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IAS 12 Selection of applicable tax rate for measurement of deferred tax relating to investment in associate

Date recorded:

The Project Manager introduced the agenda paper. It referred to a request for clarification received by the Interpretations Committee about the requirement for the selection of the applicable tax rate for the measurement of deferred tax relating to an investment in an associate in a multi-tax rate jurisdiction. The submitter had asked how the tax rate should be selected when local tax regulations prescribed different tax rates for different manners of recovery. The staff noted that paragraph 51 of IAS 12 indicated that deferred taxes should reflect the tax rate consistent with the expected manner of recovery or settlement. He said that if an entity expected to receive one part of the capitalised profit as dividend, and another part as sell or liquidation, then different tax rates would be applied.

He also indicated that according to the respondents there was diversity in practice. He said that many respondents indicated that the rate for dividends should be used unless there was a clear plan to sell. On the other hand, other respondents indicated that the tax rate applicable to a sale should be used unless there was evidence that dividends would be received. While others indicated that there would be a bifurcation between the amount expected to be recovered by dividends and by sale or liquidation. The staff had concluded that the responses reflected different fact patterns instead of diversity in practice. The staff believed that the standard was clear and consequently, the staff concluded not to add the issue to its agenda.

Several Committee members expressed concern for using the term “capitalised profits” in the draft tentative agenda decision. One member said that it should be changed because the requirement was to recognise temporary differences which could be greater or less than the capitalised profits.

One Committee member said that although the principle was clear, it would be difficult to exercise judgement because an entity would not know how the temporary difference would reverse, because the entity did not have control of the investee. The Project Manager indicated that the assessment should be made based on past experience to which the Interpretation Committee member said that in general an entity did not have that information.

The Chairman said that in this agenda decision the staff reached its conclusion that there was no diversity because they were actually different facts and circumstances. He asked whether they should make a reference to diversity in practice in the agenda decision. He would prefer to remove that reference. Some members agreed because they said that IAS 12 contained sufficient guidance while others indicated that they did not have sufficient information to reach that conclusion. The Chairman indicated that he was concerned by the lack of consistency in their approach as to whether or not to make references to diversity in practice in their agenda decisions. The Senior Director of Technical Activities would prefer to mention that there was diversity in the application of the principle instead of diversity in practice, and he said that the reference to diversity in practice would involve both application of the principle and facts and circumstances.

The Chairman called a vote and only five members agreed to take out the reference to diversity in practice of the agenda decision. He concluded that they would articulate the wording based on the comments expressed by the Senior Director of Technical Activities, i.e. by reference to the fact that there was diversity in the application of the standard.

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