REPARIS Workshop

“The relationship between corporate income tax reporting and annual accounts:

Current Approach in Austria”

Friedrich Roedler Partner - PricewaterhouseCoopers

Vienna - March 14th 2006

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Februar 2006

Financial Reporting - Background

Austria is a “middle market economy”• Few listed companies• Bank debt as most important source of financing

• Historically main purpose of statutory Austrian GAAP financial statements:

• Determine disposable income (distributable profit for corporations) protection of creditors

• Information to owners / shareholders / investors / public

Austria

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Februar 2006

Austrian GAAP

• IFRS required / allowed for consolidated accounts but not allowed for stand-alone financial statements

Sources for Austrian GAAP• Law – (§ 189 to 211 Commercial Code - “Handelsgesetzbuch”

– “HGB”)• Statements from the professional institutes (Chamber of

Accountants, Institute of Auditors)• Common practice and custom

Austria

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Februar 2006

Austrian GAAP

Key principles of Austrian GAAP• True and fair view • “Prudence” vs “Fair View”

- current assets: lower of cost or market- liabilities: higher of current value or repayment amount- no creation of hidden reserves (if reason for write-down does not exist

any longer write-up)- realisation / Imparity principle:

• gains: recognised when realised

• unrealised losses recognised

- Current assets: write-down to market

- Fixed assets: write-down if quasi-permanent impairment

Austria

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Taxable Income

Should reflect• ability to pay only realised profits should be taxed !• annualised profit on accruals basis• Financial reporting (business accounting rules according to

Austrian GAAP) as the starting point for determining taxable business income for corporations “Dependency” between accounting income and taxable profit (“Massgeblichkeit”) similar to Germany

Austria

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Februar 2006

Legal Basis for Dependency between Financial Reporting and Corporate Income Tax Reporting

• Taxable trading income - Difference between net value of a company at the beginning and at the

end of the fiscal year (income according to “tax balance sheet”)- adjusted by

• withdrawals (e.g. dividends) and contributions from shareholders

• Non-deductible expense / tax-exempt income

• § 5 (1) EStG (Income Tax Act): linkage between statutory financial reporting and income tax reporting: “dependency” (“Maßgeblichkeit”)

• Linkage applies to taxpayers (individuals, partnerships and corporations) registered in the companies register obliged to keep books according to Austrian GAAP

Austria

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“Formal” vs “General” Dependency (“Formelle” vs “Materielle” Maßgeblichkeit)

• Is taxable income to be determined based only on GAAP in general (“general” dependency) or also depending on the actual accounting choices made in the taxpayer’s statutory balance sheet (“formal” dependency)?

• Prevailing view: “formal” dependency - Simplification- ´”Equal treatment” for fisc and taxpayer

Austria

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Dependency

• Mandatory GAAP to be observed for tax purposes, e.g.: - Liabilities must be booked at the higher of current value or repayment

amount- Imparity principle also valid for tax purposes

• Where GAAP allow for discretionary accounting treatment - Tax follows accounting treatment as applied by the taxpayer for

accounting purposes- Deductions claimed from taxable income (e.g. valuation, depreciation,

provisions, accruals, ………) only if booked in statutory accounts- …. unless tax law provides a mandatory rule

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Februar 2006

Financial Reporting vs Tax Reporting

mandatory rule mandatory rule tax rule prevails

mandatory rule discretionary rule tax follows financial accounting („general“ dependency)

discretionary rule discretionary rule tax follows election made in financial reporting („formal“ dependency)

discretionary rule mandatory rule tax rule prevails

GAAP Tax Law

Austria

Tax Reporting

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„Formal“ Dependency

• Examples:• Definition of acquisition cost / production cost• Capitalisation of start-up cost and cost for major business

expansion (§ 198 (3) HGB)• write-off of current assets to market value• Write-off of fixed assets due to permanent impairment of value• Write-off of low-value assets• Accruals

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Examples - “General” Dependency

Capitalisation of self-created intangibles:

Austria

Sec 197(9) HGB: self-created intangibles must not be capitalized

Sec 4 (1) EStG: intangibles may be capitalisedonly if acquired against compensation

