Resolution of Tax and Accounting Policy Statement
Important Differences between Taxation and Accounting Rules*
Countries may retain the power to follow different approaches with respect to the relationship between commercial and tax accounting (dependence/independence). Both approaches have advantages and shortcomings. However, in both cases, well-established principles of taxation must not be disregarded.
Specific accounting and reporting standards for listed companies increase transparency and comparability, mainly for investors. A convergence of the principles governing existing accounting and reporting standards is desirable in order to increase comparability and to facilitate multiple listings. However, possible tax implications for companies, especially in countries relying on commercial accounts as primary basis for tax assessment, have to be kept in mind, and the convergence should not deteriorate the tax position of enterprises.
Tax authorities and policy makers should accept that the underlying principles of financial accounting are not always compatible with basic principles and practices used in the field of taxation. From a tax policy perspective, it is important that taxation rules are not undermined by an inappropriate extension of financial reporting requirements (e.g. fair value accounting or disregard of realization).
Taxation and financial accounting rules serve different purposes, have different objectives and are based on different principles. Although both sets of rules are used to measure the annual results of an enterprise, differences in the results (profits) or in the methods applied (e.g. valuation) have to be accepted. Financial accounting looks at the enterprise as an economic entity (group), whereas taxation is normally based on a separate entity approach.
Because of the speed and the direction of developments in financial accounting and reporting (transparency, market valuation, single performance statement, convergence of standards), existing differences will become even more important in the future. Policy makers in the fields of taxation and accounting must be aware of these differences. Tax authorities must respect them and refrain from using companies’ financial results for tax adjustments.
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* Derived from the policy statement of the International Chamber of Commerce World Business Organization.
Resolution adopted by eighth session of provisional World Parliament, convened at City Montessori School, Lucknow, Uttar Pradesh, India, in conformance with Article 19 of the Earth Constitution.
Attested:
Eugenia Almand, JD, Secretary
Provisional World Parliament