You are a financial analyst at Global Tech Industries, a multinational corporation with operations in multiple countries. The company is preparing its financial statements for the fiscal year ending December 31, 2023. As part of your role, you have been tasked with analyzing the income tax implications under IAS 12 for Global Tech Industries.

Question

Global Tech Industries operates in various jurisdictions, each with its own tax regulations and rates. The company has significant investments in research and development (R&D) projects, some of which qualify for tax incentives in certain countries. Additionally, Global Tech has incurred losses in some regions due to economic downturns, which have implications for the recognition of deferred tax assets.
Question:
1. Outline the key income tax issues that Global Tech Industries needs to consider under IAS
12 for its financial statements.
2. Explain the principles under IAS 12 for recognizing and measuring current and deferred
tax liabilities and assets. Provide examples from Global Tech Industries' operations to
illustrate the application of these principles, particularly focusing on differences between
accounting profit and taxable profit.
3. Evaluate the impact of tax incentives related to R&D investments on Global Tech
Industries' income tax expense. Discuss how these incentives affect the measurement of deferred tax assets and liabilities under IAS 12. Additionally, analyze the treatment of tax losses carried forward in jurisdictions experiencing economic downturns

Answer 1

### 1. Key Income Tax Issues under IAS 12

For Global Tech Industries, the key income tax issues to consider under IAS 12 include:

- **Recognition and Measurement of Current Tax Liabilities and Assets:**
- Determining the amount of current tax payable or recoverable based on the taxable profit (tax loss) for the period in each jurisdiction.
- Calculating tax rates applicable in the various jurisdictions in which Global Tech operates.
- Accounting for tax incentives received in certain jurisdictions.

- **Recognition and Measurement of Deferred Tax Liabilities and Assets:**
- Identifying temporary differences between the carrying amounts of assets and liabilities in the financial statements and their tax bases.
- Recognizing deferred tax assets for deductible temporary differences, unused tax losses, and unused tax credits to the extent that it is probable that future taxable profit will be available to utilize them.
- Evaluating the impact of changes in tax rates and laws on deferred tax balances.
- Assessing the realizability of deferred tax assets, especially in jurisdictions where economic downturns have resulted in tax losses.

- **Tax Impact of R&D Investments:**
- Recognizing the effect of tax incentives for R&D investments on current and deferred taxes.
- Ensuring that any tax credits or deductions associated with R&D investments are properly accounted for.

- **Cross-Jurisdictional Tax Issues:**
- Managing transfer pricing issues and ensuring compliance with local tax laws and international tax treaties.
- Considering the impact of withholding taxes on intercompany transactions.

### 2. Principles under IAS 12 for Recognizing and Measuring Current and Deferred Tax Liabilities and Assets

**Current Tax Liabilities and Assets:**

- **Recognition:** Current tax for the current and prior periods should be recognized as a liability to the extent it is unpaid. If the amount already paid exceeds the amount due, the excess should be recognized as an asset.
- **Measurement:** Current tax liabilities (or assets) are measured using the tax rates and laws enacted or substantively enacted by the end of the reporting period.

*Example:*
Global Tech Industries operates in Country A with a corporate tax rate of 25%. If Global Tech has a taxable profit of $1 million in Country A, the current tax liability will be $250,000.

**Deferred Tax Liabilities and Assets:**

- **Recognition:** Deferred tax liabilities should be recognized for all taxable temporary differences. Deferred tax assets should be recognized for all deductible temporary differences, unused tax losses, and unused tax credits to the extent that it is probable that taxable profit will be available against which they can be utilized.
- **Measurement:** Deferred tax assets and liabilities are measured at the tax rates that are expected to apply when the asset is realized or the liability is settled, based on tax laws enacted or substantively enacted by the end of the reporting period.

*Example:*
Global Tech Industries has a piece of machinery with a carrying amount of $500,000 and a tax base of $300,000, resulting in a taxable temporary difference of $200,000. If the tax rate is 20%, the deferred tax liability would be $40,000.

### 3. Impact of R&D Tax Incentives and Treatment of Tax Losses

**R&D Tax Incentives:**

- **Impact on Income Tax Expense:** Tax incentives such as tax credits or deductions for R&D reduce the current tax expense in the period in which they are claimed.
- **Deferred Tax Assets and Liabilities:** If R&D expenses create deductible temporary differences (e.g., tax deductions allowed in future periods), deferred tax assets should be recognized to the extent that it is probable that future taxable profits will be available.

*Example:*
Global Tech undertakes an R&D project costing $1 million, qualifying for a 20% tax credit in Country B. This would reduce the current tax expense by $200,000 in the year the credit is claimed.

**Tax Losses Carried Forward:**

- **Economic Downturn:** Where there are tax losses due to economic downturns, these can be carried forward to offset taxable profits in future periods.
- **Recognizing Deferred Tax Assets:** A deferred tax asset for carryforward tax losses should be recognized if it is probable that future taxable profit will be available to utilize the losses.
- **Adjustment for Probable Realization:** Regularly review the realizability of deferred tax assets. In jurisdictions experiencing economic downturns, this might involve a more conservative approach, recognizing the asset only to the extent that it is probable the losses will be utilized.

*Example:*
Global Tech has a tax loss of $500,000 in Country C due to an economic downturn. If the tax rate is 15%, a deferred tax asset of $75,000 could be recognized if it is probable that sufficient future taxable profits will be generated to utilize the loss carryforward.

In summary, Global Tech Industries must carefully evaluate the tax implications of its diverse operations under IAS 12. By recognizing the effects of tax incentives, properly measuring current and deferred tax liabilities and assets, and considering the impact of economic downturns on tax loss carryforwards, the company can ensure accurate financial reporting and effective tax management.