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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                   
				
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.