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1
REPARIS Workshop

• The relationship between corporate income tax
  reporting and annual accounts
• Current Approach in Austria
• Friedrich Roedler
• Partner - PricewaterhouseCoopers
• Vienna - March 14th 2006

PwC
2
Financial Reporting - Background
Austria

• Austria is a middle market economy
• Few listed companies
• Bank debt as most important source of financing
• Historically main purpose of statutory Austrian
  GAAP financial statements
• Determine disposable income (distributable profit
  for corporations) ? protection of creditors
• Information to owners / shareholders / investors
  / public

3
Austrian GAAP
Austria

• IFRS required / allowed for consolidated accounts
  but not allowed for stand-alone financial
  statements
• Sources for Austrian GAAP
• Law ( 189 to 211 Commercial Code -
  Handelsgesetzbuch HGB)
• Statements from the professional institutes
  (Chamber of Accountants, Institute of Auditors)
• Common practice and custom

4
Austrian GAAP
Austria

• Key principles of Austrian GAAP
• True and fair view
• Prudence vs Fair View
• current assets lower of cost or market
• liabilities higher of current value or repayment
  amount
• no creation of hidden reserves (if reason for
  write-down does not exist any longer ? write-up)
• realisation / Imparity principle
• gains recognised when realised
• unrealised losses recognised
• Current assets write-down to market
• Fixed assets write-down if quasi-permanent
  impairment

5
Taxable Income
Austria

• Should reflect
• ability to pay ? only realised profits should be
  taxed !
• annualised profit on accruals basis
• Financial reporting (business accounting rules
  according to Austrian GAAP) as the starting point
  for determining taxable business income for
  corporations ? Dependency between accounting
  income and taxable profit (Massgeblichkeit)
  similar to Germany

6
Legal Basis for Dependency between Financial
Reporting and Corporate Income Tax Reporting
Austria

• Taxable trading income
• Difference between net value of a company at the
  beginning and at the end of the fiscal year
  (income according to tax balance sheet)
• adjusted by
• withdrawals (e.g. dividends) and contributions
  from shareholders
• Non-deductible expense / tax-exempt income
• 5 (1) EStG (Income Tax Act) linkage between
  statutory financial reporting and income tax
  reporting dependency (Maßgeblichkeit)
• Linkage applies to taxpayers (individuals,
  partnerships and corporations) registered in the
  companies register ? obliged to keep books
  according to Austrian GAAP

7
Formal vs General Dependency (Formelle vs
Materielle Maßgeblichkeit)
Austria

• Is taxable income to be determined based only on
  GAAP in general (general dependency) or also
  depending on the actual accounting choices made
  in the taxpayers statutory balance sheet
  (formal dependency)?
• Prevailing view formal dependency
• Simplification
• Equal treatment for fisc and taxpayer

8
Dependency

• Mandatory GAAP to be observed for tax purposes,
  e.g.
• Liabilities must be booked at the higher of
  current value or repayment amount
• Imparity principle also valid for tax purposes
• Where GAAP allow for discretionary accounting
  treatment
• Tax follows accounting treatment as applied by
  the taxpayer for accounting purposes
• Deductions claimed from taxable income (e.g.
  valuation, depreciation, provisions, accruals,
  ) only if booked in statutory accounts
• . unless tax law provides a mandatory rule

9
Financial Reporting vs Tax Reporting
Austria
GAAP
Tax Law
Tax Reporting
mandatory rule mandatory rule tax rule prevails
mandatory rule discretionary rule tax follows financial accounting (general dependency)
discretionary rule discretionary rule tax follows election made in financial reporting (formal dependency)
discretionary rule mandatory rule tax rule prevails
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Formal Dependency

• Examples
• Definition of acquisition cost / production cost
• Capitalisation of start-up cost and cost for
  major business expansion ( 198 (3) HGB)
• write-off of current assets to market value
• Write-off of fixed assets due to permanent
  impairment of value
• Write-off of low-value assets
• Accruals

11
Examples - General Dependency
Austria

• Capitalisation of self-created intangibles

Sec 197(9) HGB self-created intangibles must
not be capitalized
Sec 4 (1) EStG intangibles may be
capitalised only if acquired against compensation
Self-created intangibles must not be capitalised
for tax purposes
12
Examples Formal Dependency
Austria

