E.6 Tax Consequences of Intra-Entity Sales

The FASB has concluded that an entity’s income statement should not reflect a tax consequence for intra-entity sales of inventory in situations in which any profit (loss) is eliminated in consolidation. The current tax expense from the sale of inventory is deferred upon consolidation (as a prepaid income tax) and is not recorded until the inventory is sold to an unrelated party. In addition, under U.S. GAAP, the buyer is prohibited from recognizing deferred taxes for the temporary difference between the carrying amount of the inventory in the consolidated financial statement and its tax base. Other than for inventory, there are no differences between U.S. GAAP and IFRS Accounting Standards related to the income tax accounting of the tax consequences of intra-entity sales of other assets. See Section 3.5.6 for additional guidance.

Under IFRS Accounting Standards, there is no exception related to intra-entity transfers of inventory. Accordingly, current and deferred tax effects must be recognized for intra-entity sales in accordance with the general principles of IAS 12. For example, an intra-entity sale creates a temporary difference between the book carrying amount of the asset and its tax base. When intra-entity transactions occur between entities that are operating in different tax jurisdictions (e.g., foreign or state tax jurisdictions) or are subject to different tax rates, the rate applied to the temporary difference is the rate at which the difference is expected to reverse, which generally is that of the buyer’s tax jurisdiction. If the buyer’s tax rate is different from the seller’s tax rate, the deferred tax recognized may not entirely offset the current tax expense resulting from the intra-entity sale.