Unless the indefinite reversal criteria in ASC 740-30-25-17 are met, a deferred tax liability is generally required for a book-over-tax outside basis differences attributable to a foreign subsidiary or corporate joint venture, except when the basis difference will be recovered in a tax-free liquidation. Regardless of whether an entity is asserting indefinite reinvestment, it should track its outside basis differences for purposes of complying with required disclosure requirements related to the amount of outside basis differences (before adoption of ASU 2023-09) and the amount of any unrecognized deferred tax liability (see FSP 16.4.4 and FSP 16.4A.4). Refer to TX 11.3.2 for considerations in assessing the ability and intent to recover the outside basis in a tax-free manner.
Under the indefinite reversal exception, a deferred tax liability does not need to be recognized for the excess outside book basis of an investment in a foreign subsidiary, or foreign corporate joint venture that is essentially permanent in duration, until it becomes apparent that the basis difference will reverse in the foreseeable future.

ASC 740-30-25-17

The presumption in paragraph 740-30-25-3 that all undistributed earnings will be transferred to the parent entity may be overcome, and no income taxes shall be accrued by the parent entity, for entities and periods identified in the following paragraph if sufficient evidence shows that the subsidiary has invested or will invest the undistributed earnings indefinitely or that the earnings will be remitted in a tax-free liquidation. A parent entity shall have evidence of specific plans for reinvestment of undistributed earnings of a subsidiary which demonstrate that remittance of the earnings will be postponed indefinitely. These criteria required to overcome the presumption are sometimes referred to as the indefinite reversal criteria. Experience of the entities and definite future programs of operations and remittances are examples of the types of evidence required to substantiate the parent entity's representation of indefinite postponement of remittances from a subsidiary. The indefinite reversal criteria shall not be applied to the inside basis differences of foreign subsidiaries.

11.4.1 Indefinite reversal exception—foreign sub/joint venture

As noted in ASC 740-30-25-17, the non-recognition of a deferred tax liability for outside basis differences that meet the indefinite reversal criteria is an exception to ASC 740’s model for the comprehensive recognition of deferred taxes for temporary differences. Therefore, an enterprise availing itself of that exception must assert its intent to indefinitely reinvest its outside basis difference. Specifically, management must have the ability and the intent to indefinitely prevent the outside basis difference of a foreign subsidiary from reversing with a tax consequence.
The indefinite reversal exception only applies to the transfer of unremitted earnings across national boundaries, and not for transfers of unremitted earnings between entities within the same foreign country. As a result, management needs to consider book-over-tax outside basis differences within each legal entity in the organization to ensure proper compliance with ASC 740.
The ability to assert indefinite reversal needs to be assessed as of each balance sheet date with respect to each foreign subsidiary or foreign corporate joint venture.
Entities that are unable to assert indefinite reinvestment must record a deferred tax liability for any taxable temporary differences that would be incurred when the outside basis difference reverses. To calculate or measure the tax effect of an outside basis difference, a realistic and reasonable expectation as to the time and manner of the expected recovery must be determined. Taxes provided should reflect the expected form of recovery (e.g., dividend, sale, liquidation) and the character of taxable income that the repatriation will generate (e.g., ordinary versus capital gain). For example, if the basis difference is expected to be recovered through distributions, a deferred tax liability would generally be needed for the parent's tax consequences of the distribution (including consideration of potential foreign tax credits (FTCs) and dividend received deductions). This includes the tax consequences of any foreign currency gains or losses, federal and state taxes, and foreign withholding taxes. If, however, the basis difference is expected to reverse through sale, the parent entity would need to consider whether capital gain rates would apply. Refer to TX 11.8.
Besides unremitted earnings, there are other transactions that may contribute to an outside basis difference, such as changes in a parent’s equity in the net assets of a subsidiary resulting from transactions with noncontrolling shareholders, movements in other components of the subsidiary’s other comprehensive income (e.g., unrealized gains or losses on available-for-sale debt securities), changes in the outside tax basis that sometimes arise in business combinations and reorganizations, and other changes in the subsidiary’s equity.
We believe that the difference between the book and tax basis represents a single outside basis difference, even if portions of the total outside basis difference originated from different events. This does not preclude an entity from asserting that a portion of the single outside basis difference qualifies for any of the recognition exceptions for outside basis differences.

11.4.2 Partial reinvestment assertion

The indefinite reversal criteria may apply to only a portion of an outside basis difference (whether caused by unremitted earnings or other factors). Thus, partial recognition of a deferred tax liability would be appropriate for that portion of the liability for which the criteria are not met. However, if an entity makes only a partial indefinite reversal assertion, the nature of the "evidence" and "plans" (ASC 740-30-25-17) should be consistent from year-to-year unless there is a clear business rationale for a change in intent. Companies also need to consider how the tax law might impact a company’s assertion. For example, an entity may assert that the historical earnings of its foreign subsidiaries are indefinitely reinvested, but that current year earnings are not indefinitely reinvested. In this situation the entity would not record a deferred tax liability on historical outside basis differences but would be required to record a tax liability for any outside basis differences created in the current year. It is also possible for an entity to not assert indefinite reinvestment on historical earnings, but to assert indefinite reinvestment on prospective earnings.
There may also be circumstances when a foreign subsidiary has unremitted earnings, but, for other reasons, the overall outside tax basis in the subsidiary actually exceeds the book basis (i.e., deductible temporary difference or potential deferred tax asset). See TX 11.5 for a discussion of the accounting for a tax-over-book basis difference.

