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While deferred taxes must be recorded for branch earnings, another area that must be considered when looking at the accounting for branches is the accounting for any CTA related to the operations of the branch. In circumstances when the temporary differences associated with the CTA of the foreign branch will not be taxed in the US until there is a remittance of cash or property, a question arises as to whether or not a company can apply an indefinite reversal assertion to the CTA of the foreign branch.
We believe the answer depends on which of two acceptable views is applied in an entity’s interpretation of the accounting literature. View 1 is that an indefinite reversal assertion is not available for a branch. View 2 allows for the application of an indefinite reversal assertion (when facts and circumstances permit). The views are summarized as follows:
View 1 (Inside basis approach)—ASC 740-30-25-17, which is an exception to the comprehensive recognition of deferred taxes, only applies to outside basis taxable temporary differences related to investments in foreign subsidiaries and certain foreign corporate joint ventures. Because branch income is directly taxable to the owner or parent, there is technically no outside basis in the branch and therefore the exception in ASC 740-30-25-17 is not applicable. Furthermore, ASC 740-30-15-4 prohibits applying the indefinite reversal criterion to analogous types of temporary differences.
View 2 (Outside basis approach)—In deliberating ASC 740, the FASB indicated that the underlying rationale for the exception in ASC 740-30-25-17 is based on the inherent complexity and hypothetical nature of the calculation. Application of the exception depends on a company’s ability and intent to control the timing of the events that cause temporary differences to reverse and result in taxable amounts in future years. In particular, the exception focuses on the expectation of owner or parent taxation in the home jurisdiction. Taxation of CTA varies by jurisdiction and can be complex. There may be some circumstances when taxation of CTA occurs only upon a remittance of cash from the branch. In these limited circumstances, the timing of taxation can be controlled by the owner or parent. On that basis, an indefinite reversal assertion could potentially be applied to the CTA of a foreign branch (even though the assertion could not apply to the periodic earnings of the branch since they pass through to the parent). This is not an “analogous” temporary difference which would be prohibited by ASC 740-30-15-4; rather, it is in the scope of ASC 740-30-25-17. That is because such amount relates to a foreign operation and carries with it the same measurement complexities as any other foreign outside basis difference.
Although either view is acceptable, the election is an accounting policy that should be applied consistently. If View 2 is adopted, indefinite reversal could be asserted for any branch for which the criteria are supportable by specific plans relating to the unremitted branch earnings. As a result, under View 2, an indefinite reversal assertion could be made and supported for one branch while not being made for another.
For a company applying View 2, other points to note are as follows:
  • View 2 is analogous to the conclusion reached in TX 11.10.2.2 with respect to previously taxed income of a foreign subsidiary. As noted in TX 11.10.2.2, the fact that earnings have already been taxed can make an indefinite reversal assertion difficult when there is a possibility of repatriation from foreign operations.
  • When an overall translation loss exists in the CTA, it is necessary to demonstrate that the temporary difference will reverse in the foreseeable future before recognizing a deferred tax asset under ASC 740-30-25-9.
  • In the event that an indefinite reversal assertion changes, the deferred taxes attributable to current year CTA movement are recorded to other comprehensive income in accordance with ASC 740-20-45-11(b). However, because the beginning-of-year CTA balance did not arise during the year, but rather in prior years, ASC 740-20-45-11(b) does not apply and the tax effects associated with these prior-year cumulative balances should be recorded to continuing operations.
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