The Impact of IFRS on Income Tax Administration

Today, International Financial Reporting Standards (IFRS) is the accounting standard used in over 100 countries except in the United States. Ethiopia is one of the countries currently supposed to implement IFRS.

The IFRS, also known as the International Accounting Standards, is a set of accounting standards issued by an independent, not-for-profit organisation called the International Accounting Standards Board (IASB).

The most obvious and immediate impact of the IFRS in financial reporting has been the adoption of tax reporting.

IFRS are developed without regard to their appropriateness for tax purposes, in the belief that accounting values shall be free from tax considerations.

Therefore, their increasing relevance within the national accounting systems raised the question of how IFRS can be matched with tax rules. For instance, a movement towards IFRS means that corporate income will now be taxed based on a value based approach rather than transaction based.

However, the constant goal to move towards the adoption of international financial reporting standards as the set of globally accepted principals seems to not be able to keep up with the ever-changing economy. On the other hand, shall IFRS be used as a tax base across the globe, it raises many accounting concerns.

Since there are differences between IFRS and Generally Accepted Accounting Principles (GAAP) accounting for taxable earnings and profits, foreign source income, investments in subsidiaries, and computation of permanent and temporary differences, once book accounting methods are changed, the impact on tax accounting methods requires consideration.

For example, a book and tax methods are currently the same. If IFRS changes the book treatment, what will happen to the existing tax method; how would it be possible to continue using historical tax methods; should it mean, tax conforms to book methods; will a request for a change in accounting method be necessary; and Which method is acceptable for tax purposes?

The answers to these questions will have a major impact on the preparation of tax report. These questions still unanswered in the Ethiopian finance and tax system in line the current effort to the implementation of   IFRS in the country.

The Ethiopian government has taken the initiative to integrate the financial statements of its companies with international standards.

This is declared in the Financial Report Proclamation of Ethiopia issued in 2014 requiring companies including banks to follow IFRS in their financial statement presentation.

In line with this, the government has established the Ethiopian Accounting and Auditing Board (EAAB) to monitor and supervise the implementation of IFRS in Ethiopia.

As a result, some progress has been achieved regarding awareness creation in the IFRS through short-term training, and in pushing the financial institutions to start implementing the standards.

On the other hand, there are still huge challenges, especially in applying the standards. The problems can be attributed to the high cost of translating them into practice, a complexity of financial reporting, lack of implementation guidance, and lack of availability of competent specialists. Resistance to change and lack of capacity of the board regarding qualified human resources and proper infrastructure are also among the challenges.

Among all the challenges that business organisations and practitioners in Ethiopia mention is that the immediate impact of adopting tax reporting into the IFRS in financial reporting is not clear.

Is the new financial reporting standard a permissible tax accounting method? How much is the new Ethiopian income tax proclamation in line with IFRS standards? Is the new book method preferable for tax reporting purposes? Will there be modifications in the computation of permanent and temporary differences? How will reporting by IFRS affect the computation of taxable earnings and profits, foreign source income, and investments in subsidiaries?

In most countries financial reporting is regulated by domestic accounting standards or by GAAP or by IFRS and tax administration is regulated by federal and state laws, under the control of tax authorities.

According to a PricewaterhouseCoopers (PwC) survey published in 2013, while countries such as China, Czech Republic, France, Germany, Switzerland and the US have already accepted IFRS, they did not change tax acts as a result of the adoption. But the United Kingdom is among the countries that changed their tax acts as a result of IFRS adoption.

The dynamic relationship of tax and IFRS in Ethiopia is, however, a subject of debate. The new income tax proclamation of 2016 requires taxpayers to use IFRS to keep records and prepare financial reports. On the other hand, the Ethiopian Revenues & Customs Authority (ERCA) seems to lag behind in understanding the accounting rules currently in effect, especially lacking focus on the most important issues that impact tax revenues.

While the trend is calling for regulators to keep updating themselves to the ever changing financial reporting and prepare the tax environment for a smooth transition to IFRS, many of the major companies in Ethiopia are using GAAP, and ERCA is comfortable with what is familiar.

Since the previous tax laws of the country are deeply interrelated with GAAP, the Authority ought to publish specific guidelines on tax treatments in line with each IFRS standard, especially where there are deviations. Most importantly, in moving to IFRS, the tax man must conduct assessments involving all stakeholders to understand and address the impact of IFRS on the tax administration, and the taxpayers


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