Staff document offers guidance on accounting implications of tax reform

The Financial Accounting Standard Board’s (FASB) staff on Jan. 22, 2018, offered interpretive guidance for four questions about the accounting ramifications of the Tax Cuts and Jobs Act (TCJA).

Published via a question-and-answer document on the FASB’s website, the questions cover accounting for the new base erosion anti-abuse tax (BEAT), the Global Intangible Low-Tax Income (GILTI), whether to discount the liability on the deemed repatriation of earnings and whether to discount alternative minimum tax credits that become refundable.

For the deemed repatriation and the alternative minimum tax credits that become refundable, the FASB’s staff said neither should be discounted.

Topic 740, Income Taxes, prohibits discounting of deferred tax amounts, the FASB’s staff said. This prohibition should be applied by analogy to the tax the new law imposes on undistributed and previously untaxed post-1986 foreign earnings and profits, the staff said.

A similar analogy applies to credit carryforwards associated with the alternative minimum tax, which the new law repeals. The credits should not be discounted, the staff said.

The BEAT was established by the new law, which requires a business to pay the tax if the BEAT is greater than its regular tax liability. The BEAT calculation eliminates the deduction of certain payments made to foreign affiliates but applies a lower tax rate on the resulting BEAT income, the FASB said.

Financial reporting professionals asked the FASB if deferred tax assets and liabilities should be measured at the statutory tax rate of the regular tax system or the lower BEAT rate if the taxpayer expects to be subject to the new tax.

The FASB staff said the new tax is similar to the alternative minimum tax under prior law.

“Therefore, the FASB staff believes that an entity that is subject to BEAT should measure deferred tax assets and liabilities using the statutory tax rate under the regular tax system. The FASB staff believes that measuring a deferred tax liability at the lower BEAT rate would not reflect the amount an entity would ultimately pay because the BEAT would exceed the tax under the regular tax system using the 21 percent statutory tax rate,” the staff wrote.

Further, although a business may believe that it could be subject to the new tax for the foreseeable future, Topic 740 states that “no one can predict whether an entity will always be an alternative minimum tax taxpayer.”

“The FASB staff believes that a similar conclusion could be applied to BEAT,” the document states.

Topic 740 is less clear when it comes to the treatment of the GILTI, a separate new tax introduced by the law.

In general, GILTI is described as the excess of a U.S. shareholder’s total net foreign income over a deemed return on tangible assets, which is defined as 10 percent of its foreign qualified business asset investment reduced by certain interest expense amounts.

Some groups asked the FASB whether deferred tax assets and liabilities should be recognized for basis differences expected to reverse as GILTI in future years or if the tax on GILTI should be included in tax expense in the period in which it is incurred.

The FASB’s staff said Topic 740 is not clear as to the treatment of GILTI, and either interpretation can apply, depending on facts and circumstances. A business must disclose its accounting policy related to GILTI inclusions, the staff said.

Many questions have arisen in practice about the GILTI regime, said national partner-in-charge, April Little, of a major accounting firm.

“The GILTI regime — that is more complex because it’s unlike any other tax system we’ve had experience with. It’s a brand new system that couldn’t analogize to any existing tax,” Little said.

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