• Capitalisation of interest in production cost

203(4) HGB option to capitalise interest
expense in production cost
EStG no tax rule
Option to capitalise interest expense in
production cost for tax purposes - dependency
13
Example - No Dependency
Austria
Acquired goodwill
203(5) HGB acquired goodwill may be
capitalised and amortized over the expected
period of use
8(3) EStG acquired goodwill must be
capitalised and amortized over 15 years
acquired goodwill must be capitalised and
amortized over 15 years for tax purposes even if
not capitalised for accounting purposes
14
No Dependency Due to Mandatory Tax Rules
Austria

• Examples
• Acquired goodwill
• Inventories capitalisation of material and
  selling overhead cost
• Depreciation of fixed assets
• Accruals
• Correction of errors
• GAAP financial reporting current year
• Tax retroactive correction of prior years
  (opening balance sheet)
• Financial reporting year-end / fiscal year-end

15
Reverse Dependency - (umgekehrte
Maßgeblichkeit)
Austria

• Valuation of Inventories
• 207 HGB lower of cost or market principle for
  inventory
• 6 Z 2 EStG optional for tax but in fact
  mandatory due to general dependency
• 208 (1) HGB for financial accounting
  obligatory write-up if reason for previous
  write-down ceases to exist
• Sec 6 Z 2 EStG for tax lower of cost or
  market with optional write-up if reason for
  previous write-down not valid any longer
• 208 (2) HGB exemption from the obligation to
  write-up inventory if otherwise also an
  obligation to write-up for tax purposes

208 (2) HGB allows an exemption from from
true and fair view principle for tax reasons !!!
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Reverse Dependency Impact of Tax on
Financial Reporting
Austria

• options allowed for tax purposes (valuation) must
  be exercised in accordance with statutory
  accounting (formal dependency)
• some tax benefits can be claimed only if also
  reflected in statutory financial accounts, e.g.
• Immediate write-off of low-value fixed assets
• tax has major impact on financial reporting

17
Accounting Choices Implicitly Impacted by
TaxExamples
Austria

• depreciation of fixed assets
• period and methodology (financial consistent
  methodology tax straight-line)
• depreciation in 1st year (full or half year
  depreciation)
• purchase price allocation after an asset deal
  (e.g.goodwill)
• inventory valuation (production cost, LIFO, .)
• bad debt provisions
• accounting for lease contracts
• accruals for pensions
• choice of fiscal year-end

18
Impact of EU Law
Austria

• Austrian Commercial Code implements 4th Company
  Law Directive ? Accounting rules have to be
  interpreted according to EU law
• Impact of ECJ case law on tax through dependency
  rules ?
• ECJ can only interpret the relevant provisions of
  EU law
• but not, how these accounting rules relate to
  Austrian tax law
• ECJ can not rule how an accounting rule is
  interpreted for tax purposes
• VwGH 27.9.2000 General tax principles override
  EU accounting directives
• EU Commission proposal for Common Consolidated
  Tax Base

19
Impact of IAS / IFRS
Austria

• IAS / IFRS obligatory for consolidated accounts
• Stand-alone accounts Austrian GAAP IAS / IFRS
  not allowed
• Convergence of Austrian GAAP IAS ?
• IAS as starting point for taxable income (CCTB
  project of the EU Commission) ?

20
Impact of IAS / IFRS
Austria

• IAS / IFRS accounts not suitable for determining
  taxable income
• private standard-setter for IFRS/IAS
• tax courts to interpret IAS /IFRS ?
• main purpose information of investors
• un-realised profits
• subjective valuation of assets where no market
  value available
• based on future expectations ? uncertainty
  subjectivity
• judgemental (e.g. IAS 38 capitalisation of
  development cost IAS 37 restructuring cost)

21
The Future of the Dependency Principle in
Austria
Austria

• Expect increased divergence between financial and
  tax reporting
• businesses have become more complex
• ? need for more specific tax rules
• ? dependency does not lead to more simplicity !
• broadening of tax base by disallowing certain
  accruals and provisions
• globalisation convergence of local GAAP and IAS
  / IFRS
• IAS / IFRS not suited for tax purposes
• impact of dependency principle on quality of
  financial reporting and corporate governance