The second quarter of 2022 was relatively quiet on the tax law development front; however, companies continue to face a variety of challenges that may ultimately impact quarterly tax provision calculations. The most prominent challenge for many businesses is navigating the continued period of inflation and an evolving economic outlook. The following update provides insights on federal and international tax laws that may impact a company’s second quarter provision in 2022. Read more about state and local tax considerations in our companion alert: State tax law changes for the second quarter of 2022.
Changes in valuation allowance
The continued presence of inflationary pressures on the economy may result in companies reassessing forecasts for the current and future periods. Companies with a valuation allowance need to consider how to account for these changes in forecast and any resulting change in the amount of valuation allowance required. Under ASC 740, a company is required to assess the need for a valuation allowance at each reporting date. A change in the assessment of any required valuation allowance may be required to be treated as discrete, as part of the forecasted annual effective tax rate, or a mix of both. To the extent the change in assessment is the result of a change in the assessment of income available in the current year, the change should be included in the forecasted annual effective tax rate applied to year-to-date pretax book income. To the extent the change in assessment is related to income available in future periods to support the realization of deferred tax assets, the change would be recorded as a discrete item in the period in which the company’s assessment changed.
Section 174 required capitalization now effective
To date, Congress has not made any progress on repealing or delaying required capitalization of research and experimental expenditures under section 174 and the IRS has not provided any additional guidance clarifying the costs required to be capitalized. The capitalization requirement, included as part of the Tax Cuts and Jobs Act (TCJA), is effective for tax years beginning after Dec. 31, 2021. Section 174 requires that companies capitalize and amortize domestic research and experimental expenditures over five years and foreign expenditures over 15 years. As companies continue to assess the impact of section 174 on their income tax return and provision, revisions to the forecasted annual effective tax rate used for interim provision calculations may be necessary.
While there is still significant support for delaying the provisions of section 174, current economic factors, such as inflation, may be an obstacle to passing tax reform. Companies should continue to evaluate the impact of section 174 with the possibility that tax law changes will not be passed before year-end. Read more about the current challenges in tax policy in the recent tax alert: An update on the tax policy landscape against inflation backdrop. Keep in my mind that a reporting entity’s tax provision must reflect the tax laws as currently enacted.
Updates from the Financial Accounting Standards Board (FASB)
FASB issued one accounting standards updates during the second quarter of 2022 related to fair value measurement for equity securities. Year-to-date, FASB has issued three updates.
The Board continues to discuss the proposed accounting standards update for enhancements to income tax disclosures. The FASB revised the scope of the project scope and objective during the first quarter. Going forward, the Board’s objective for the project will focus on improving the transparency and decision usefulness of income tax disclosures and such improvements will focus on income taxes paid and the rate reconciliation.
On May 21, 2022, the Australian people elected a new government representing a policy shift from the current government. The new government has announced a multinational tax integrity package to close various loopholes. The government has announced plans that would impact multinationals in four ways:
- Supporting the OECD’s Two-Pillar solution for a global minimum tax rate of 15%.
- Limiting interest expense deductions by multinationals to 30% of earnings before interest, tax, depreciation and amortization (EBITDA).
- Limiting benefits to multinationals in relation to Australia’s tax treaties when companies hold intellectual property in tax havens.
- Introducing additional transparency measures.
These measures will not apply for some time, generally no earlier than July 1, 2023.
In April of 2022, Canada’s Minister of Finance introduced Canada’s 2022 Budget. The Budget received Royal Assent on June 23, 2022 and as such, any impact on a Company’s tax provision should be reflected in the current quarter. Find an in depth analysis of the changes included in the 2022 Budget in the alert: 2022 Canada Federal Budget: Detailed commentary.
The Finance Act 2022 was passed after receiving President’s assent on March 30, 2022. Some of the highlights of the Finance Act 2022 are as follows:
Income from the transfer of digital assets will be taxed at 30%.
For purposes of section 40(a)(ii) of the Income Tax Act, the term tax includes and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. Consequently, penalty proceedings may be initiated, and the Assessing Officer shall recompute the total income of the assessee for such previous year and make necessary amendments.
Changes to the rules regarding the filing of amended returns.
In response to rising energy costs and the burden it is placing on business, the Irish Government recently announced several measures, aimed to support businesses struggling with the rise, this includes a temporary reduction on the VAT on gas and electricity supplies, a reduction on excise taxes for petrol and diesel.
The new Compliance Intervention Framework which was previously introduced is now active from May 1, 2022. The new Framework has introduced new factors such as real-time reporting, an increase of tax transparency and the use of a dedicated digital resource by Revenue. The Framework should be considered in the context of the self-assessment regime and is based on the principle that it is the responsibility of the taxpayers to ensure their returns are accurate and filed on time.
The Framework is updated to include 3 intervention levels which support self-review and self-reporting of tax errors. Level 1 is designed to support and remind taxpayers of their obligations without the need for a more in-depth review. Level 2 has two types of interventions, audits and risk reviews. The risk review under Level 2 is a new concept. It will focus on a particular issue in the tax return, or a risk identified from Revenue. A risk review will commence 28 days after the date of notification. A taxpayer can still make a prompted qualifying disclosure in respect of tax underpayments up to the commencement of the risk review. Level 3 takes the form of an investigation and occur when Revenue below there has been serious tax/duty fraud or evasion.
The conversion of Legislative Decree no. 4 / 2022 modified the regulation that provides the possibility for entities that adopt the Italian GAAP to suspend up to 100% of the annual amortization/depreciation of the cost of tangible and intangible assets for accounting purposes.
This last amendment granted the possibility of opting for the suspension of depreciation allowances for all entities, regardless of whether the entities availed of this option in 2020. Moreover, the option is extended for the financial year in progress as of Dec. 31, 2021 and also for the one in progress as of Dec. 31, 2022. Entities must allocate profits corresponding to the suspended amortization/depreciation amount to an unavailable reserve in equity.
The application of the mentioned option does not affect the possibility of deducting the amortization and depreciation (including the suspended part) for IRES and IRAP purposes, even without the accrual in the profit and loss account of the year.