The timing of the recognition of a liability for secondary tax on companies in accordance with international financial reporting standards

Abstract

United States Generally Accepted Accounting Practice (“US GAAP”) generally requires taxes to be measured at the rate applicable to distributed profits, while International Financial Reporting Standards (“IFRS”) requires the undistributed rate to be used. This current conflict between US GAAP and IFRS has particular relevance in South Africa, which has a dual tax system as a result of Secondary Tax on Companies (“STC”) being levied when a company distributes its profits. Currently, under US GAAP, South African companies would be required to raise a liability for the tax that would become payable on the future distribution of profits, while under IFRS, this is only recognised when the profits are distributed.

The objective of the study is, therefore, to consider the timing of the recognition of a liability for STC.

The literature study has indicated strong arguments for both the recognition of a liability for STC prior to the declaration of a dividend and the non-recognition of a liability for STC prior to the declaration of a dividend. The empirical study, however, concluded that the recognition of a liability prior to the declaration of a dividend is not appropriate, as a majority of the respondents believe that no “past event” has occurred and therefore the definition of a liability in terms of the IASB Framework is not satisfied. The results of the empirical study, however, also indicate that if the “past event” hurdle could be overcome, uncertainty exists as to whether the recognition of a liability for STC prior to the declaration is appropriate. This is as a result of mixed opinions among the respondents as to whether the “probability” and “measurability” criteria, in terms of the IASB Framework, could be satisfied prior to the declaration of a dividend.

Key Words:

• Distributed rate
• FAS 109
• IAS 12
• IFRS
• Income tax consequences of dividends
• Secondary Tax on Companies
• South Africa
• Undistributed rate
• US GAAP