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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 12, 2021
By Guillermo Narvaez – Technical Director of the Kreston International Global Tax Group
Digital Services Taxes (DSTs) are a new global initiative designed to charge larger technology companies that provide digital platforms such as social media, advertising, online marketplaces and other search engine tools for commercial transactions or selling user data online advertising. It is beginning to apply across the world at the behest of the G20 – the Organisation for Economic Co-operation and Development (OECD) who are calling for changes to the international tax system to address the challenges of the digitisation of the economy by mid-2021.
A simple enough idea – impose additional tax costs on those who earn more – but is it really this simple? Who actually pays this tax, as on the face of it, it is the customers themselves who face liability rather than the platforms on which they are advertising.
Online platforms essential for SMEs to grow
Big tech companies like Amazon, Google and Apple shift the tax burden instigated by DSTs downstream to their customers, many of whom are SMEs. The European Centre for International Political Economy (ECIPE) has stated that “the EU’s commercial landscape is characterised by an overall share of highly diverse SMEs who account for 99.8% of all EU enterprises and 66.6% of overall EU employment.”
Copenhagen Economics also point out that 82% of SMEs in Europe use search engines to promote products and services online, while 42% of SMEs use online marketplaces to sell their products and services.
So we can see that SMEs are disproportionately affected by DSTs and are the ones left with the bill.
But in reality, to what extent are DSTs targeting the big fish? The DSTs’ purpose is well-meaning – challenge some of the world’s largest multinational enterprises (MNEs) to pay their dues.
However, when these enterprises can just pass this on to others – particularly digitally dependent SMEs who cannot otherwise achieve their goals – the DST is surely not having its desired effect?
Not looking at the profitability of the platforms means that the DST may end up being a disproportionate levy and, as a result, drive a possible deceleration of economic growth.
SMEs are inadvertent “victims” of the new tax levy
So what is the thinking behind this new levy? Many SMEs exist either in the middle of the digital services supply chain or to ensure the delivery of a product or service to its final customer. Where tech companies at one end of the chain and final customers at the other, SMEs sit between the two, paying for services (such as advertising) provided by the tech companies.
The logic of the DST is, in part, that tax on profitability (such as income tax) do not have the reach to impose tax burdens on tech companies for digital services. However, tech companies can circumvent the economic burden of the DST by transferring the levy to their customers, as they currently do with SMEs.
Conversely, whilst tech companies can pass on the levy to SMEs by increasing the cost of their services and so cover their tax liability, SMEs cannot similarly shift the burden downstream to their customers, as doing so may well take away their competitive advantage.
A well-meaning but flawed tax concept
Finally, even though consumers successfully use one or more digital service, they do not usually have to pay anything at all. Most of these can access any information, products and services through the use of free online services.
While SMEs serve a vital purpose in domestic economies, they are often the primary victims of this tax burden, whereas tech companies escape cost-free. Hence this system of taxation is a flawed one and deeply unfair.
SMEs are part of the digital services supply chain and a vital element of any country seeking to pursue economic growth while achieving a healthy economy. Since over 99% of EU businesses are SMEs, surely it would be fairer to support their development, rather than leave them to have to shoulder most of the actual tax burden?
(a version of this article also appeared in Accountancy Daily, May 12th 2021)
April 30, 2021
Two member firms of Kreston – Kreston FLS, based in Mexico, and Daehyun Accounting Corporation, based in Seoul – have joined the Expatland Global Network, a leading provider of global mobility services.
The addition of the two firms as Expatland Global Network partners represents the latest expansion of the network’s collaboration with Kreston, which now includes a total of 13 member firms around the globe.
The Expatland Global Network brings together international teams of professionals to provide global mobility services across taxation, logistics, real estate, education advice and more. These ‘E-Teams’ are made up of like-minded service providers in over 30 cities globally. Their expertise ranges from banking and insurance to medical and education, each passionate about helping expats coordinate their moves abroad and settle into their new home.
The partnership with Expatland Global Network will provide expats with access to trusted advice on tax planning and financial reporting across Mexico and South Korea, benefitting from the expert advice and local insight offered by Expatland Global Network’s international ‘E-Teams’.
Kreston FLS is a full-service accounting, legal and financial services firm based in Mexico City. Its clients span a wide spectrum of sectors, most notably in manufacturing and services. With its five offices and 95 staff members, Kreston FLS is one of six firms that make up Kreston International’s Mexican presence.
Based in Seoul, Daehyun Accounting Corporation provides a broad spectrum of services, including audit, tax, consulting and M&A for its SME clients both local and international. Daehyun Accounting Corporation is one of two Seoul-based Kreston International members.
Kreston FLS and Daehyun Accounting Corporation become the 68th and 69th partners, respectively, to join the Expatland Global Network– 13 of which are Kreston International member firms – across the UK, Europe, Asia-Pacific and North America.
Liza Robbins, Chief Executive of Kreston: “Expatland Global Network has for some time been a trusted partner of Kreston Global and is at the forefront of providing global mobility services and insight. The addition of these two firms to the Expatland network is a testament to its success and we look forward to seeing this international partnership continue to bear fruit.”
John Marcarian, Founder of Expatland Global Network: “Despite the setbacks to international movement caused by the pandemic, the demand for expatriation among the internationally mobile community looks set to recover quickly. We’re pleased to expand our relationship with Kreston International by adding these two firms as new partners and, in doing so, significantly enhance our offering in Mexico and South Korea.”
April 6, 2021
Tax experts from Kreston predict digitalisation of tax and transfer pricing will be dominant issues for the next two years, in addition to base erosion and profit shifting (BEPS).
In a survey of attendees of Kreston’s International Tax Conference, a significant number of respondents indicated that BEPS and Transfer Pricing (both 19.35%), along with tax digitalisation (17.26%), were the top three issues likely to be at the forefront of industry debate.
Tax avoidance and evasion (15.48%), harmonisation of tax (11.31%) and tax investigations (10.7%) were also highly ranked, highlighting the public and political scrutiny these issues continue to receive around the globe.
Notably, one of the most contentious tax issues globally – the debate over the potential levying of wealth taxes – was viewed as least likely to dominate the agenda, with only 6.55% of respondents putting it in their top three choices.
Mark Taylor, Chair of the Global Tax Group at Kreston Global, said:
“These figures bear out our conversations within the Kreston International network: that the BEPS project and transfer pricing continue to dominate the international tax landscape for multi-nationals.
“The fact that tax digitalisation came second in our poll reflects the belief that governments across the globe have this high on their agenda. As ever the tax landscape globally continues to evolve and this is only likely to accelerate in the post-Covid era as individual countries look to rebalance their economies.”
The findings of the survey were initially presented at the 2021 International Tax Conference, held virtually on 24 March. The event brought together nearly 130 global tax professionals from 41 different countries across the Kreston network.
