Deloitte
Accounting Research Tool
...
Chapter 3 — Book-Versus-Tax Differences and Tax Attributes

3.4 Outside Basis Differences

3.4 Outside Basis Differences

ASC 740-10
25-1 This Section establishes the recognition requirements necessary to implement the objectives of accounting for income taxes identified in Section 740-10-10. The following paragraph sets forth the basic recognition requirements while paragraph 740-10-25-3 identifies specific, limited exceptions to the basic requirements.
25-2 Other than the exceptions identified in the following paragraph, the following basic requirements are applied in accounting for income taxes at the date of the financial statements:
  1. A tax liability or asset shall be recognized based on the provisions of this Subtopic applicable to tax positions, in paragraphs 740-10-25-5 through 25-17, for the estimated taxes payable or refundable on tax returns for the current and prior years.
  2. A deferred tax liability or asset shall be recognized for the estimated future tax effects attributable to temporary differences and carryforwards.
25-3 The only exceptions in applying those basic requirements are:
  1. Certain exceptions to the requirements for recognition of deferred taxes whereby a deferred tax liability is not recognized for the following types of temporary differences unless it becomes apparent that those temporary differences will reverse in the foreseeable future:
    1. An excess of the amount for financial reporting over the tax basis of an investment in a foreign subsidiary or a foreign corporate joint venture that is essentially permanent in duration. See paragraphs 740-30-25-18 through 25-19 for the specific requirements related to this exception.
    2. Undistributed earnings of a domestic subsidiary or a domestic corporate joint venture that is essentially permanent in duration that arose in fiscal years beginning on or before December 15, 1992. A last-in, first-out (LIFO) pattern determines whether reversals pertain to differences that arose in fiscal years beginning on or before December 15, 1992. See paragraphs 740-30-25-18 through 25-19 for the specific requirements related to this exception.
    3. Bad debt reserves for tax purposes of U.S. savings and loan associations (and other qualified thrift lenders) that arose in tax years beginning before December 31, 1987. See paragraphs 942-740-25-1 through 25-3 for the specific requirements related to this exception.
    4. Policyholders’ surplus of stock life insurance entities that arose in fiscal years beginning on or before December 15, 1992. See paragraph 944-740-25-2 for the specific requirements related to this exception.
  2. Subparagraph superseded by Accounting Standards Update No. 2017-15.
  3. The pattern of recognition of after-tax income for leveraged leases or the allocation of the purchase price in a purchase business combination to acquired leveraged leases as required by Subtopic 842-50.
  4. A prohibition on recognition of a deferred tax liability related to goodwill (or the portion thereof) for which amortization is not deductible for tax purposes (see paragraph 805-740-25-3).
  5. A prohibition on recognition of a deferred tax asset for the difference between the tax basis of inventory in the buyer’s tax jurisdiction and the carrying value as reported in the consolidated financial statements as a result of an intra-entity transfer of inventory from one tax-paying component to another tax-paying component of the same consolidated group. Income taxes paid on intra-entity profits on inventory remaining within the consolidated group are accounted for under the requirements of Subtopic 810-10.
  6. A prohibition on recognition of a deferred tax liability or asset for differences related to assets and liabilities that, under Subtopic 830-10, are remeasured from the local currency into the functional currency using historical exchange rates and that result from changes in exchange rates or indexing for tax purposes. See Subtopic 830-740 for guidance on foreign currency related income taxes matters.

Footnotes

6
There may be situations in which the reversal of the excess of financial reporting over tax basis is apparent because of future global intangible low-taxed income (GILTI) inclusions (e.g., excess of financial reporting over tax basis inside the controlled foreign corporation [CFC]); see Section 3.4.10.
7
Reduced to 37.5 percent for taxable years beginning after December 31, 2025.
8
An SFC includes all CFCs and all other foreign corporations (other than passive foreign investment companies) in which at least one domestic corporation is a U.S. shareholder.
9
Net tax liability under IRC Section 965 is the excess, if any, of the taxpayer’s net income tax for the taxable year in which the IRC Section 965 inclusion amount is included over such taxpayer’s net income tax for the taxable year, excluding (1) the IRC Section 965 amount and (2) any income or deduction properly attributable to a dividend received by such U.S. shareholder from any deferred foreign income corporation.
10
Additional disaggregation may be appropriate in situations in which a portion of the outside basis difference is related to intra-entity loans (see Section 9.7), basis differences that will reverse because of Subpart F inclusions (see Section 3.4.8), or GILTI inclusions (see Section 3.4.10).
11
Presentation of the component parts would still be disaggregated (i.e., a DTA in the United States would not be net on the balance sheet against a foreign withholding tax DTL).
12
In the case of an unborn FTC, the U.S. parent would also need to represent that the associated earnings will move all the way “up the chain” in a manner similar to the example above.
13
With certain exceptions, ASU 2016-01 eliminated the cost method. Exceptions include (1) QAHPs that are not eligible for the equity method and elect not to use the proportional amortization method and (2) investments in Federal Home Loan Bank and Federal Reserve Bank stock issued to member financial institutions.
14
Treasury regulations promulgated under IRC Section 704(c) account for the difference between the fair value and the adjusted tax basis in property at the time they are contributed to the partnership. In addition, such regulations can result in adjustments in certain other situations, including when the fair value of property owned by the partnership is in excess of its adjusted tax basis at the time of a contribution to the partnership.
15
(80 percent × $80 million [fair value of the company]) ÷ ($80 million [fair value of the company] + $20 million contribution) = 64 percent.
16
($37.5 million + $20 million) × 64 percent = $36.8 million.
17
$25 million (initial GAAP basis) + $12.5 million (20X9 income) = $37.5 million.
18
IRC Section 704(c), as noted in footnote 14, applies to reverse IRC Section 704(c) layers created as a result of a revaluation. Upon the contribution of $20 million by B, the partners revalued the partnership property. Under IRC Section 704(c), use of the “remedial method” will generally result in the $6.8 million’s becoming taxable over time, whereas use of the “traditional method” will generally result in the $6.8 million’s becoming taxable upon the ultimate sale or taxable liquidation of the partnership since the goodwill has no tax basis in the hands of the partnership.
19
(80 percent × $80 million [fair value of the company]) + $20 million contribution ÷ ($80 million [fair value of the company] + $20 million contribution) = 84 percent.
20
$25 million (initial GAAP basis) + $12.5 million (20X9 income) = $37.5 million.
21
While the exception in ASC 740-30-25-7 refers to a “more-than-50-percent-owned domestic subsidiary,” the exception was written at a time when the usual condition for control was ownership of a majority (over 50 percent) of the outstanding voting stock. Accordingly, we believe that an entity is not automatically prohibited from applying that exception simply because it owns less than 50 percent of the VIE.