IAS 1/IAS 12 — Presentation of payments of non-income taxes
At its March 2012 meeting, the Committee received a request to clarify the presentation of production-based royalty payments payable to one taxation authority that are claimed as an allowance against taxable profit of another taxation authority. The request for clarification relates to whether these costs should be recognised as an operating expense or a tax expense in the statement of comprehensive income.
It was assumed that production-based royalty payments are, in themselves, outside the scope of IAS 12 Income Taxes while the tax payable to the other taxing authority is within the scope of IAS 12. On the basis of this assumption, the requests asked for clarification of whether the production-based royalty payments can be viewed as a prepayment of income tax payables to the other taxation authority.
At its March meeting, the Committee observed that paragraph 82(d) of IAS 1 Presentation of Financial Statements is intended to require an entity to present taxes that meet the definition of income taxes under IAS 12 within the ‘tax expense’ line item. Similarly, the Committee noted that the basis of calculation determined by the relevant tax rules should be considered rather than the manner of settlement of a tax liability or the factors relating to recipients of the tax.
Therefore, the Committee concluded that production-based royalties do not meet the definition of an income tax and should not be presented as an income tax expense in the statement of comprehensive income.
On the basis of this analysis, the Committee tentatively decided not to add this issue to its agenda.
At its July 2012 meeting, the staff presented comment letter analysis with respect to the tentative agenda decision; noting six comment letters. In analysing the comment letters, multiple concerns were expressed including the scope of tax expense under IAS 1, ‘net’ versus ‘gross’ treatment within the context of the scope issue related to IAS 12, ‘monetary value’ or ‘physical volume’ within the context of the scope issue related to IAS 12, collective-base assessment of the scope of income taxes under IAS 12, the adequacy of outreach activities performed and proposed changes to the wording of the tentative agenda decision.
The staff noted that all the respondents agreed with the view that the line item of ‘tax expense’ that is required by paragraph 82(d) of IAS 1 is intended to encompass taxes that meet the definition of income taxes under IAS 12. It is the basis of calculation that determines whether a tax meets the definition of an income tax. Comment letter analysis suggested that in some situations, entities might need to assess different taxes together on a collective basis to determine whether each tax meets the definition of income taxes under IAS 12.
The staff believed that the basic principle also applied to the case when assessed on a collective basis. Thus, in their view, the royalty payments should not be viewed as prepayment of the taxable profit due to another taxing authority. This is because, in accordance with the relevant tax rules, the calculation basis would not necessarily be a net amount even when assessed in combination with the taxable profit due to another taxing authority. The staff recommended that the agenda decision outline consideration to analysing multiple taxes on a collective basis, but acknowledging that the basis of the calculation of the total amount of those taxes would be a determinant factor in deciding whether those taxes meet the definition of income taxes under IAS 12.
The staff also noted that outreach did not identify a significant diversity in interpretation of the relevant accounting requirements under IAS 1 and IAS 12. In particular, outreach identified no significant diversity in interpretation of the basic principle that it is the basis of calculation that determines whether a tax meets the definition of an income tax.
In considering the staff’s recommendations, many Committee members supported the view that production-based royalty payments are, in themselves, outside the scope of IAS 12 (however acknowledging that this was an assumption in the submission) and that such payments cannot be viewed as a prepayment of income tax payables to the other taxing authority.
However, many Committee members were uncomfortable with the staff’s recommendation regarding analysing multiple taxes on a collective basis. They noted that this idea was not previously discussed, and many believed that assessment on a collective basis may result in income taxes being artificially scoped out of IAS 12. While they acknowledged that analysing multiple taxes on a collective basis was not explicitly prohibited in IAS 12, they were not certain that a collective basis assessment was intended when drafting IAS 12. Therefore, several Committee members preferred that any reference to analysing multiple taxes on a collective basis be removed. Other Committee members expressed some support for exploring the collective basis argument further.
However, the Committee ultimately decided to reaffirm its decision not to add this issue to its agenda, but with changes to the wording of the tentative agenda decision to not reflect the collective basis assessment as proposed by the staff. Committee members offered a number of other comments regarding the tentative agenda decision wording which will be handled outside of the public meeting.