred tax assets and describe the effects of this review.
- Prepare the presentation of income tax amounts on the balance sheet and income statement and explain the disclosure requirements.
- Explain the key differences between the treatment of income taxes under IFRS and ASPE.
Introduction
The levy of taxes is a well-established method for governments to raise the funds necessary to carry out its various programs and initiatives. There are, of course, always vigorous debates about the appropriate level of taxation and the uses to which the taxation proceeds are put, but it is an inescapable truth that governments require some form of taxation revenue to function. One form of taxation that is commonly used is an income tax. Most of us are familiar with the application of personal income tax, as this type of tax is levied on employment and other forms of personal income. Governments also raise funds through assessing income taxes on corporate profits. This practice raises some interesting and complex accounting questions, and it is these questions that will be addressed in this chapter. We will not, however, be examining the processes involved in preparing corporate tax returns or the development of sophisticated tax structures like the one described in the opening vignette, as our focus is on the financial accounting and reporting issues. As well, we will not be looking at other forms of taxation, such as value-added taxes or payroll taxes, as these topics have been discussed in previous chapters.
Chapter Organization