Costa Rica
July 2, 2021
Country: Latin America
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Peru
June 22, 2021
July 2, 2021
June 22, 2021
June 11, 2021
In May this year, the IASB issued updates to IFRS-16, with regard to rent concessions, and to IAS-12, which covers leases as part of income tax reporting.
The international financial reporting standards (IFRS) are a set of international accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They’re intended to bring transparency, make international comparisons more straightforward and give investors the information they need to make decisions.
The standards are frequently updated, as in the case of these two recent changes – but what do those amendments mean in practice?
IAS-12 established how an individual company should account for income tax, including any deferred tax representing tax payable or which is later recoverable.
In certain circumstances, companies aren’t obliged to recognise deferred tax (that is, to record them in the financial statements that form the body of their accounts) the first time they recognise assets or liabilities.
In the past, whether the exemption applied to leases and decommissioning obligations, which companies recognise as both asset and liability, was something of a grey area.
This amendment removes that ambiguity, making it absolutely clear that companies are expected to recognise deferred tax on transactions of this type.
The amendments take effect for annual reporting periods beginning on or after 1 January 2023. Companies can choose to apply the amendments before that date under the principles of ‘early application’.
On 31 March 2021 the IFRS issued ‘Covid-19-Related Rent Concessions beyond 30 June 2021’.
This amendment to IFRS-16 extends a ‘practical expedient’ (effectively an emergency measure) by a year, first announced in May 2020 as part of the global response to COVID-19.
The expedient recognised the impact of the COVID-19 pandemic on businesses. Many sought rent concessions from landlords as part of an effort to control cashflow as, for example, footfall in city centres dropped drastically due to national lockdowns.
Under the practical expedient, lessees were not required to assess whether rent concessions counted as ‘lease modifications’ for accounting purposes.
Without this amendment, the concession would have expired at the end of June 2021, while many world economies are still grappling with COVID-19 or its aftermath.
Under the terms of the recent amendment, a lessee can apply the expedient to COVID-19-related rent concessions for which a reduction in lease payments affects only payments originally due on or before 30 June 2022.
The lessee is required to apply the amendment for annual reporting periods beginning on or after 1 April 2021.
They must also apply the amendment retrospectively, with the cumulative effect of its initial application being recognised as an adjustment to the opening balance retained earnings. Disclosure requirements under paragraph 28(f)1 of IAS-8, ‘Accounting Policies, Changes in Accounting Estimates and Errors, don’t apply on this initial application.
Contact your local Kreston audit contact (or admin@kreston.com) for more information or to talk about how these changes might affect your company accounts.
The range of support that businesses have received from governments around the world in response to the Coronavirus pandemic has been largely effective, according to key voices from across our network.
We recently conducted an informal poll featuring 41 of our senior leaders, of whom the majority (59%) stated that the schemes such as furlough, tax relief and emergency business loans have been “very effective” in helping clients weather the pandemic. The figure is even greater among EMEA-based respondents (63%), who describe such initiatives as “very effective.” Globally, only about 30% said that such schemes had little to no impact for clients, and about 12% said that clients had not utilised the available schemes at all.
Our leaders believe that the technology, media, and telecoms (78% of those asked), as well as life sciences (66%), are the sectors that stand in poll position to kickstart the global economic recovery. In contrast, manufacturing is not anticipated to be a major driver of post-pandemic growth (with only 37% believing in its potential). Only 15% of respondents said that the retail industry would play a significant role in the economic recovery globally.
Liza Robbins, Chief Executive of Kreston, said:
“Throughout this crisis, we have seen unprecedented levels of government intervention to stave off economic disaster across the globe, with schemes aimed at, and often succeeding in, supporting businesses and protecting jobs. These figures bear out in our conversations within the Kreston network, indicating that, despite the challenges, many schemes have often been successful – particularly across EMEA. With the worst of the pandemic’s economic impact hopefully now behind us, Technology, Media, and Telecoms, and Life Sciences appear poised to play an important role in the next phase of economic recovery and post-pandemic growth around the globe.”
June 10, 2021
May 19, 2021
Losses in a limited-risk entity pursuant to the OECD Guidance on the Transfer Pricing Implications of the Covid-19 Pandemic
By Guillermo Narvaez, Tax Partner at Kreston FLS Mexico
The OECD guidance on the transfer pricing implications of the Covid-19 pandemic (referred to as the “Guidance”) was issued in December 2020. The idea was to give light to taxpayers and tax administrations on what to do about intercompany operations and how to apply the methodology of transfer pricing determined in the OECD TP Guidelines (“OECD TPG”) due to ‘fact patterns that may arise commonly in connection with the pandemic’.
There is a permanent discussion in transfer pricing related to ‘limited risk’ distribution operations and how to deal with this kind of transaction. A point to stress is whether a limited-risk distribution business could afford losses or these businesses are not ‘entitled’ to generate them.
There is neither a rule in the OECD TPG nor the Guidance related to losses generated by limited-risk distribution operations. Moreover, the term ‘limited risk’ is not defined in the OECD TPG. However, what is expected is that distributors with low risks have profits regularly and if losses are generated these should be part of an isolated fact not frequently repeated; however, this is only convention. When a subsidiary has full support from its related parties to make the distribution of products with moderate risks, the least expected thing is to deal with risks that could finally drive operating losses.
The fact is that a limited-risk operation can indeed generate losses, and this matter should not be a concern for the taxpayer nor the tax authority as long as the risks associated with the distribution operation and borne by the distributor, including the financial risk, are assumed by the latter.
If the terms of the agreement between related parties were those that independent businesses would have agreed and the negative operating result of the distribution operation is directly coming from applying such terms, the loss will probably make sense. Note that risks during a pandemic may be exacerbated. Nonetheless, the contractual terms should not be necessarily modified because of force majeure.
The Guidance is clear when it states that ‘It is important to emphasize that in the absence of clear evidence that independent parties in comparable circumstances would have revised their existing agreements or commercial relations, the modification of existing intercompany arrangements and/or the commercial relationships of associated parties is not consistent with the arm’s-length principle’.
Each case should be analysed to understand the background and effect of the pandemic on the specific operation accurately to get conclusions on what to do when a loss is incurred by a low-risk distribution operation.
Another matter is that the pandemic does not suffice to change the transfer pricing method applied in previous years. The Guidance is clear with regard to fostering the OECD TPG aims without modifying the arm’s length principle and its rules, all of them determined in the OECD TPG.
The Guidance is focused on giving light on what is needed to do in an extraordinary event like the pandemic suffered since the beginning of 2020 but in some cases with a very general view.
