IFRS tax accounting effects of new rules on corporate income tax
On 14 June 2018, The Swedish Parliament passed a law on major changes to the Swedish regulations on corporate income taxation. The law will apply from 1 January 2019. However, some of the changes have tax accounting implications under IFRS earlier than January based on the law being enacted.
The two changes that are most relevant from an IFRS tax accounting perspective are the change to the corporate income tax rate in two steps and the rules limiting the possibility to deduct interest expenses. The change in tax rate affects the valuation of deferred tax assets and deferred tax liabilities, while a limitation on interest deductions can have an indirect effect on companies’ possibility to account for deferred tax assets.
Change in corporate income tax rate
The new law provides for a decrease in the corporate income tax rate in two steps, from 22% to 21.4% from 1 January 2019 and to 20.6% from 1 January 2021.
Under IFRS, deferred tax assets and deferred tax liabilities have to be valued based on the tax rate that will apply when the underlying temporary difference reverses or when unused tax losses or credits are utilized. This means that deferred taxes should be revalued as soon as future tax rate changes are substantively enacted – even if this happens within an interim period and even before the new rate actually applies. Revaluation of deferred tax assets and liabilities that were originally booked through profit and loss will impact tax expense and the effective tax rate. The revaluation of deferred tax assets and liabilities that were originally accounted for through other comprehensive income or through equity, should however be accounted for in the same way as the original asset or liability (backwards tracing).
The result of this IFRS accounting is that the effect from the revaluation will be accounted for in the period in which the new regulation is passed, i.e., June 2018. Another possible alternative is to incorporate the revaluation effects when calculating the estimate annual effective tax rate in line with IAS34 30 c. In the case that the profit before tax is spread evenly over the whole year this will spread the effect over the year, and allocate approximately half of the revaluation effect to Q2.
In order to decide which of the future tax rates has to be used, companies should create an overview of when each of their temporary differences will revert as well as when tax losses carried forward and tax credits will be utilized.
It is important to note that some items, such as tax allocation reserves, will still be reversed with a tax rate of 22% due to specific regulations in the new law.
Limitations on interest deductions
The new limitations on interest deductions allow companies to deduct net interest expenses of up to 30% of earnings before interest, taxes, depreciation and amortization (EBITDA). However, this limitation only applies to net interest expense exceeding SEK5 million. The proposed limitation is combined with detailed definitions of what should be deemed as interest income and expense and how the income measure EBITDA should be calculated for this specific purpose.
Under IFRS, the limitation will affect the current tax calculation for fiscal years starting on or after 1 January 2019. Companies that need to project future taxable profits in order to determine the amount of deferred tax assets that could be capitalized, should however incorporate the future effects of the new limitations in their projections already in Q2 2018.
EYG no. 010012-18Gbl
DID YOU LIKE THIS ARTICLE?
Subscribe to the Tax Insights newsletter for the latest thinking in tax.