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Deferred Taxes Estimation Worksheet

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					Circular Note                                                      Dept./cont. No.
                                                               Abt./Lfd.Nr.: CF/ BA 35                                       5/25/2009




From:
Von:
To:
                            regional VP CF/BA, responsible controller overseas,
An:
Subject:
                            Guideline relating to Deferred Taxes
Thema:


Dear all,
With this Circular Note CF/BA 35 you receive a guidance relating to Deferred taxes for US GAAP again underlining the importance of XXX
groupwide tax planning. Due to the complexity of the matter we provide you with this excel file illustrating the concept of deferred taxes by giving
examples enabling you to more efficiently estimate and calculate the expected effects of deferred taxes for strategic tax planning. We kindly ask
you to distribute this Circular Note CF/BA 35 in the area of your responsibility.

We thank you for your co-operation. In case of any questions, please do not hesitate to contact the controlling team in Karlsruhe.

With best regards,


             signed                                                     signed


            Dir. C/BA                                                    C/BA
Deferred Taxes
                              US GAAP          IFRS                  US GAAP        UK GAAP
Legal requirement         § 274 (and others)  IAS 12                 FAS 109         FRS 19
                     of German Commercial Code

Basic concept
1.) in general, ratio of income tax expenses and pretax financial income should corrrespond with tax rate (tax burden ratio) as calculated within annual accounts
2.) due to different regulations for annual accounts and tax purposes, differences will occur, distorting the tax burden ratio (refer to sheet example)
3.) as long as those differences will reverse in time (timing difference) there is a chance for correction by matching (deferral) of those differences
4.) correction will be performed within the annual accounts to reflect expected tax burden (deferred tax liability) or expected tax savings (deferred tax asset)
5.) possible areas of differences: a.) differences due to local tax vs. local statutory, b.) differences local statutory vs. US GAAP


Explanation of Terms
timing differences: differences in income that will reverse in time
permanent differences: differences in income that will not reverse, i.e. non-taxable income or non-deductible expenses
timing concept: "profit and loss" differences reversing in time --> Concept for US GAAP
deferral method: accounting method for deferred taxes mandatory for US GAAP aiming to present correct profit; planned changes in tax rate are not considered


Pre-requisite for Deferred Taxes
a.) profit and loss differences between tax and annual accounts required
b.) differences reverse in time (timing differences)
c.) no permanent differences
If all the pre-requisites are met accounting of deferred taxes
     if pretax financial income > taxable income --> deferred tax liability
     if pretax financial income < taxable income --> deferred tax asset


Use of tool as presented in worksheets
the tool can be used for strategic deferred tax planning (as well as illustrating the examples presented)
based on expected "pretax income for annual accounts purposes" (US GAAP) as estimated within planning phase, the more difficult part is the estimation of "pretax income
for tax purposes"; your local tax consultant should inform you only on the material timing differences and permanent differences and the development in time (i.e. reversal)
for example, those timing differences can be due to different depreciation rates for (in-)tangible assets, capitalization of intangibles, start up and development costs,
valuation of receivables, legitimacy and valuation of provisions
it is not fully applicable to entities with current losses or loss carry forwards since different considerations are required (refer below)


Entities with losses or loss carry forwards
the concept of deferred taxes acts on the assumption that differences will reverse in time if tax expenses will be incurred, i.e. the company creates profit leading to tax expenses
in general, timing differences arising in years of current losses that will reverse in years of losses will not result in tax expenses
--> hence, no deferred taxes would then be required
--> hence, deferred tax assets and liabilities originated in previous years then would be reversed as far as no tax expense will be expected (based on future prospects!)
--> same applies to loss carry forwards
note that under US GAAP loss carry forwards are not capitalizable (in contrast to IFRS); exception until further notice: Spain
Example
A.) Situation without accounting for deferred taxes

                                                           2009                                2010
                                                 annual                              annual
                                                               tax accounts                       tax accounts
                                                accounts                            accounts


             Pretax Income                      100,000           130,000           130,000           100,000
             Actual tax expense (50%)            -65,000          -65,000            -50,000          -50,000
             Income after tax                    35,000           65,000             80,000           50,000

             Calculated tax rate                 65.00%           50.00%             38.46%           50.00%


B.) Situation with accounting for deferred taxes

                                                           2009                                2010

                                                 annual                              annual
                                                               tax accounts                       tax accounts
                                                accounts                            accounts


             Pretax Income                      100,000           130,000           130,000           100,000
             Actual tax expense (50%)            -65,000          -65,000            -50,000          -50,000
             Deferred taxes 50% of 30.000        15,000                              -15,000                     A
             Income after tax                    50,000           65,000             65,000           50,000

             Calculated tax rate                 50.00%           50.00%             50.00%           50.00%

                                             deferred tax asset                  reversal of difference

             Entries to be performed         DR tax asset                        DR deferred tax expense
                                              CR deferred tax expense             CR tax asset

             Balance Sheet                   Tax asset of 15                     Tax asset of 0

