E.11 Deferred Taxes for Outside Basis Differences
E.11.1 Investment in a Subsidiary or a Corporate Joint Venture That Is Essentially Permanent in Duration
Under U.S. GAAP, a DTL is not recognized when the excess of
financial reporting basis over tax basis in a domestic subsidiary or a domestic
corporate joint venture that is essentially permanent in duration arose in
fiscal years on or before December 15, 1992, unless the temporary difference
will reverse in the foreseeable future. If the temporary difference arose in
fiscal years after December 15, 1992, a DTL must be recognized for the excess
book over tax basis “unless the tax law provides a means by which the investment
in a domestic subsidiary can be recovered tax free” and the entity expects that
it will ultimately use that means in accordance with ASC 740-30-25-3.
In accordance with ASC 740-30-25-18(a), a DTL is generally not recognized for
financial reporting basis in excess of tax basis in a foreign subsidiary or a
foreign corporate joint venture that is essentially permanent in duration unless
the difference is expected to reverse in the foreseeable future.
ASC 740-30-25-9 states that a DTA “shall be recognized for an excess of the tax
basis over the amount for financial reporting of an investment in a subsidiary
or corporate joint venture that is essentially permanent in duration [domestic
or foreign] only if it is apparent that the temporary difference will reverse in
the foreseeable future.” The need for a valuation allowance must also be
assessed.
Note that in accordance with paragraph 64 of ASU 2015-10, the above exception to
recognizing deferred taxes does not apply to partnerships (or other pass-through
entities).
See Section 3.4 for detailed guidance on
the accounting under ASC 740 for outside basis differences.
Under IFRS Accounting Standards, paragraph 39 of IAS 12 requires
recognition of a DTL for all taxable temporary differences associated with any
form of investee (domestic or foreign) unless (1) “the parent . . . is able to
control the timing of the reversal of the temporary difference” and (2) “it is
probable that the temporary difference will not reverse in the foreseeable
future.”
In addition, paragraph 44 of IAS 12 states that a DTA is
recognized for all deductible temporary differences associated with any form of
investee (domestic or foreign) “to the extent that, and only to the extent that,
it is probable that . . . the temporary difference will reverse in the
foreseeable future [and] taxable profit will be available against which the
temporary difference can be [used].”
E.11.2 Equity Method Investee (That Is Not a Corporate Joint Venture)
Under U.S. GAAP, a DTL is recognized on the excess of the financial reporting
basis over the tax basis of the investment. ASC 740-30-25-5 states, in part,
that “[a] deferred tax liability shall be recognized for [an] excess of the
amount for financial reporting over the tax basis of an investment in a
50-percent-or-less-owned investee except as provided in paragraph 740-30-25-18
for a corporate joint venture that is essentially permanent in duration.”
Similarly, an investor that holds a noncontrolling interest (in
general, less than 50 percent ownership) in an investment that is not a
corporate joint venture that is essentially permanent in duration (foreign or
domestic) always recognizes a DTA for the excess tax basis of an equity
investee over the amount for financial reporting purposes. As with all DTAs, in
accordance with ASC 740-10-30-18, realization of the related DTA “depends on the
existence of sufficient taxable income of the appropriate character (for
example, ordinary income or capital gain) within the carryback, carryforward
period available under the tax law.” If all or a portion of the DTA is not more
likely than not to be realized, a valuation allowance is necessary.
See Section 12.3.1 for
additional guidance on deferred tax consequences of an investment in an equity
method investment.
Under IFRS Accounting Standards, the guidance in paragraph 39 of
IAS 12 on taxable temporary differences, and in paragraph 44 of IAS 12 on
deductible temporary differences (see Section E.11.1), applies to the accounting
for all outside basis differences associated with investments, regardless of the
form of the investee (i.e., subsidiary, branch, associate, or interests in joint
arrangements).