Project You have the option to select one of two topics to write a short (3 to 5
ID: 2383669 • Letter: P
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Project You have the option to select one of two topics to write a short (3 to 5 pages) paper. Grading will be based on whether the appropriate issue was identified, the appropriate accounting literature identified, the application of the accounting literature to the issue (logically, even if the answer is not entirely correct), and the writing skills demonstrated in the paper. Each of these items will constitute 25% of the paper’s grade. When writing papers on accounting issues/research, it is always advisable to ask the requester what format or style he/she prefers. In the real world your supervisor will always have a preferred style on how papers are written, make sure you know that before you write any paper. My preference is a short lead in identifying (in summary form) the issue and answer, followed by the discussion of the issue (and/or facts), the identification of the accounting literature, the application of the accounting literature to the facts, and the accounting answer. References supporting the appropriate accounting should be provided. You should consider using the FASB Current Text for you accounting research. Our WSU login and passcode to the FASB Current Text are noted below. Your choices of topics are:
1. In the news, we often hear about whether or not corporations should be allowed to repatriate earnings. What does that mean and what are the economics involved, what is the current accounting relating to whether or not deferred income taxes should be recorded, and if you were King/Queen for the day, would you change the current accounting and tax laws relating to this issue and if so, why.
Explanation / Answer
The multinational corporations are able to indefinietly postpone taxes on their foreign income by operating through a foreign subsidiary, the taxes are defferd as long as the earnings remain in the control of the foreign subsidiary and are invested outside the United States.
the US parent corporaton is not liable to pay taxes on the Foreign incomes untill the earnings are paid to the US parent in form of dividends or other incomes.
Repatriation of earnings would mean bringing back the foreign earnings of a US parent Corp in the form of dividends or other incomes, which would bring huge tax revenues to the government and would increase tax burden on the pocket of the US parent Corp. Thus we normally see huge accumulated profits in the foreign subsidiaries which are not repatriated to USA.
The Economic impact of repatriation of earnings can be analysed keeping the below factors in mind :
1.How the repatriated Earnings are used
2. Role of flexible Exchange rates
The use of the repatriated earnings would have a major impact in economic stimulation, that is the earnings need to be spent to have an impact on the economy. If invested or spent domestically the repatriatin of earnings would boost the economy. If the repatriated earnings are distributed as dividends rather than making domestic investments to increase job flow in the economy it is unlikely to have a major positive impact on the economic development.
The impact of repatriation of earnings on flexible foreign exchange rate is another factor that must be considered. The repatriation would lead to an increase in the demand on US dollar because when the foreign earning are repatriated they are converted into US dollars. The result would be an increase in the price of the US dollar in the foreign exchange market.
The strong dollar condition would lead to decrease in the exports as the export would become costly, while the foriegn import would become cheap and preferable. This reduction in exports and increase in imports would furthur strain the economy and would offset any positve effect that would occur from repatriation of earnings.
FAS 109 issued by FASB deals with the Accounting for income taxes. The objetives of the Accounting for income taxes is to
1. Recognize the amount of taxes payable or Refundable for the current year.
2. Recognize deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an enterprise's financial statements or tax returns.
Deffered tax liabilities and Assets are recognized to give impact on taxes arising due to any temperory difference.
Deffered tax liabilities are recognized due to temperory difference that will increase in taxable amounts in the future, While the deffered tax assets are recognized for temperory differences that will result in deductible amounts in the future.
The measurement of deffered tax liability and assets are based on the tax rate conventions as per the enacted Tax laws and the effect of future changes are not anticipated. Moreover in the case of deffered tax assets a valuation allowance should be recognized based of available evidence if it concludes that it is more likely than not that some portion or all of the deferred tax asset will not be realized.
The Current tax laws provide for a Corporate tax rate of 35% providing a benefit of tax credit for taxes paid in foreign countries for foreign taxes paid by their subsidiaries on the earnings used to pay the repatriated dividends. The option to deffer taxes by investing in foreign countries with low tax rate gives an incentive to US firms.
If I would have been the king/ Queen of the day i would have brought a permanent decline in the tax rates on repatriated earnings along with condition on use of the funds repatriated into US, not fullfilling the conditions would lead to taxation at normal rates. The conditions would primarily focus on new domestics investments to boost the economy by increasing money flow and creating employments.
The reason for permanently changing the tax rate is because a temperory change would bring one time huge flow of funds which would lead to loss of revenues to the government and would also affect the flexible exchange rate and the positive effects of the repatriation would be waved off by strong dollar, while a permanent decline would encourge the corporations to bring income to US as per the economic cycle of the foreign subsidiary.
For Eg: young foreign subsidiaries will receive capital from their U.S. parent so long as there are
profitable foreign investment opportunities, followed by a period of self-financing of foreign
investment by the foreign subsidiary, and ending with a period of repatriations made by mature foreign subsidiaries.
Furthur the Corporations would wait for such temperory declines to repatriate earnings from foreign subsidiaries and save huge on taxes.
The Domestic investment would not only boost the economy but would also bring revenue to the government in form of taxes on incomes from the domestic ventures and money flow fullfilling the losses of revenue on repatriation.
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