             Profit effect                   increase of 15                      decrease of 15

             Note A                           Difference pretax income annual
                                                  accounts vs. tax accounts
                                                    2009            2010
                                                   -30,000         30,000
The timing differences 2009 and 2010 refers to differences in Pretax Income for annual accounts and tax accounts purposes
Due to corrective entry of deferred taxes within annual accounts (for 2009 deferred tax gain; for 2010 deferred tax expense)
the calculated tax rate based on trade balance equals the effective tax rate
(refer to worksheet "tool")
     Estimation of expected deferred taxes in strategic planning
     Referring to "example" worksheet
                                                                            2005               2006               2007                2008                2009

                                                                           TUSD                TUSD               TUSD               TUSD                TUSD

 1       Pretax income annual accounts (US GAAP)                            100                 130

 2       minus Pretax income tax accounts                                   130                 100

 3       = Total Differences                                                 -30                30                  0                   0                   0

 4       plus non-deductible expenses                                         0                  0

 5       minus non-taxable income                                             0                  0

 6       = Timing Differences                                                -30                30                  0                   0                   0

 7       Tax rate                            50%

 8       = calculated deferral actual year                                   -15                15                  0                   0                   0

 9       plus / minus cumulative deferral (prior years)                       0                 -15                 0                   0                   0

10       = required deferral actual year                                     -15                 0                  0                   0                   0

11       hence p&l effect                                                    15                 -15                 0                   0                   0


Note
line 11: positive values (increase in profit) and negative values (decrease in profit) resulting from comparison of prior year's and actual year's balance sheet
         items in annual accounts (deferred tax assets and liabilities; netted within this excel), i.e. reflecting the required p&l entries to reach required
         deferred taxes and liabilities within balance sheet
     Estimation of expected deferred taxes in strategic planning
     Depreciation of Tangible Assets
     differences due to different depreciation rates                       2006                2007              2008                2009                2010
     assumption 100.000 profit before differences
                                                                           TUSD               TUSD               TUSD                TUSD               TUSD

 1       Pretax income annual accounts (US GAAP)                          98,020              98,020            98,020              98,020              98,020

 2       minus Pretax income tax accounts                                 97,030              97,030            97,030              97,030              97,030

 3       = Total Differences                                                990                990                990                 990                 990

 4       plus non-deductible expenses                                        0                  0                  0                   0                   0

 5       minus non-taxable income                                            0                  0                  0                   0                   0

 6       = Timing Differences                                               990                990                990                 990                 990

 7       Tax rate                             40%

 8       = calculated deferral actual year (Profit effect)                  396                396                396                 396                 396

 9       plus / minus cumulative deferral (prior years)                      0                 396                792                1,188               1,584

10       = required deferral actual year                                    396                792               1,188               1,584               1,980

11       hence p&l effect                                                   -396               -396               -396               -396                -396


Note
line 11: positive values (increase in profit) and negative values (decrease in profit) resulting from comparison of prior year's and actual year's balance sheet
         items in annual accounts (deferred tax assets and liabilities; netted within this excel), i.e. reflecting the required p&l entries to reach required
         deferred taxes and liabilities within balance sheet
     Estimation of expected deferred taxes in strategic planning
     Debt discount TUSD 20 (disagio) on loan
     differences due to different treatment of disagio                     2006                2007              2008                2009                2010
     annual acts: TUSD 20 expensed; for tax TUSD 10 for 2 years
     assumption 100.000 profit before differences                          TUSD               TUSD               TUSD                TUSD               TUSD

 1       Pretax income annual accounts (US GAAP)                          80,000             100,000

 2       minus Pretax income tax accounts                                 90,000              90,000

 3       = Total Differences                                              -10,000             10,000               0                   0                   0

 4       plus non-deductible expenses                                        0                  0                  0                   0                   0

 5       minus non-taxable income                                            0                  0                  0                   0                   0

 6       = Timing Differences                                             -10,000             10,000               0                   0                   0

 7       Tax rate                             40%

 8       = calculated deferral actual year (Profit effect)                 -4,000             4,000                0                   0                   0

 9       plus / minus cumulative deferral (prior years)                      0                -4,000               0                   0                   0

10       = required deferral actual year                                   -4,000               0                  0                   0                   0

11       hence p&l effect                                                  4,000              -4,000               0                   0                   0


Note
line 11: positive values (increase in profit) and negative values (decrease in profit) resulting from comparison of prior year's and actual year's balance sheet
         items in annual accounts (deferred tax assets and liabilities; netted within this excel), i.e. reflecting the required p&l entries to reach required
         deferred taxes and liabilities within balance sheet
n balance sheet
				
DOCUMENT INFO
Description: This worksheet provides a description of the basic concept of deferred taxes. It further provides an explanation of terms, pre-requisites for deferred taxes, how this tool can be used for strategic deferred tax planning, and the effects of carry forward losses. This worksheet provides an example of how to calculate deferred taxes and also a template model for calculating estimated deferred taxes. This estimation can help a business strategically plan deferred tax treatment for certain activity.