Estimation of Tax Values Based on IFRS Information: An Analysis of German DAX30 and Austrian ATX Listed Companies

Abstract

Although tax values of corporate assets and liabilities could provide useful information for various economic decisions, they are typically unknown to financial statement users. Additional corporate tax information has been repeatedly claimed. We analyse whether tax balance sheets can be reconstructed using tax information provided by consolidated IFRS accounts. Our results suggest that, for DAX30 firms, the most important differences between IFRS and tax reporting occur for intangibles and provisions. For ATX companies, diverging IFRS and tax rules relating to fixed assets and provisions are the main cause for IFRS–tax differences. We find evidence that book values reported in IFRS balance sheets are generally higher than tax values. Only in connection with inventories, we observe that the median of estimated tax values is higher than IFRS-book value for both Austrian and German groups. We also try to estimate the total stock of unused tax losses because it offers information about a company's potential loss offsets and future tax payments. Our analyses show that estimated values of tax losses often do not differ substantially from the actual stock of tax losses. Due to several methodological and practical problems, we conclude that, especially for multinationals, reconstructed tax balance sheets should be critically scrutinised.

Notes

The text of Grassley's letter is available at: http://finance.senate.gov/newsroom/ranking/release/?id=91fa02fb-af2b-4255-89fd-c3e9c466bce1

The text of Doggett's legal proposal is available at: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=108_cong_bills&docid=f:h1556ih.txt.pdf

Based on the composition of the indices at 29 October 2007, the following financial companies have been excluded from the analyses: Allianz SE, Commerzbank AG, Deutsche Bank AG, Deutsche Postbank AG, Erste Bank der österreichischen Sparkassen AG, Hypo Real Estate Holding AG, Münchener Rück AG, Raiffeisen International Bank-Holding AG and Wiener Städtische Versicherung AG. Due to the lack of a financial statement according to IFRS, the following corporations have not been investigated: Daimler AG, E.ON AG, Fresenius Medical Care AG & Co. KGaA, Infineon Technologies AG, SAP AG and Siemens AG.

For ThyssenKrupp, only the accounting periods 2004/05 and 2005/06 are analysed because the consolidated financial statements of 2004/05 and 2003/04 have been prepared in compliance with US GAAP. Thus, IFRS information for 2003/04 is not available. Furthermore, the financial year 2004 of A-TEC Industries cannot be included in the study because the company's initial public offering was in 2006. Due to the absence of legal obligations, A-TEC Industries has not announced notes to consolidated accounts in previous years.

For example, BASF, a German listed multinational, reports a domestic income tax rate of 38.0% in the financial statement of 2005. However, the firm informs that deferred taxes of foreign subsidiaries are evaluated by an average tax rate of 29.0%.

Tax values of corporate assets and liabilities as well as tax loss carry-forwards presented in this paper in million Euros have been calculated in thousand Euros. For this reason, rounding differences may occur.

Employee benefits relating to defined benefit plans (e.g. pension obligations, severance payments) are included in the estimated tax provisions regardless of whether they are shown as provisions or liabilities in firms' financial statement. This is due to the fact that pension liabilities are always included in provisions according to German and Austrian GAAP.