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Some transaction gains and losses (ASC 830-20-35-3) and all translation adjustments are recorded directly in CTA. ASC 830-30-45-21 requires the tax effects of these items to be allocated to CTA.
With respect to deferred taxes provided by a parent or investor for the outside basis temporary difference, the method of allocating deferred taxes between continuing operations and other items must be considered. As indicated in ASC 740-20-45-14, the allocation of tax effects to two or more items other than continuing operations must follow certain procedures.
Although several alternatives exist, one logical method of allocation is set forth below. For simplicity of discussion, it should be assumed that (1) the only sources of change in the outside basis difference during the year are continuing operations and translation adjustments for the year, and (2) no remittance or other recovery of the parent’s investment has occurred during the year. It is also assumed that there is no current or deferred taxes in the local jurisdiction.
  1. Compute the total deferred tax provision for the year. This would be the difference between (a) the required year-end deferred tax liability at enacted tax rates and current exchange rates, utilizing available credits, and (b) the beginning-of-year deferred tax liability.
  2. Compute the charge to continuing operations. This consists of the following components:
    1. The deferred taxes related to the current year’s continuing operations at average exchange rates for the year (i.e., the rate used in translating the income statement).
    2. The change in the deferred tax asset/liability resulting from changes in tax laws or rates and the portion of a change in the valuation allowance that results from a change in judgment about the realizability of the related deferred tax asset in future years.
  3. The differential (1 less 2 above) represents (in the absence of any other items except continuing operations) the charge (or credit) to CTA. This computation will require appropriate consideration of foreign withholding taxes and limitations on utilization of foreign tax credits.
TX 12 offers a comprehensive discussion of intraperiod allocations.
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