Deferred Tax on Revaluation and Unremitted Overseas Earnings
Crestline Holdings Ltd revalued its head office building in 20X5, creating a revaluation surplus of BDT 15,000,000. The building is depreciated for accounting purposes over 25 years but attracts tax allowances on a different profile. The tax base of the building is BDT 8,000,000 below its carrying amount after the revaluation. The applicable tax rate is 25%. Crestline also owns 100% of an overseas subsidiary whose retained earnings are BDT 50,000,000; the subsidiary has no plan to distribute and Crestline can control the timing of any distribution. Finally, a BDT 2,000,000 fine was recognised as an expense; it is not deductible for tax. The finance director proposes to recognise deferred tax only on the fine, arguing that the revaluation surplus is an equity item and the overseas earnings are permanently reinvested.
1. Explain the deferred tax consequences of the revaluation and the overseas earnings.
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The revaluation creates a taxable temporary difference of BDT 8,000,000 (carrying amount exceeds tax base). Deferred tax of BDT 8,000,000 x 25% = BDT 2,000,000 arises. Because the revaluation was recognised in other comprehensive income, the related deferred tax is also recognised in OCI, not in profit or loss. The FD is wrong to ignore it: the temporary difference exists regardless of whether the gain is in equity.
For the overseas subsidiary, a temporary difference arises between the carrying amount of the investment and its tax base. However, no deferred tax is recognised if the parent controls the timing of the reversal and it is probable that the difference will not reverse in the foreseeable future. Crestline owns 100% and can control distributions, and there is no plan to distribute, so no deferred tax is recognised on the BDT 50,000,000. The FD's conclusion is correct here, but for the wrong reason: it is the control and non-distribution test that matters, not a general 'permanent reinvestment' assertion.
2. Treat the fine and quantify the total deferred tax charge and where it is recognised.
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The fine of BDT 2,000,000 is non-deductible. It creates no temporary difference because it has no tax base and will never be deductible; it is a permanent difference. No deferred tax arises on it. The FD's proposal to recognise deferred tax on the fine is therefore incorrect.
Total deferred tax: BDT 2,000,000 relating to the revaluation, recognised in OCI; nil in respect of the fine; nil in respect of the overseas earnings.
The deferred tax charge to profit or loss is nil. The BDT 2,000,000 is presented within OCI alongside the revaluation surplus. The FD's proposal recognises the wrong amount in the wrong place: it books tax on a permanent difference and omits tax on the taxable temporary difference. Disclosure should explain the unrecognised deferred tax on the subsidiary investment.