International Financial Reporting Standards (IFRS) can be explained as a combination of standards of accounting created by an independent accounting entity that reports on financials information in domestic public and private entities. The adoption of these set standards has had effects on tax planning strategy in the United States. The move will require the government to analyze tax implications and determine whether making the tax approach conforms to the method allowed by the standards. The current tax regime is a more complex task, which makes accounting finance demanding process hence need for adapting the IFRS tax evaluation approach. Therefore, apart from allowing United States a chance to compete globally, IFRS will increase tax avoidance as well as increase tax burden to the tax payers.
There are many reasons as to why the IFRS will have a huge impact on accounting standards. The impacts on adopting IFRS on corporate taxes, tax policy and tax planning is a critical debate which requires deep knowledge of the standards of accounting (Hu & Shevlin, 2021). The method allows the companies in United States to have great financial statements comparability than non-US companies. According to Braga (2017) IFRS aim is to ensure there is more information to its users. Therefore, IFRS will influence these firms in ensuring they raise their standards. IFRS have resulted to a higher range of financial accounting techniques, which shifts with its conversion.
For instance, in the United States, it is allowed for every state to follow federal approach. Every state has a tax jurisdiction which allow the tax regime to follow the federal approach of IFRS in the US (Silva et al., 2020). Taxpayers who reside in states that do not adopt shifts to federal tax accounting system may be obliged to keep specific legacy accounting methods. These methods systems will grant access to data required to proceed filing tax returns accordingly as per the past tax accounting ways. Adopting IFRS, is thought to influence not only the taxes of the state income but also corporate taxes and other domestic taxes within the US.
The IFRS model will affect the current tax planning strategy, both in short term and long term. Changes to federal taxable income- federal taxable income will shift unless the IFRS method is used to relief of some burden to the taxpayers which in turn will affect the taxable income (Silva et al., 2020). The biggest challenge is that the states might not allow federal state relief measures (Moore, 2019). During the past few years, there has been massive budget deficits and states have decoupled from certain federal governments provisions.
Tax avoidance will be on the rise due to the reported earnings. Thus, an Increase in reported earnings might as well lead to an increase in avoidance of the tax (Herath & Melvin, 2017). The metrics of avoiding tax are because of effective tax rate which takes pre-tax earnings. Thus, the adoption of IFRS as the only standard system by various states, widens the set of businesses that can be set as a factor reference thus enabling companies to select suitable support pricing (Moore, 2019). This will largely influence the tax base of the country and largely have an impact on the economy.
It can also be argued that IFRS will affect the rate of tax avoidance either negatively or positively. The adoption of IFRS can as well affect the rate of entities avoidance of tax due to several factors may it be negatively or positively (Hu & Shevlin, 2021). Subsidiary companies across the US are involved mostly in profit making for tax purposes since the IFRS was adopted. IFRS adoption also has been related with high levels of tax avoidance in the public companies (Moore, 2019). Thus, the reason why there is need to understand all the implications of adopting IFRS.
Re-evaluation model of assets which is as a due to the adoption of IFRS model will increase capital tax. It needs all the assets to be carried at fair market value less the accumulated depreciation with evaluations carried out in regular times to ensure that the carrying amount of a particular asset is consistent with the market price (Herath & Melvin, 2017). For large corporations that will use the re-evaluation model under IFRS, capital tax will be expected to increase (Hassan, 2020). Taxpayers net worth or capital-related tax liabilities is directly impacted by the model re-evaluation which will increase the tax burden.
In conclusion, IFRS has the most sustainable change to the tax system and regime across every state of United States. There will be formidable change for all the companies including government agencies and accounting practitioners to adopt the IFSR approach in tax planning systems. However, the system will generate more engagement and fee opportunities for practitioners and reduce financial frameworks with which companies will comply. IFRS, which aims to create a common financial independence among countries is rapidly growing, and companies are accepting it use when the US accounting profession. Once IFRS adoption is complete, there will be need to keep reviewing accounts in future. Therefore, this will be a great opportunity to reassess ongoing trainings requirements, how competitors are reporting and what additional savings will give out to the economy.
References
Braga, R. N. (2017). Effects of IFRS adoption on tax avoidance. Revista Contabilidade & Finanças, 28(75), 407–424. doi:10.1590/1808-057×201704680
Hassan, E. A. (2020). The Economic Consequence of International Financial Reporting Standards Adoption: Evidence from Corporate Tax Avoidance in Gulf States. Accounting & Taxation, 12(1), 45-65.
Herath, S. K., & Melvin, A. (2017). The impact of IFRS adoption on corporate income taxation: A review of literature. International Journal of Business Management and Commerce, 2(9).
Hu, J., Li, S., & Shevlin, T. (2021). How does the market for corporate control impact tax avoidance?
Moore, A. B. (2019). Disclosing tax consequences of a LIFO repeal: considerations toward an ethical decision-making model based on potential convergence of IFRS & US GAAP: Evidence from international M&A laws. The Journal of Theoretical Accounting Research, 14(2), 29-45.
Silva, A. P., Fontes, A., Ribeiro, H., & Alves, S. R. (2020). The Role of Enforcement Mechanisms on IFRS Implementation: Perceptions from Tax Officials. Economic and Social Development: Book of Proceedings, 304-309.