In certain countries, the tax rate applied to a company’s tax return reporting income depends upon whether the profits for the period are distributed or undistributed. Amounts are initially taxed at the higher rate, but a tax credit is received when the profits are distributed. Therefore, companies need to determine what rate (distributed versus the undistributed tax rate).
Global Multinational Corporation (Global) is a U.S. company that owns and operates 100% of a consolidated subsidiary in a foreign jurisdiction where income taxes are payable at a higher rate on undistributed profits than on distributed earnings. For the year ending December 31, Year 1, Global’s foreign subsidiaries taxable income is $150,000. Global’s foreign subsidiary also has net taxable temporary differences amounting to $50,000 for the year, thus creating the need for a deferred tax liability on the balance sheet. The tax rate on distributed profits is 40%, and the tax rate on undistributed profits is 50%; the difference results in a credit if profits are distributed in the future. At the date of the balance sheet, no distributions have been proposed or declared. On March 31, Year 2, Global’s foreign consolidated subsidiary distributes dividends of $75,000.
- Obtain and review the accounting and measurement guidance related to anticipated tax credits in IAS12, Income Taxes, and in Sections 25 and 30 of ASC740-10, Income Taxes-Overall. Document the relevant portions of the IFRS and US GAAP related to the accounting Global must follow for the above series of transactions.
- Provide the required journal entries for both Year 1 and Year 2 under both the US GAAP and IFRS for each respective date where you are provided information in the above scenario. In your explanation for each journal entry, make sure you document the basis for each journal entry amount. In other words, how did you obtain the figures? In addition, provide a detailed explanation for each respective journal entry with the appropriate Reference(s) to IAS12 and ASC 740-10, respectively.
- Write a paper of 4 pages in length, not counting the title and reference pages, which you must include.
- Use terms, evidence, and concepts from class readings, including professional business language.
- Cite at least 5-6 credible, academic or professional sources for this assignment, outside of the textbook. Format your paper according to APA format.
Cecchini, M., Leitch, R., & Strobel, C. (2015). Transfer pricing: Factors to consider. Journal of Corporate Accounting & Finance, 26(6), 5-11.
Ernst & Young Foundation. (2017). Accounting for income taxes — differences between the US GAAP and IFRS (PowerPoint presentation).
Slemmer, D. (2018, November 1). Avoiding a transfer pricing audit: 3 best practices for multinationals. Tax Insider. Retrieved from https://www.thetaxadviser.com/newsletters/2018/nov/avoiding-transfer-pricing-audit.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=05Nov2018
Graham, J. (2017, October 11). $100 billion question: Will Trump let Alphabet, Pfizer keep tax havens? Investor’s Business Daily.
Hendriksen, J. (2016). The role of offshore tax havens in the international tax system. Análise Europeia – Revista Da Associação Portuguesa De Estudos Europeus,1(2), 42-59.
McClure, J. H. (2014). What does the new IRS transfer pricing audit road map mean for multinationals? Financial Executive, 30(2), 88-92.
Munira, H. (2017). Transfer pricing in global business and ethical issues. Advances in Management, 10(2), 1-6.
Taylor, G., Richardson, G., & Lanis, R. (2015). Multinationality, tax havens, intangible assets, and transfer pricing aggressiveness: An empirical analysis. Journal of International Accounting Research, 14(1), 25.
Doupnik, T. S., & Perera, H. (2015). International accounting (4th ed.). New York, NY: McGraw-Hill Publication.
Nellis, S. (2017). Apple wins big with U.S. tax bill but faces snag on foreign patents (Reuters). Retrieved from https://finance.yahoo.com/news/apple-wins-big-u-tax-034523464.html
U.S. Census Bureau. (2017). U.S. goods trade: Imports and exports by related parties, 2016. Retrieved from https://www.census.gov/foreign-trade/Press-Release/2016pr/aip/related_party/rp16.pdf