During the last few months, many opinions were shared about the new tax code and its implications.
What impact does the new tax code have on the preparation of financial statements properly? The three areas most affected are resources, systems and accounting.
The new tax rules require additional time from various members of organizations including chief financial officers, chief accountants, accountants, financial managers as well as personnel from other departments. For example, the full fixed assets count required on April 1, 2011 will engage employees from various parts of the organization. Temporary help may be needed to address all the needs.
The two systems most affected by the new tax code are those related to the value added tax invoice and fixed assets accounting.
VAT invoice accounting
Effective Jan. 10, 2011 all companies have to update the form of the VAT invoice following the new requirements. VAT invoice accounting will require a system update to register VAT invoices exceeding Hr 10,000. Additional adjustments may be needed to meet the requirement to include VAT invoices into VAT input within 365 calendar days from the date of issuance.
Fixed assets accounting
The update of the tax base of fixed assets will affect the deferred tax calculation required for accounting and financial statements preparation. The changes in the tax base will include an update of the net book value to match the book value of the assets as a result of the count on April 1, 2011, the application of the new useful lives and the new fixed assets categories. The fixed assets count, deferred tax calculation, applying the new tax base for the fixed assets and new corporate income tax rates have the most significant impact in accounting.
New income tax rates
Any company that has temporary differences between tax and accounting values for longer than a three-month period from Dec. 31, 2010 will be affected by the new corporate income tax rates. Changes with respect of the corporate income tax are effective as of April 1, 2011. Rates will be reduced from 25 percent in January to 23 percent for the remainder of the year. Further reductions to 21 percent, 19 percent and 16 percent will be applied in 2012, 2013 and 2014, respectively. These new rates have to be applied in calculating the deferred tax balance.
Tax base of fixed assets
The new tax code requires completing a count of a company's fixed assets as of April 1, 2011. The fixed assets are to be adjusted in the tax accounting records to match the values in the statutory accounting records except for the effect of valuations completed after Jan. 1, 2010. The question of whether the resulting reversal of the temporary differences between tax and statutory fixed assets values is a fiscal 2010 or fiscal 2011 event is currently being discussed.
One might argue that the reversal is a 2011 adjustment because the tax base of the assets changes on April 1, 2011 and the Dec. 31, 2010 balance has the old tax base to be applied in deferred tax calculation. Another point of view is that the reversal of the deferred tax liability or asset resulting from the temporary differences on fixed assets values can be reliably estimated, and therefore should be recorded as of Dec. 31, 2010. In any case, upon reversal of the difference, the portion of the deferred tax from the revaluation of fixed assets will be recorded in the equity, and the rest to financial results.
The outcome of this application of the rule could be an upward revaluation of the tax base of fixed assets (especially for those companies which historically completed and recorded the results of fixed assets upward valuation in accounting records only), with resulting higher amortization and higher deduction of the expense for income tax reporting purposes in future periods. This outcome could potentially raise questions during tax inspections, and companies should be prepared to reply to these requests.
The new tax code seeks to reduce the number of differences between tax and accounting records, for example in implementing new rules on the timing of recording expense and revenue in tax records. However, certain temporary differences between tax and accounting balances will remain, affecting deferred tax calculation.
These and other topics on accounting will come up during the first year of application. Consultations with peers, tax inspectors, accountants and keeping up with the latest updates on the tax authorities' clarifications of the new tax code will make the application easier.