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TEI comments on International Accounting Standards and European Union consolidated tax base: May 30, 2003.

On May 30, 2003, Tax Executives Institute submitted the following comments to the European Commission Directorate-General, Taxation and Customs Union Tax Policy on the use of the International Accounting Standards (IAS) for company tax purposes in the European Union (EU). The submission is the outgrowth of the European Chapter's participation in a workshop held by the Commission on March 18 on the use of IAS in developing a consolidated tax base for EU-wide activities. TEI's comments were prepared under the aegis of the European Chapter, whose president is Hilary A. Robinson of Kodak Ltd., and the International Tax Committee, whose chair is Bruce R. Maggin of IBM Corporation.

On behalf of Tax Executives Institute, I am writing to provide comments to the European Commission regarding the use of the International Accounting Standards (IAS) for company tax purposes in the European Union (EU).

As the preeminent international association of business tax professionals, TEI has a significant interest in promoting sound tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. TEI applauds efforts of the Directorate-General, Taxation and Customs Union Tax Policy, toward reducing costs and providing greater certainty for taxpayers, as well as enhancing coordination among Member States. In respect of using IAS for company tax purposes, TEI is pleased to submit the following written comments on the Consultation Document, The application of International Accounting Standards (IAS) in 2005 and the implications for the introduction of a consolidated tax base for companies' EU-wide activities issued in February 2003 ("Consultation Document"). The Consultation Document explores the possibilities that the introduction of IAS as a common set of accounting standards in the EU might afford for the establishment of a common consolidated tax base.

These comments build on the efforts of representatives from TEI's European Chapter who participated in the workshop held by the Commission on March 18, 2003, in Brussels to discuss the Consultation Document and promote a free exchange of views on the issues it raises. We welcome further dialogue on any of the points raised in our comments.


TEI was established in 1944 to serve the professional needs of business tax professionals. Today, TEI has 53 chapters covering North America and Europe. Our 5,300 members represent approximately 2,800 leading corporations. TEI is a non-profit organization that represents a cross-section of the business community; it is dedicated to the development and effective implementation of responsible tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and governments alike. As a professional association, TEI is firmly committed to maintaining tax systems that work--systems that are administrable and with which taxpayers can comply.

The majority of TEI members work for multinational companies that engage in international trade, including many non-U.S, based enterprises. Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the various tax laws relating to the operation of business enterprises. Consequently, TEI members have a special interest in the potentially sweeping changes in European Union tax policy under consideration by Commission staff. Implementation of any of the ideas being explored has major implications for the multinational enterprises represented by TEI members.

General Comments

The Consultation Document acknowledges that IAS accounts would serve, at most, as a starting point for arriving at a tax base and not the tax base itself. Since "it is questionable whether or not using IAS accounts as a starting point would be the most efficient way forward to establishing a common tax base," (1) TEI recommends any initiatives, particularly those designed to simplify the existing systems of taxation in the EU, progress incrementally through well-defined proposals. Such an approach would allow both taxpayers and Member States to evaluate and react to new rules, project their effects upon their operations, and plan for and measure the effects of the incremental change.

One example highlighting the importance of such an approach would be using consolidated accounts after the elimination of intercompany transactions as a common tax base. This would radically depart from the arm's-length principle, which is the basis of the tax conventions drawn up in accordance with the OECD model tax treaty. (2) Additionally, as expressed at the workshop, it may be more appropriate to agree upon basic tax principles before attempting any linkage to IAS.

Questions Raised in the Consultation Document

1. The current endorsement procedure of IAS provides Member States with the necessary level of "control" over accounting standards in the EU. Could it be extended or supplemented to provide sufficient taxation input for IAS to form the starting point for the tax base?

This question concerns the "legislative" framework for the preparation of IAS. The community endorsement process that applies to the adoption of IAS within the EU is probably too fast and flexible for taxation aspects, particularly because it would diminish scrutiny from Member States' parliaments. Frequently, there are sound policy reasons for divergence between tax and accounting principles, and a separate deliberative process for assessing tax changes will prevent unintended and undesirable consequences. (3)

Ultimately, the process should be one that has the greatest likelihood of creating a set of rules regarding a common tax base that will be consistently applied. In order to achieve the objective of significantly reducing the compliance costs associated with dealing with 15 different tax systems within the Internal Market (potentially more in the near future), it is important that the rules both begin and remain truly consistent. Although time consuming, the "Legislation by Directive" approach described in the Consultation Document may provide the greatest certainty without usurping the authority of the Member States.