Self-created intangibles must not be capitalised for tax purposes

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Februar 2006

Examples – “Formal” Dependency

Capitalisation of interest in production cost:

Austria

§ 203(4) HGB: option to capitalise interest expense in production cost

EStG: no tax rule

Option to capitalise interest expense in production costfor tax purposes - dependency

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Februar 2006

Example - No Dependency

Austria

Acquired goodwill:

§ 203(5) HGB: acquired goodwill may be capitalised and amortized over the expected period of use

§ 8(3) EStG: acquired goodwill must be capitalised and amortized over 15 years

acquired goodwill must be capitalised and amortized over 15 years for taxpurposes even if not capitalised for accounting purposes

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Februar 2006

No Dependency Due to Mandatory Tax Rules

• Examples:• Acquired goodwill• Inventories: capitalisation of material and selling overhead

cost• Depreciation of fixed assets• Accruals• Correction of errors

- GAAP financial reporting: current year- Tax: retroactive correction of prior years (opening balance sheet)

• Financial reporting year-end / fiscal year-end

Austria

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“Reverse” Dependency - (“umgekehrte Maßgeblichkeit”)

Valuation of Inventories:

• § 207 HGB: lower of cost or market principle for inventory

• § 6 Z 2 EStG: optional for tax but in fact mandatory due to general dependency

• § 208 (1) HGB: for financial accounting: obligatory write-up if reason for previous write-down ceases to exist

• § Sec 6 Z 2 EStG: for tax: “lower of cost or market” with optional write-up if reason for previous write-down not valid any longer

• § 208 (2) HGB: exemption from the obligation to write-up inventory if otherwise also an obligation to write-up for tax purposes

Austria

§ 208 (2) HGB allows an exemption from from “true and fair view” principle for tax reasons !!!

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“Reverse” Dependency – Impact of Tax on Financial Reporting

• options allowed for tax purposes (valuation) must be exercised in accordance with statutory accounting (“formal” dependency)

• some tax benefits can be claimed only if also reflected in statutory financial accounts, e.g.:- Immediate write-off of low-value fixed assets

• tax has major impact on financial reporting

Austria

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Accounting Choices Implicitly Impacted by TaxExamples:

• depreciation of fixed assets- period and methodology (financial: “consistent methodology”; tax:

straight-line)- depreciation in 1st year (full or half year depreciation)

• purchase price allocation after an asset deal (e.g.:goodwill)• inventory valuation (production cost, LIFO, ….) • bad debt provisions• accounting for lease contracts• accruals for pensions• choice of fiscal year-end

Austria

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Impact of EU Law

Austrian Commercial Code implements 4th Company Law Directive Accounting rules have to be interpreted according to EU law

Impact of ECJ case law on tax through dependency rules ?- ECJ can only interpret the relevant provisions of EU law- but not, how these accounting rules relate to Austrian tax law- ECJ can not rule how an accounting rule is interpreted for tax purposes

• VwGH 27.9.2000: General tax principles override EU accounting directives

• EU Commission proposal for Common Consolidated Tax Base

Austria

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Impact of IAS / IFRS

• IAS / IFRS obligatory for consolidated accounts• Stand-alone accounts: Austrian GAAP; IAS / IFRS not allowed• Convergence of Austrian GAAP – IAS ?• IAS as “starting point” for taxable income (CCTB project of the

EU Commission) ?

Austria

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Impact of IAS / IFRS

• IAS / IFRS accounts not suitable for determining taxable income

- private standard-setter for IFRS/IAS

- tax courts to interpret IAS /IFRS ?

- main purpose: information of investors

- un-realised profits

- subjective valuation of assets where no market value available

- based on future expectations uncertainty & subjectivity

- judgemental (e.g.: IAS 38: capitalisation of development cost; IAS 37: restructuring cost)

Austria

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The Future of the “Dependency Principle” in Austria

Expect increased divergence between financial and tax reporting• businesses have become more complex

- need for more specific tax rules - dependency does not lead to more simplicity !

• broadening of tax base by disallowing certain accruals and provisions

• globalisation: convergence of local GAAP and IAS / IFRS • IAS / IFRS not suited for tax purposes • impact of dependency principle on quality of financial reporting

and corporate governance

Austria