11.4.3 Evidence required for indefinite reversal assertion

ASC 740-30-25-17 requires management to compile evidence to support its assertion that the indefinite reversal criteria are met. Merely having a history of not distributing foreign earnings does not constitute evidence of specific reinvestment plans. The specific plans for reinvestment must be documented and must support the assertion that the reversal of the outside basis difference can and will be postponed indefinitely.
The following evidence, among others, should be considered:
  • The forecasts and budgets of the parent and subsidiary for both the long and short term
  • The financial requirements of both the parent and subsidiary for the long and short term, including:
    • Projected working capital and other capital needs in locations where the earnings are generated; and
    • Reasons why any excess earnings are or are not needed by the parent and/or another subsidiary somewhere else in the chain
  • Past history of dividends
  • Tax consequences of a decision to remit or reinvest
  • Remittance restrictions in a lease or loan agreement of a subsidiary
  • Remittance restrictions imposed by foreign governments

11.4.4 Effect of change in an indefinite reversal assertion

In accordance with ASC 740-30-25-19, if there is a change in judgment regarding the indefinite reversal assertion, the parent entity should adjust income tax expense in the period of change.

ASC 740-30-25-19

If circumstances change and it becomes apparent that some or all of the undistributed earnings of a subsidiary will be remitted in the foreseeable future but income taxes have not been recognized by the parent entity, it shall accrue as an expense of the current period income taxes attributable to that remittance. If it becomes apparent that some or all of the undistributed earnings of a subsidiary on which income taxes have been accrued will not be remitted in the foreseeable future, the parent entity shall adjust income tax expense of the current period.

In determining the period in which an indefinite reversal assertion changed, management should consider the nature and timing of the factors that influenced their change in plans.
In most cases the initial recognition of a deferred tax liability for the temporary difference accumulated in prior periods as a result of a change in the indefinite reversal assertion will be reflected entirely in continuing operations. Conversely, any adjustment to the deferred tax liability resulting from the current-year movements in the temporary difference should be allocated to the respective category of income (e.g., discontinued operations, other comprehensive income) in accordance with the intraperiod allocation rules. See TX and

11.4.5 Indefinite reversal assertion and purchase accounting

In a business combination, the acquirer must make its own determination regarding indefinite reversal in connection with any outside basis differences of the acquired entity. If the acquirer does not meet or does not assert the indefinite reversal criteria at the time of the acquisition with respect to the outside basis difference in an acquired foreign subsidiary, deferred taxes should be recognized in acquisition accounting, regardless of the prior owner's assertion (see TX 10.4.4 for more details).
A reporting entity may determine it is not able to assert indefinite reversal on acquired outside basis differences, and therefore, recognize the deferred tax liability in acquisition accounting. However, it is important that the assertion (or lack thereof) implicit in the acquisition accounting is consistent with the entity's broader reinvestment plans. In addition, the reasons for any subsequent change in assertion with respect to future earnings of those acquired subsidiaries must be reconcilable with the position taken in purchase accounting. Accordingly, a reporting entity should carefully consider any decision to provide deferred taxes in purchase accounting if it intends to assert indefinite reinvestment with respect to future earnings.
An acquisition may also impact the acquirer's intent and ability to delay reversal of a taxable temporary difference related to subsidiaries it owned prior to the acquisition. As discussed in TX 10.4.4, the tax effects of the change in assertion related to the acquirer's previously owned subsidiaries is not part of the acquisition transaction and would be recorded in the period in which management's assertion changes, as noted in TX 11.4.4.

11.4.6 Going-concern uncertainty—indefinite reversal assertion

The existence of a going-concern uncertainty may suggest that management is no longer able to control the decision to indefinitely reinvest foreign earnings. In fact, the financial uncertainty that often exists in these cases may create a presumption that unremitted foreign earnings will be needed to meet existing obligations and keep the business afloat. In this regard, the facts and circumstances of each individual going-concern situation should be evaluated to understand whether maintaining an indefinite reinvestment assertion is still possible.

11.4.7 Bankruptcy—indefinite reversal assertion

Even before entering bankruptcy, reporting entities facing financial difficulties might find that they are no longer able to sustain an indefinite reinvestment assertion. As the assertion is generally based upon the reporting entity's ability and intent to indefinitely reinvest the earnings of a foreign subsidiary, a reporting entity having liquidity issues may find it difficult to support such an assertion. Once the reporting entity files for bankruptcy, and control of the reporting entity is moved from management to the bankruptcy court, it may be even more difficult to continue to make such an assertion.

11.4.8 Gain recognition agreement

Under US tax law, certain transfers of stock or securities of a foreign corporation by a US transferor to a foreign subsidiary are not taxed to the extent the US transferor agrees to recognize the gain realized on the transfer if certain "gain recognition events" occur during a 5-year period following the year of the transfer. This is known as a gain recognition agreement (GRA).
A question arises as to whether a tax liability should be recorded when a US transferor transfers shares of a subsidiary subject to a GRA. We believe that whether a tax liability is recorded on the difference between the fair market value and the book basis of the property transferred will depend on whether the entity has the intent and ability to indefinitely defer the tax consequences—in other words, whether the US transferor can prevent any gain recognition events from occurring prior to the expiration of the 5-year period.
We believe this is analogous to the guidance when an entity converts from C corporation to S corporation status and the consideration of whether the entity should continue to record a deferred tax liability to the extent it will be subject to the built-in gains tax (see TX 8.4). To the extent the transferor can support the ability and intent to defer the tax consequences (i.e., not engage in "gain recognition events" during a 5-year period following the year of the transfer), we do not believe a tax liability should be recorded.
If at any time prior to the expiration of the 5-year period, the entity's ability and intent changes, the entity would be required to record the tax liability.
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