2. Are IAS too "investor orientated" for the tax administration to use them as the primary source for determining the taxable base? To what extent do the IAS principles of materiality, fair value and "substance over form" conflict with taxation principles? Could any conflict be resolved by the provision of supplementary schedules provided specifically for taxation purposes?

This question concerns the general principles underpinning IAS. TEI concurs with those commentators who have suggested that tax policy is a matter for the Member States. Accordingly, the determination whether the IAS are too "investor orientated" can only be determined through a comprehensive review of the IAS, in the context of either: (a) tax accounting rules in each Member State, or (b) a common set of tax accounting rules, and corresponding underlying taxation principles.

Whether materiality, fair value, and "substance over form" conflict with taxation principles can only be determined by first establishing a common set of taxation principles. The current taxation regimes of Member States all require adjustments to accounting profits. It is unlikely that these issues will disappear even if a common tax base is introduced. To the extent there are differences, they may be addressed through supplementary schedules provided specifically for taxation purposes.

3. If only a limited number of companies use IAS, is it appropriate to design a common tax base around IAS?

This question concerns the number of companies likely to adopt IAS. Based on the discussion at the March 18 workshop, the use of IAS at the subsidiary level will likely be widespread--at least for consolidation reporting purposes. Accordingly, the adoption of IAS by the Member States as a method of accounting for subsidiary companies for statutory purposes has great merit in its own right. Since the statutory accounts generally form the basis for the tax accounts, with dependency varying among Member States, adoption of a common tax base utilizing IAS to any degree will be greatly simplified if the Member States allow the use of IAS for statutory accounts.

Those entities that must use IAS for consolidated accounts will be forced to use IAS for subsidiary consolidation reporting accounts (as opposed to statutory accounts), since the subsidiary IAS accounts are a prerequisite to consolidating such accounts. Allowing the use of these ac counts for statutory purposes will therefore allow companies utilizing IAS for statutory accounting purposes at the subsidiary level to adjust these IAS accounts to determine the tax accounts. If there were a common set of tax accounts, the mapping of the IAS accounts to the tax accounts would only be necessary once. In sum, using IAS as a starting point for a common tax base follows naturally from the use of IAS for local statutory accounts. If the use of IAS accounts for statutory purposes is not permitted, then the potential administrative efficiencies of the Commission's initiative will be greatly reduced.

Finally, given that many major European companies (not to mention small or medium sized enterprises) are unlisted, the proposal to limit IAS to listed companies will deprive many companies of the ability to use IAS for their statutory accounts. This could impair competition either by excluding them entirely or by requiring them to produce two sets of accounts.

4. Which of the two approaches is preferable--adjusting IAS consolidated accounts to arrive at a consolidated tax base or creating a tax specific method of consolidating the accounts of individual subsidiaries?

This question concerns the implications of an IAS regulation specifically directed at consolidated accounts and a significant attraction of a common tax base consolidation. Using consolidated accounts after the elimination of intercompany transactions as a common tax base would depart from the arm's-length principle, which is the basis of the tax conventions drawn up in accordance with the OECD Model Treaty. TEI submits any departure from this principle would be objectionable.

EU consolidated accounts will likely be a subset of consolidated accounts for many multinational enterprises. Adjusting IAS consolidated accounts to produce a set of EU consolidated accounts would be burdensome. For example, non-EU company consolidated accounts would have to be reversed out and eliminations relating to transactions between EU and non-EU companies would have to be reversed. A separate audit would likely also be required.

Assuming a common tax base is established for subsidiary accounts, the common tax accounts of individual EU subsidiaries could be more readily applied. For example, this could be the aggregation of the net taxable income of the individual companies, the consolidation method used in most Member States offering a form of tax consolidation or transfers of losses/group contributions. (4)

5. Is "dependency" sustainable if a common tax base is adopted across the EU? Can the additional features currently secured via dependency, be provided without requiring dependency?

