IAS 12 — Deferred tax related to an investment in subsidiary

Date recorded:

Agenda Paper 4


In its March 2020 meeting, the Committee discussed a submission on the accounting for deferred tax related to an investment in a subsidiary. In the fact pattern described, the subsidiary operates in a jurisdiction in which a 20% tax rate applies only when it makes a profit distribution. The tax paid by the subsidiary is its own tax liability and not a withholding tax paid on behalf of its parent. The submitter asks if deferred tax should be recognised on the temporary difference arising on any undistributed profit. View 1 stated that, applying IAS 12:52A, no deferred tax should be recognised, because the tax is payable only upon actual distribution. Therefore, a 0% tax rate is applied to the undistributed profits that create the taxable temporary difference. View 2 stated that the entity should recognise deferred tax on the taxable temporary difference applying IAS 12:39-40. IAS 12:52A and the newly added IAS 12:57A are not applicable in relation to investments in subsidiaries. In the meeting, the staff concluded View 2 should be taken and did not recommend to add the matter to the Committee's standard-setting agenda but to publish a tentative agenda decision. Most of the Committee members agreed with that conclusion.

Of the eleven responses received to the tentative agenda decision, eight agreed with not adding the matter to the Committee's standard-setting agenda. Two respondents did not provide a view on the technical analysis and conclusion but expressed concerns on the consequences of the agenda decision's application on different transactions. One respondent considered IAS 12 does not provide an adequate basis for the Committee's conclusion.

Staff analysis

The respondents who did not provide a view on the conclusion expressed concerns about the outcome of application of the accounting described in the agenda decision to two changes in a group's legal structure—these are: creating a new parent and combining a parent and subsidiary into a single legal entity. One of these respondents highlighted that such changes in legal structures may result in an entity recognising (or derecognising) deferred tax associated with an investment in a subsidiary, yet neither the tax position of the entity nor the taxes payable upon distribution of profits is affected. These respondents therefore asked whether applying such an accounting treatment to these transactions meets the qualitative characteristics of useful financial information and appropriateness of the application of the true and fair override in IAS 1:19. The staff acknowledged that different legal structure can lead to different tax consequences. However, the different accounting outcome is actually reflecting the differing nature, i.e. tax arises from the recovery of the investment in the subsidiary and tax arises from the distribution to the group's shareholder. In addition, the staff commented that the applicability of the requirements in IAS 1:19 to the transactions described (change in the legal structure) is beyond the scope of the matter addressed in the submission.

Another respondent disagreed with the Committee's conclusion that the principles and requirements in IAS 12 provide an adequate basis for the accounting of the fact pattern described. The respondent considered that the conclusion in the tentative agenda decision constitutes an interpretation of the requirements in IAS 12 because the staff analysed not only the wording in IAS 12 prior to amendments made to the Standard in 2000 but also the purpose of the amendment and an agenda paper for an IASB meeting in October 2000. The staff continued to consider IAS 12 provides adequate basis and quoted IAS 12:39 & 51 as the basis of the conclusion. They further explained that the discussion on amendments made to IAS 12 in 2000 was to ensure the Committee had all relevant information available in reaching an informed decision.

Staff recommendation

The staff recommended that the Committee finalise the tentative agenda decision with an editorial change to the wordings.


The Committee members had no comments on this issue.

The Committee decided, by a unanimous vote, to finalise the agenda decision.

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