Deferred Tax on Revaluation and Unremitted Overseas Earnings
Delta plc revalues its head office building upward by BDT 200m; the building is depreciated for accounting but tax depreciation is based on original cost. The tax base of the building is BDT 60m lower than its carrying amount after revaluation. Delta also owns 100% of an overseas subsidiary whose retained earnings are BDT 800m; Delta has no intention to remit these earnings and the subsidiary has no plan to distribute. The group effective tax rate is 25%. Separately, Delta has unused tax losses of BDT 120m carried forward, but the tax authority restricts their use to 50% of future taxable profit, and Delta forecasts taxable profits of BDT 150m next year.
1. Compute the deferred tax consequences of the revaluation, the overseas earnings, and the tax losses, explaining each judgement.
Read the worked answer
Revaluation. The revaluation creates a taxable temporary difference of BDT 200m (carrying amount exceeds tax base). Deferred tax liability = 200 × 25% = BDT 50m. Because the revaluation is recognised in OCI, the related deferred tax is also recognised in OCI, not profit or loss. If the building were non-depreciable and the entity expected to recover through sale with no tax on sale, no liability would arise, but here recovery is through use and tax depreciation differs, so the liability is recognised.
Overseas earnings. A taxable temporary difference exists between the carrying amount of the investment and its tax base. However, the exception for subsidiaries applies: no deferred tax is recognised if the parent controls the timing of reversal and it is probable the difference will not reverse in the foreseeable future. Delta has no intention to remit and the subsidiary will not distribute, so no deferred tax liability is recognised on the BDT 800m. If remittance plans change, recognise 800 × 25% = BDT 200m (subject to any withholding tax and foreign tax credit).
Tax losses. A deferred tax asset is recognised only to the extent it is probable that future taxable profit will be available. The restriction to 50% of future profit means the usable amount next year is 150 × 50% = BDT 75m. The DTA is therefore limited to 75 × 25% = BDT 18.75m, not 120 × 25% = BDT 30m. The remaining losses are unrecognised unless further profits are forecast. Disclose the unrecognised DTA and expiry dates.
2. How would the analysis change if Delta announced a plan to remit 60% of the subsidiary's earnings next year, and why does the OCI treatment of the revaluation matter to users?
Read the worked answer
Remittance plan. Once Delta announces an intention to remit 60% of BDT 800m = BDT 480m in the foreseeable future, the exception no longer applies to that portion. Recognise a deferred tax liability of 480 × 25% = BDT 120m, adjusted for any withholding tax on dividends and any foreign tax credit. The remaining 40% (BDT 320m) stays outside the exception only if the no-remittance intention is maintained for it; otherwise recognise tax on the full amount. The DTL is recognised in profit or loss (or OCI if the related earnings were recognised in OCI).
Why OCI matters. Recognising the BDT 50m revaluation deferred tax in OCI keeps the tax effect matched to the gain that gave rise to it. If it were routed through profit or loss, profit would be distorted while the revaluation surplus sits in equity. Users see a clean revaluation reserve net of tax and a tax charge that reflects operating performance. The exam expects you to trace the source of the temporary difference to the statement where the tax is recognised and to explain that the subsidiary exception is a control-and-intention test, not a mechanical calculation.