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Income Taxes

Date recorded:

The Board held a brief discussion of three issues noted for resolution before the joint FASB/IASB exposure draft on income taxes is issued.

Tax credits and investment tax credits

The Board agreed that, to be consistent with the scope exclusion in SFAS 109, 'investment tax credits' should be defined as tax credits that are directly related to the acquisition of depreciable assets.

Special deductions

SFAS 109 has explicit requirements for certain 'special deductions' that are a feature of the US tax system. IAS 12 does not address the issue at present. The Board agreed that IAS 12 should continue to be is silent on special deductions. The Board and staff are not aware of any problems in practice arising, although this does not mean that there is consistent treatment in practice or that problems will not arise in the future.

Weighted probability approach to determine the applicable rate

The Board agreed that that the rate used to measure deferred tax assets and liabilities should continue to be simply the rate expected to apply. This was not an expected value notion, but rather a best guess of the rate that would be applied, given the nature of the related income.

The use of the undistributed or distributed rate

The Board discussed the situation of certain entities (such as Real Estate Investment Trusts) that qualify for a special tax rate (often significantly lower than the normal corporate income tax rate) provided that the Trust distributes a given percentage of its income as a dividend on an annual basis.

The Board agreed that an entity should use the rate that it expects will applying when measuring current or deferred tax assets or liabilities. The Board acknowledged that this was a change in its previous decisions but thought the concept of requiring the rate that is expected to apply was a concept already contained in both Statement 109 and IAS 12. Some Board members were very unhappy about the consequences of this decision, but were not willing to dissent from the proposal package because of it.

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