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ACCA Strategic Professional · Strategic Business Reporting (International) · Income taxes

Omega has a subsidiary, Zeta, which has retained earnings of $2m since acquisition. Omega controls the timing of dividends from Zeta and has stated it will not distribute these profits in the foreseeable future. Dividends from Zeta would incur withholding tax of $100,000. How should Omega treat the taxable temporary difference on the undistributed profits?

No deferred tax liability is recognised. IAS 12 exempts temporary differences on investments in subsidiaries when the parent controls the timing of reversal and it is probable they will not reverse in the foreseeable future, which applies here.

  1. ARecognise a deferred tax liability of $100,000 because the profits are taxable on distribution
  2. BRecognise a deferred tax liability only when the dividend is declared
  3. CRecognise no deferred tax liability, because the parent controls timing and the difference will probably not reverse in the foreseeable futureCorrect
  4. DRecognise a provision for $100,000 under IAS 37

Explanation

IAS 12 requires deferred tax on investments in subsidiaries unless the parent can control the timing of reversal and it is probable the difference will not reverse in the foreseeable future. Both conditions are met here. Recognising the liability would ignore this exception.

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