This question concerns the principle of dependency, i.e., the linkage between IAS and the tax base. TEI does not believe that dependency itself need be an immutable goal of a common consolidated tax base. Indeed, divergence between tax and accounting principles often is the result of deliberate and sound tax policy. On the other hand, we agree that there is a benefit in considering specifically whether and how the IAS base should be adjusted for tax purposes. Cascading adjustments of the tax base solely for the sake of dependency, however, would be ill- advised.

As a starting point, it would be helpful to develop tax rules allowing a common mapping of tax accounts from statutory accounts based on IAS. In our view, however, each IAS rule must be examined to determine its acceptability.

Stated simply, dependency is not desirable and cannot be achieved with respect to all accounting issues. Indeed, accounting issues encompass a broad range of subjects; for example, revenue recognition, asset capitalization, appropriate use of provisions, and the deductibility of specific expenses. A complete set of standard tax accounting rules could be formulated and proposed, drawing on the previous work of the EC in reviewing the company taxation rules in each of the member states, e.g., the Commission's internal 1988 paper regarding guidelines for a tax base. Absent such a process, however, dependency should not be presumed.

6. If using IAS as a starting point for a common base is too ambitious, does the existing framework for introducing IAS provide a useful example for how specific tax recommendations could be introduced? Should such recommendations seek to define only the tax base itself or seek to explain how to adjust IAS based figures to arrive at the recommended tax base?

This question concerns alternative methods of establishing a common tax base. Given the policy and fiscal implications for Member States with respect to potential modifications to Member States' tax bases, creating a series of "Tax Recommendations" is likely the only viable approach to introducing common rules.

7. Is the Societas Europaea an appropriate corporate vehicle for establishing a pilot project for a common tax base based on IAS? If yes, what additional practical steps would be required to implement this?

This question concerns whether the Societas Europaea (SE) form could be used to advance the principle of a common tax base with fewer obstacles than current company structures would engender. Since the SE will be a European company form organized under supra-national European laws rather than the laws of any individual Member State, it may well be an appropriate vehicle for establishing a pilot program. At this time, however, TEI questions whether it could undergird a workable pilot program unless detailed substantive and procedural rules governing taxation of such an entity are established in advance. The use of an SE under such a pilot program, either for new or existing operations, would not be feasible unless there is a fair degree of certainty with respect to the tax rules that would apply. Accordingly, the pilot program may serve to facilitate the wider approach, i.e., creating an EU set of tax rules to determine a common tax base, though the additional step of determining an allocation method--consistent with the arm's-length principle-would be necessary.


TEI commends the Commission staffs' work to date on this initiative and recommends that the Commission staff set as its next steps (1) an analysis of whether individual company accounts should be the starting point of a common tax base, and (2) the determination of the adjustments that are likely to be required to the IAS accounts. These steps will provide a solid basis for determining whether a common set of tax accounting rules and an EU consolidation method can be instituted, which in turn will allow further progress toward a common consolidated tax base.

TEI considers that the Commission's initiative in discussing the concept of a common tax base and its mechanics with the business community at this early stage is laudable and useful. We would greatly appreciate the opportunity to continue to participate in these consultations and comment on future developments in this project.

This letter was prepared under the aegis of TEI's International Tax Committee, whose chair is Bruce R. Maggin, with guidance from TEI's European Chapter, whose president is Hilary A. Robinson. If you have any questions about the Institute's views, please contact Mr. Maggin at 1.914.765.4083, Ms. Robinson at 44.1442.844.371, or Fred F. Murray or Gregory S. Matson of the Institute's legal staff at 1.202.638.5601.

(1) Summary, Consultation Document, at 3 (February 2003).

(2) European multinationals have engaged in costly litigation in the United States to combat the use of formulary apportionment and in support of the arm's-length principle. While a method of apportionment for a common tax base was specifically excluded from the scope of the Consultation Document, and therefore not addressed in these comments, TEI has concerns about any movement away from the arm's-length principle and toward formulary apportionment.

(3) This becomes increasingly important given the trend away from historical cost accounting and toward current value accounting. For example, as emphasized at the workshop on March 18, unrealized profits or phantom accrual income should not be taxed.

(4) This method could also be used as an allocation basis in accordance with the arm's-length principle.
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Publication:Tax Executive
Date:May 1, 2003
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