The new International Financial Reporting Standards (IFRS) on revenue, financial instruments and leases have been described as having the greatest impact on financial reporting since the adoption of IFRS. The new IFRS rules also give rise to important tax considerations.
Finance and tax professionals should consider the impact of the new standards on the tax position of their businesses and, to do so, they will need support from other parts of the organization, including for review and possible amendments to contracts.
Assessing the tax impact of the new standards requires a careful analysis of a number of tax considerations and here are some of the challenges that the new IFRS may pose:
Determining the one-time tax effect from the transition to the new standards. There are specific rules for tax adjustments when these are resulting from changes in accounting policy and/or new accounting standards. Applying the rules in practice may be challenging, while the possibility for different interpretations may create controversy with the authorities during future control proceedings.
Transition to more than one new standard in 2018. Estimating the aggregate tax effect from the simultaneous transition to IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers with effect from 1 January 2018 may be a challenging exercise. The task would be even more difficult for businesses that elect for early adoption of IFRS 16 Leases from 1 January 2018.
Specific issues relating to the application of the new IFRS rules. Some of the current provisions of the Bulgarian Corporate Income Tax Act create uncertainty with regard to the tax implications to arise when the new IFRS rules are applied. It may be expected that the tax legislation will also undergo changes to reflect better the new reality.
When should businesses be ready with the analysis of the tax impact of the new IFRS? The tax effects from the application of the new standards will be reflected for the first time in the 2018 annual corporate income tax returns to be filed by the end of March 2019. Entities undergoing business transformations will need to assess the impact on their tax position even earlier, if required to file a tax return in the course of 2018.
It might seem now that there is plenty of time to assess the tax impact of the new IFRS rules. Yet, leaving this for early 2019 may create significant extra burden for the tax and finance teams involved in year-end reporting, while for businesses, such a delay may lead to unexpected cash flow effects.
Stella Koycheva, Senior Manager, Tax, presented the topic at the 2018 KPMG Client Business Seminar.
© 2018 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.