On 22 December 2017 US President Trump signed the Republican party’s tax bill (the Tax Cuts and Jobs Act) into law. The tax changes affecting US corporates are wide ranging and complex. Australian groups with US subsidiaries and operations will need to assess the potential financial effects of these changes on their consolidated financial statements.
One key change is the reduction in the US corporate tax rate from 35% to 21%, which takes effect from 1 January 2018. The Act also requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. While the drop in the US corporate tax rate is likely to benefit companies in the longer term, it may have an immediate financial reporting effect for those companies reporting at 31 December 2017.
Calculating deferred taxes
US companies that have deferred tax assets in respect of unused tax losses will see the value of those tax benefits fall by 40% as a result of the tax rate dropping from 35% to 21%. On the other hand, there will also be a positive reduction in any deferred tax liabilities.
Under AASB 112 Income Taxes, current and deferred tax assets and liabilities must be measured using the tax rates and laws that have been enacted or substantively enacted by the entity’s balance date. President Trump’s signing of the bill means that the changes contained in Act are enacted for the purpose of reporting under AASB 112 at 31 December 2017.
Hence, Australian groups with US subsidiaries or operations will need to consider the effect of the change in the corporate tax rate on any US deferred tax assets (for example, unused tax losses) and deferred tax liabilities when preparing their consolidated financial statements. This is particularly relevant for any listed Australian groups containing US operations when reporting their 31 December 2017 results and where the effects on deferred tax balances are material to those financial statements.
Where a remeasurement occurs to deferred tax balances arising from a change in the relevant tax rate, the amount of the change will be recognised through income tax expense, unless the deferred tax relates to an item recognised directly in equity (for example, movements in an asset revaluation reserve).
Other potential measurement effects
The change in the US corporate tax rate will also affect any financial reporting measurements and calculations relating to US corporates and operations that use, or rely on, an after-tax discount rate. US entities, or those with operations in the US, should also assess whether any inputs into fair value estimates or other accounting estimates may be affected by this change.
This Accounting Update does not attempt to deal with all the relevant elements of the Act and clients with operations in the US are urged to seek professional advice on the effects of these changes on their own circumstances.