March 30, 2017 Brexit withdrawal notification doesn't trigger immediate tax accounting consequences United Kingdom (UK) Prime Minister Theresa May gave written notice to the European Council that the UK intends to withdraw from the European Union (EU) by invoking Article 50 of the Lisbon Treaty. The action formally begins the two-year process of negotiations on a withdrawal agreement. That means the UK will leave the EU by 29 March 2019, unless a deal is reached sooner or the negotiation period is extended by unanimous consent of the European Council. The British exit or Brexit will affect both UK-domiciled entities and entities in the EU and non-EU countries, such as the US, that have relationships with UK entities. Tax law in EU member states and other countries provides tax exemptions and other tax relief that depends on whether the entities involved are domiciled in the EU. Along with many other aspects of European law, these tax exemptions and other tax relief would presumably no longer apply when the UK actually withdraws, unless new agreements are reached. It isn't possible to predict the outcome of the negotiations. Key considerations US GAAP requires entities to measure current and deferred tax assets and liabilities using enacted tax rates and provisions of the enacted tax law.1 It also requires entities to recognize, at the date of enactment, the effect on deferred taxes of a change in tax law or rates2 and a change in tax status that results from a change in tax law.3 Because there is no precedent for an EU member state to leave the EU, the UK's formal notification under Article 50 has raised the question of whether that action constitutes a recognition event under the provisions of US GAAP. The written notification of withdrawal is simply the beginning of withdrawal negotiations and therefore does not change the application of existing tax laws or provide any indication of what tax laws and treaties will look like when the negotiations are completed. That is, it is the commencement of a complex, multi-territory, multi-faceted legislative process. We believe it would be appropriate for companies to account for the income tax effects of the UK withdrawal at the earlier of: (1) the date of enacted changes in the tax laws throughout the negotiation period between the UK and individual EU member states and the EU; or (2) the date on which the UK actually withdraws from the EU. In responding to a recent Securities and Exchange Commission (SEC) preclearance submission, the SEC staff indicated that it would not object to this conclusion. Further, the SEC staff indicated that it would not be appropriate for an entity to account for the income tax effects of the UK's withdrawal now. The SEC staff also said that, if a reporting entity evaluates its facts and circumstances and concludes that the UK's notice of withdrawal triggers accounting for the income tax effects, it would encourage the entity to request a staff consultation. Companies that may be materially affected by the UK's withdrawal should provide clear and transparent disclosure of the status of the UK's withdrawal efforts and the potential tax effects of an eventual withdrawal. This disclosure should include a description of the withdrawal event, the nature of the entity's activities that could be affected and the potential financial statement effects. Next steps — Companies need to consider whether to make additional disclosures in the notes to the financial statements, management's discussion and analysis or in other sections of their SEC filings to address the current and future tax implications of Brexit. — Companies should closely monitor the Brexit negotiation process and any tax law developments to appropriately account for the tax implications of these changes in the period of enactment. ——————————————— — For more information about EY's Tax Accounting services, visit us at www.ey.com/US/TaxAccounting ———————————————
——————————————— 1 Accounting Standards Codification (ASC) 740-10-05-7 and ASC 740-10-30-2(a). 2 ASC 740-10-25-47 and ASC 740-10-35-4. 3 ASC 740-10-25-33. | |||||||