IAS 12 — Deferred tax related to a subsidiary's undistributed profits

Date recorded:

Agenda Paper 3


The Committee received 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 states 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 states 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.

Staff analysis

Respondents to outreach performed by the staff observe differences in accounting for such temporary differences. Some are taking View 1 while some are taking View 2, although most of the respondents support View 2.  The staff analysed that IAS 12:39 requires an entity to recognise a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, unless the recognition exception in IAS 12:39 applies. The staff conclude that taxable temporary differences arise from the undistributed profits as the parent expects to recover the carrying amount of the investment through distributions of profits. The staff also conclude that the recognition exception does not apply because the parent expects the subsidiary to distribute profits in the foreseeable future. The parent, therefore, should use the distributed tax rate of 20% to measure the deferred tax liabilities in accordance with IAS 12:51 and this reflects the outcome of View 2.

Moreover, the staff consider that the new IAS 12:57A does not apply to internal distributions of a reporting entity because they are eliminated on consolidation and not a dividend in the context of consolidated financial statements. In the fact pattern, the taxable temporary difference is reflecting the tax consequences of recovering the investment in the subsidiary through distribution of profits rather than the tax consequences of dividends.

IAS 12:52A applies when an entity pays a higher or lower tax rate depending on whether it distributes profits or not. However, it is also not applicable because the measurement of the tax in the fact pattern is resulting from the tax consequences of distributions of profits.

Staff recommendation

The staff recommended that the Committee publish a tentative agenda decision explaining why neither an interpretation of, or amendment to, IAS 12 is necessary.


In general, the Committee members agreed with the staff analysis and conclusion that deferred tax should be recognised for the fact pattern described. Quite a number of Committee members did not agree that the dividend being eliminated on consolidation is a good reason to explain why IAS 12:57A does not apply. The dividend does exist at the reporting entity level. In view of this, the staff suggested to stay silent instead of saying that the dividend does not exist in the tentative agenda decision. In addition, the staff clarified that, instead of saying the dividend is eliminated on consolidation, what they are trying to emphasise is that the assessment is from the perspective of the reporting entity. Although there is a dividend, the reporting entity is not the entity recognising the liability to pay such dividend. That is why IAS 12:57A does not apply. The staff clarified that they are not implying that there is no tax consequence but the tax consequence is arising from the recovering of the investment of subsidiaries instead of from the dividend.

One Committee member pointed out that, in some countries, not all reserves are available for distribution. In order to make it clear when deferred tax should be recognised, it would be useful to state that deferred tax is recognised on the reserves that are available for distribution and the entity has the intention to distribute. Another Committee member considered that specifying the two conditions IAS 12:39 and analysing why those two conditions are not satisfied for recognition exception could explain the reason for recognising such deferred tax arising from investments in subsidiaries more clearly. The staff agreed and will add all these items in the tentative agenda decision.

The Committee decided by, a vote of 11:2, to publish a tentative agenda decision with the amendments discussed and explaining why neither an interpretation of, nor amendment to, IAS 12 is necessary.

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