Benefit from SFAS No.10: Reduction of Inventory to Market Could be Deducted From Undistributed Earnings for Tax Saving
With economic recession, revised Statement of Financial Accounting Standards (SFAS) is of significant impact on earning, cost and expense of a company. Taxation Agency of Ministry of Finance stated that a company could recognize more reduction of inventory to market based on revised SFAS No. 10 to prevent from a 10% surtax levied on undistributed earnings. Due to revised SFAS No. 34 which allowed reclassification of financial assets, 10% tax shall not be levied on large amount of write-off earnings of Chinatrust Financial Holding Co.
Official of Ministry of Finance (MOF) stated that tax should be based on realization principle and a 25% tax should not be levied on unrealized profit. However, undistributed earnings on which a 10% tax may be levied shall be treated in different ways.
Financial Supervisory Commission (FSC) announced that listed companies and OTC companies shall comply with revised SFAS No. 10. Some companies have planned to adopt revised SFAS No. 10 from Q4 of this year. Financial Accounting Review Committee of Accounting Research and Development Foundation (ARDF) stated that revised SFAS No. 10 was the standard applicable to financial accounting in Taiwan and of no difference to public offering or non-public offering.
According to Article 66-9 of Income Tax Act, undistributed earnings shall be calculated in accordance with Commercial Accounting Act. Based on financial accounting standard, reduced undistributed earnings could be recognized. Therefore, more reduction of inventory to market allocated based on revised SFAS No. 10 could be deducted from undistributed earnings and a 10% tax shall be prevented.
Regarding the impact from a 25% income tax, official of MOF stated that financial accounting adopted the method of Lower of Cost or Market which was the same as old SFAS for inventories. After revised SFAS No. 10 adopts the method of Lower of Cost of Net Realizable Value, while calculating loss of reduction, difference occurred due to old and new standards must be considered. That is, difference between the results of reduction of inventory to market based on methods of Lower of Cost or Market and Lower of Cost of Net Realizable Value.