Tax rate change in Finland: Tax Accounting Implications

Overview

The Finnish tax rate change from 26% to 24.5% is substantially enacted for the purposes of IAS 12, Income taxes. This applies to companies with balance sheet dates of 13 December 2011 or after.

The Finnish Government announced a 1% decrease in the corporate income tax rate in June 2011 after the Parliament elections and proposed a draft Government Bill HE 50/2011 on 5 October 2011 in this regard. In addition, following a satisfactory collective labour agreement, the Government agreed on an additional 0.5% tax rate decrease which was proposed as a supplementary Government Bill HE 130/2011 on 29 November 2011. These two Government Bills introduced a corporate income tax rate change from 26% to 24.5% in total with the effective date on 1 January 2012. For current tax, the new tax rate applies to tax years ending on 1 January 2012 or later, i.e. tax year ended 31 December 2012 for calendar year end companies.

The legislation was passed by the Parliament on 13 December 2011. The President signed the legislation on 29 December 2011.

Legislative process in Finland

In Finland the Government issues its legislative proposals as a Government Bill (Hallituksen esitys) which initiates the process in Parliament. After the legislation is approved by the Parliament, legislation is signed by the President after which the law enters into force.

Substantively enacted vs. enacted

Deferred tax assets and liabilities are measured under IFRS at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. The IASB (International Accounting Standards Board) has noted that substantive enactment occurs when any future steps in the enactment process will not change the outcome.

Given the Finnish legislative process and practice, our view is that the point of substantive enactment in Finland for IFRS reporting purposes occurs when the Parliament approves the legislation. Hence, the decrease in tax rate to 24.5% was substantively enacted with the effective date 1 January 2012 for the purposes of IAS 12, Income taxes when legislation was passed by the Parliament on 13 December 2011.

Under US GAAP (ASC 740-10-30-2) the measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The point of enactment in Finland for US GAAP reporting purposes occurs when all the steps in the legislative process are passed and the President signs the legislation. For US GAAP purposes the Finnish tax rate change to 24.5% was enacted on 29 December 2011.

IFRS and US GAAP Impact

For IFRS reporting purposes, companies with balance sheet dates on or after 13 December 2011 (for example calendar year ends) should measure deferred tax assets and liabilities being realised or settled on or after 1 January 2012 based on this new 24.5% rate.

For US GAAP reporting purposes, companies with balance sheet dates on or after 29 December 2011 (for example calendar year ends) should measure deferred tax assets and liabilities being realised or settled on or after 1 January 2012 based on this new 24.5% rate.

In practice, deferred tax assets and liabilities in the balance sheet as at 31 December 2011 should be measured with the new tax rate of 24.5% in full for IFRS as well as US GAAP reporting purposes.  

IFRS Disclosures

2011
The effect of the change in tax rates on deferred tax balances is generally disclosed as a component of the income tax expense and/or a reconciling item in the effective tax reconciliation.

2012
In the tax rate reconciliation, the starting point is often the parent company’s effective tax rate. For Finnish groups with calendar year ends, this will affect the 2012 effective tax reconciliation for the first time. The basis on which the applicable tax rate is computed as well as changes compared to the previous accounting period should also be disclosed. Again this is likely to affect the 2012 financial statements.