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Striking the right balancePwC Budget Seminar1 March 2013

- Tax Accounting

Tax Accounting

An OverviewAn Overview

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Tax Accounting – what does it cover?

A company could be required to pay a number of taxes, which couldinclude:

• Business Tax

• Customs (Excise Tax)

• Payroll Tax

• Withholding Tax

• Corporate Tax

• Capital Gains Tax

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• Capital Gains Tax

• Transfer/Property Tax

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Tax accounting covers the accounting for taxes based on INCOME

What is Tax Accounting?

Total Income TaxExpense/Benefit

(F/S expense or benefit)

=Current TaxExpense/Benefit

(Tax Return + UTPs)

+Deferred TaxExpense/Benefit

(Matching Principle)

Current tax expense - estimate of taxes payable per the tax return

Deferred tax expense (or benefit) is the change in the estimatedfuture tax effects attributable to:

(F/S expense or benefit) (Tax Return + UTPs) (Matching Principle)

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future tax effects attributable to:

•temporary differences; and

•carry forwards (losses, unutilised Foreign Tax Credits)

Tax Accounting – Basic Framework

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Basics of Tax Accounting

Potential Temporary Differences

• Depreciation• Depreciation

• Leave Provisions

• Warranty Reserves

• Inventory Obsolescence Reserves

• Tax Deductible Intangibles

• Any Book to Tax Differences that affects Taxable Income but such

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• Any Book to Tax Differences that affects Taxable Income but suchaffect will reverse itself in a future year.

Basics of Tax Accounting

Illustrative Example

• An asset is purchased for $10,000.

• Financial Accounting: Straight Line Method - 4 Year Useful Life• Financial Accounting: Straight Line Method - 4 Year Useful Life

• Tax Return Accounting: Accelerated Method - 5 Year Useful Life

• At the end of the useful life, Book Value and Tax Return basis are bothzero.

YEAR GAAP TAX RETURNGROSS

TEMPORARYDIFFERENCE

COST 10,000 10,000 N/A

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COST 10,000 10,000 N/A

YEAR 1 BASIS 7,500 5,500 (2,000)

YEAR 2 BASIS 5,000 3,500 (1,500)

YEAR 3 BASIS 2,500 1,750 (750)

YEAR 4 BASIS 0 750 750

YEAR 5 BASIS 0 0 0

Basics of Tax Accounting

Illustrative Example (cont’d)

12000

2000

4000

6000

8000

10000

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0

2000

Cost Year 1 Year 2 Year 3 Year 4 Year 5

GAAP Tax Return

Impact of Changes in Tax Law

Example of changes that may impact Tax Accounting balances:

• Extension of Tax Incentives• Extension of Tax Incentives

- Through impact on ‘enacted’ current or future tax rate

• Safe Harbour for Capital Gains

- By removing uncertainty and hence the need for reserves foruncertain tax position related to disposal of substantial interests

Example of changes that may only impact current tax expense:

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Example of changes that may only impact current tax expense:

• Enhanced deduction under PIC Scheme

• Tax Rebates

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Tax Accounting

Recent TrendsRecent Trends

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The tax area represents a significantpercentage of total restatements of financialstatements for US listed companies

ASC-740 RestatementsASC-740 Restatements

600

800

1,000

1,200

1,400

1,600

1,800

2,00010.0%

10.5%

11.2%

8.3%8.6%

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Source: Audit Analytics®

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0

200

400

600

2006 2007 2008 2009 2010

Total Restatements Tax Restatements

Demand for transparency of financial reporting

Areas of focus by regulatory authorities

• Valuation allowances – Realisability of tax losses

• Indefinite reinvestment of undistributed earnings

• Uncertain tax positions and tax reserves (transfer pricing issues!)

• Disclosure requirement – effective tax rate transparency (foreignearnings); early warning disclosures

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Audience question

Which of these business issues is your biggest concern overthe next twelve months:the next twelve months:

1. Compliance

2. Tax accounting and reporting

3. Transfer Pricing

4. Tax function effectiveness

5. Mergers and Acquisitions

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5. Mergers and Acquisitions

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What business issues will be the main tax concernsover the next 12 months?

51%Transfer pricing

17%

23%

25%

29%

40%

49%

51%

Dispute resolution

Tax compliance

Cross-border tax structuring

VAT/GST

Mergers & acquisitions

Tax accounting and reporting

Transfer pricing

Tax accountingand reportingand transferpricing are thelargestconcerns

49%

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Source: Global Tax Monitor Survey (Base: 636 primary buyers of tax services (y/e Q1 2012))

13%

13%

0% 10% 20% 30% 40% 50% 60%

Tax function effectiveness

Customs

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49%

Tax Accounting

GAAP TrendsGAAP Trends

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Undistributed Foreign Earnings

A deferred tax liability shall be recognized for thefollowing types of taxable temporary differences:

• An excess of the amount for financial reporting over thetax basis of an investment in a subsidiary;

• An excess of the amount of financial reporting over thetax basis of an investment in a 50-percent-or-less-

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tax basis of an investment in a 50-percent-or-less-owned investee for a corporate joint venture that isessentially permanent in duration.

