From the Sept/Oct 2019 issue of New Jersey CPA magazine (njcpa.org/newjerseycpa)
By Robert A. Trenery Jr., CPA, KPMG LLP
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Despite the possible simplification intentions of the Tax Cuts and Jobs Act (TCJA) of 2017, income taxes for corporations are as complex as ever, and, therefore, so are the accounting for income taxes (AIT) considerations. Whether it be under U.S. GAAP ASC 740 or International Financial Accounting Standards (IFRS) IAS 12, the nuances are many and potential missteps lurk at every corner.
Beyond the mandatory repatriation and corporate rate change, companies of all sizes need to be aware that their AIT process may be much more complicated and that many of the decisions they made in 2017 and 2018 will impact them for years to come.
GILTI
One example relates to global intangible low-taxed income (GILTI). Companies made an election under ASC 740 to either apply deferred tax treatment or period cost treatment for temporary differences impacting the GILTI calculation. Many public and private companies grappled with this decision over the course of 2018 since a commitment one way or another had to be made within one year of the enactment of TCJA. Tracking GILTI-based deferred tax assets (liabilities) on foreign controlled corporations may prove to be a daunting task for complex and simple corporate tax structures alike. However, the other accounting policy choice would be essentially permanent tax treatment and the effective tax rate inconsistencies that come along with period cost treatment often necessitating additional clarifying disclosures.
The result of this accounting policy choice will now be part of the annual income tax provision process. That reality adds complexities and puts in place a method of accounting that the company must abide by prospectively.
The issues and nuances do not stop here. There is the impact on a company’s foreign unremitted earnings assertion with respect to investments in controlled foreign corporations and whether it meets the criteria for indefinite reinvestment. While portions of foreign earnings may generally be subject to U.S. federal taxes when generated, currently there can be additional U.S. federal consequences and local country withholding taxes that are incurred upon a remittance.
Other considerations
Other considerations include (but are not limited to) the base erosion and anti-abuse tax (BEAT), interest deductibility and any limitation with the application on Internal Revenue Code section 163(j) and differing or varying state income tax treatment for certain of these items.
As the Treasury Department issues new regulations and other guidance, there will also need to be a reassessment of tax positions for which there is uncertainty along with any associated unrecognized tax benefits. Tax positions will also need to be assessed under the guidance on uncertainty in income taxes as companies look to implement restructurings and other tax-planning actions to address the overall consequence of the TCJA.
Ancillary AIT impacts that are not a direct result of the TCJA could otherwise be affected. For example, as a result of the new landscape, a company may choose to reassess its inter-company transactions and related transfer pricing policies to manage the impact associated with BEAT.
With all of this in mind, companies may need to consider new or expanded income tax controls and processes as a result of the TCJA. The complicated calculations associated with GILTI, BEAT and foreign-derived intangible income may require extraction of underlying financial data from foreign subsidiaries. BEAT may require review of related-party transaction documents and section 162(m) review of stock agreements. Not only may there need to be additional levels of review, the qualifications of personnel involved in the process may need to be reassessed to determine if they have the appropriate experience and training.
By working closely with their tax and accounting advisors and auditors, companies can help assure they are managing the appropriate financial statement impact of the TCJA, both now and in the future.
Robert A. Trenery, Jr., CPA, is a tax partner at KPMG LLP. He is a member of the NJCPA and can be reached at rtrenery@kpmg.com.