-BY SARITA DEVI

UNIT-7

SYLLABUS Unit 7 – ACCOUNTING AND TAX ISSUES

IN INTERNATIONAL BUSINESS

Evolution of International accounting

standards (IFRS)

Issues and Challenges

International Double Taxation

Transfer Pricing

Tax treaty shopping

Tax havens

Double taxation

Double taxation-income of foreign

subsidiary is taxed both by the host-

government and by the parent

company’s government

Double taxation mitigation

Tax credit- allows an entity to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government.

Tax treaty- between two countries, agreement specifying which items of income will be taxed by the authorities of the country where the income is earned.

Deferral principle- specifies that parent companies are not taxed on foreign source income until they actually received a dividend.

TAX HAVENS

A country with an exceptionally low or

even no income tax.

How does it works

Companies establish wholly owned, non

operating subsidiary in the tax haven.

Tax haven subsidiary owns the common

stock of the operating foreign subsidiaries

TAX HAVENS

Transfer of funds takes place from foreign

operating subsidiaries to the parent company to

be funneled through the tax haven subsidiary

Tax levied on foreign source income by a firm’s

home government can be deferred under the

deferral principle until the tax haven subsidiary

pays the dividend to the parent.

TRANSFER PRICING

Transfer price- “ The price at which goods and

services are transferred between entities within

the firm”

Used to position funds within an international

business

Arm’s length price

Market-based price

Negotiated price

Cost-based price

BENEFITS

Reduce tax liability- shift earnings from

high-tax country to low-tax country

Used to move funds from a country where

currency devaluation is going to happen

Used to transfer funds when financial transfers in the form of dividends are restricted by host-country government

Reduce import duties

PROBLEMS

Management incentives and performance evaluation

Face government regulations

Ex- u/s 482 of the Internal Revenue Code, the Internal Revenue Service used to allocate transfer prices.

TAX TREATY SHOPPING “Treaty shopping” generally refers to a

situation where a person, who is resident in one country (say the “home” country) and who earns income or capital gains from another country (say the “source” country), is able to benefit from a tax treaty between the source country and yet another country (say the “third” country). This situation often arises where a person is resident in the home country but the home country does not have a tax treaty with the source country.

Example

INDIA

(PARENT

COMPANY)

US

(SOURCE

COUNTRY)

UK (THIRD

COUNTRY)

30% tax

on

dividends

Tax

treaty

How countries tackle this?

US- By LOB

CANADA- Anti-treaty shopping rules

IFRS International Financial Reporting Standards

International accounting framework to properly organize and report financial information.

Derived from the pronouncements of the London-based International Accounting Standards Board (IASB).

More than 120 countries.

IFRS requires businesses to report their financial results and financial position using the same rules; this means that, barring any fraudulent manipulation, there is considerable uniformity in the financial reporting of all businesses using IFRS, which makes it easier to compare and contrast their financial results.

US uses GAAP

FEATURES OF IFRS

Fair presentation

and compliance with IFRS

Going concern

Accrual Basis of

Accounting

Offsetting Materiality

and aggregation

Frequency of reporting

FEATURES OF IFRS

Consistency of

presentation

Comparative information

BENEFITS to have a common accounting language, so

business and accounts can be understood from company to company and country to country.

to maintain stability and transparency throughout the financial world. This allows businesses and individual investors to make educated financial decisions, as they are able to see exactly what has been happening with a company in which they wish to invest.

global adoption of IFRS would save money on alternative comparison costs and individual investigations, while also allowing information to flow more freely.

Ind-AS Adopted by companies in India and issued

under the supervision and control of

Accounting Standards Board (ASB)

The Ind AS are named and numbered in

the same way as the corresponding

International Financial Reporting Standards

(IFRS).

41 Ind AS

Applied to the companies of financial year

2015-16 voluntarily and from 2016-17 on a

mandatory basis.

List of Indian Accounting Standards[6]

Ind AS 101

First-time adoption of Ind AS

Ind AS 102

Share Based payments

Ind AS 103

Business Combination

Ind AS 104

Insurance Contracts

Ind AS 105 Non-Current Assets Held for Sale and Discontinued

Operations

Ind AS 106

Exploration for and Evaluation of Mineral Resources

Ind AS 107

Financial Instruments: Disclosures

Ind AS 108

Operating Segments

Ind AS 109

Financial Instruments

Ind AS 110

Consolidated Financial Statements

Ind AS 111

Joint Arrangements

Ind AS 112

Disclosure of Interests in Other Entities

Ind AS 113

Fair Value Measurement

Ind AS 114

Regulatory Deferral Accounts

Ind AS 115

Revenue from Contracts with Customers

Ind AS 1

Presentation of Financial Statements

Ind AS 2

Inventories

Ind AS 7

Statement of Cash Flows

Ind AS 8

Accounting Policies, Changes in Accounting Estimates and Errors

Ind AS 10

Events after Reporting Period

Ind AS 11

Construction Contracts

Ind AS 12

Income Taxes

Ind AS 16

Property, Plant and Equipment

Ind AS 17

Leases

Ind AS 18

Revenue

Ind AS 19

Employee Benefits

Ind AS 20

Accounting for Government Grants and Disclosure of Government

Assistance

Ind AS 21

The Effects of Changes in

Foreign Exchange Rates

Ind AS 23

Borrowing Costs

Ind AS 24

Related Party Disclosures

Ind AS 27

Separate Financial Statements

Ind AS 28

Investments in Associates and

Joint Ventures

Ind AS 29

Financial Reporting in Hyper

inflationary Economies

Ind AS 32

Financial Instruments:

Presentation

Ind AS 33

Earnings per Share

Ind AS 34

Interim Financial Reporting

Ind AS 36

Impairment of Assets

Ind AS 37

Provisions, Contingent

Liabilities and Contingent

Assets

Ind AS 38

Intangible Assets

Ind AS 40

Investment Property

Ind AS 41

Agriculture