Undistributed Foreign Earnings

Does not apply to entitieswho do not include theresults of subsidiaries,

branches, and jointventures in their

financial statements via

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financial statements viaconsolidation or equitymethod of accounting.

Undistributed Foreign Earnings - IFRS

Investment in Subsidiaries:

Can parentcontrol the timing

of the reversal?

Recognise TD

Is it probable thatthe TD will reversein the foreseeable

future?

Recognise TD

NO

YES

YES

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future?Do not provide

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NO

* TD = Temporary Difference

Undistributed Foreign Earnings – US GAAP

Indefinite Reinvestment Criteria:

• Repatriation presumption is overcome with “sufficient• Repatriation presumption is overcome with “sufficientevidence”

‘Sufficient evidence’

• Document intent, ability, and specific plans for reinvestment(Asserting that the parent does not need the cash is NOT sufficient)

• Should align with business model

• Evidence of specific plan for reinvestment for each subsidiary

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• Evidence of specific plan for reinvestment for each subsidiary

Tax Free Repatriation of Earnings

• Singapore NIL withholding tax on dividends

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Identification of Applicable DTA / DTL Tax Rate

Principle:• Tax rate applicable on reversals

Common Fact Patterns where Errors Arise:

• Company enjoying a reduced rate does not conduct item by itemanalysis to determine the applicable rate

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analysis to determine the applicable rate• Company simply uses the next year’s applicable tax rate

• Expiration of tax holidays

• Company does not keep a fixed asset reversal table by years

Identification of Applicable DTA / DTL Tax Rate

Illustrative Example

• An asset is purchased for $36,000.

• Financial Accounting: Straight Line Method - 6 Year Useful Life• Financial Accounting: Straight Line Method - 6 Year Useful Life

• Tax Return Accounting: Accelerated Method - 3 Year Useful Life

Zero % 17%

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Book 6,000 6,000 6,000 6,000 6,000 6,000

Tax (12,000) (12,000) (12,000) - - -

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Tax (12,000) (12,000) (12,000) - - -

Difference (6,000) (6,000) (6,000) 6,000 6,000 6,000

DTA / (DTL) (1,020) (1,020) (1,020) 1,020 1,020 1,020

Tax Return to Provision True-up

Things to Consider:

have significant true-up adjustments at

•(ECI) Computation

•Use of Prudence

•Permanent verses Temporary Classification

•Timing of Adjustment•1 year lag for calendar year end companies

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•1 year lag for calendar year end companies•2 year lag for non-calendar year endcompanies

Uncertain Tax Positions

A Tax Position is:

• A position in a previously filed tax return orexpected to be taken in a future tax return;

• A decision not to file a tax return;

• Allocation or a shift in income between jurisdictions;and

• A decision to classify a transaction, entity , or other

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• A decision to classify a transaction, entity , or otherposition in a return as tax exempt.

Uncertain Tax Positions

Examples of Tax Positions:

• Position taken or expected to be taken on a tax• Position taken or expected to be taken on a taxreturn (e.g. – capital vs. revenue expenditures)

• Permanent establishment

• Transfer pricing

• Withholding tax

• Treaty positions

• IP migration

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• IP migration

• Cross-border financing

• Tax holidays

Uncertain Tax PositionsMeasurement of Benefit – Example

A company does not bring a gain of $100 to tax on the basis that is itcapital in nature.capital in nature.

Distribution of potential outcomes has a binary outcome:

1. If the position is sustained, the entire as-filed tax return amount(i.e. 100% of the benefit) will be accepted.

2. If the position is lost upon challenge, none of the as-filed taxreturn amount (i.e. zero benefit) will be accepted.

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• IFRS or Singapore FRS applies the “weighted-average” or “single bestestimate “ approach: All or Nothing

• US GAAP determines the largest amount that has a cumulativeprobability of >50% of being ultimately realized: All or Nothing

return amount (i.e. zero benefit) will be accepted.

Other Items to Consider

• Permanent verses Temporary Classification

• Balance Sheet Classification of Deferred TaxBalances (Current verses Non-Current)

• US GAAP to STAT Accounting Differences

• Business Combinations

• Intra-Period Allocation

• Interim Reporting

• Intercompany Transactions

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• Intercompany Transactions

Thank you

Mahip Gupta Director +65 6236 3642 Mahip.Gupta@sg.pwc.com

Joan Neely Manager +65 6236 3707 joan.s.neely@sg.pwc.comJoan Neely Manager +65 6236 3707 joan.s.neely@sg.pwc.com

This presentation has been prepared by PwC for general guidance on matters of interest only, and is not intended to provide specific advice onany matter, nor is it intended to be comprehensive. No representation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this presentation, and, to the extent permitted by law, PwC firms do not accept or assume anyliability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the informationcontained in this presentation or for any decision based on it. If specific advice is required, or if you wish to receive further information on anymatters referred to in this presentation, please speak with your usual contact at PwC or those listed in this presentation.

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