Tax rate reconciliation (TRR)

Preliminary notes to TRR

Technical remarks
Tax rate reconciliation (TRR) is in accordance with IAS 12.81 (c) required disclosure which illustrates relationship between tax expense (tax revenue) in accordance with P/L statement and tax balance result before taxes. Using the reconciling items Quotentreiber are disclosed and tax rate is deduced. Tax rate is a key indicator of tax accounting.
The starting point of the TRR is the product from the tax balance result before taxes and applied tax rate. The following tax rates are regarded, acc. to IAS 12.85:

(1) national tax rate in a country where a parent company is based
(2) for companies that operate in several tax law circles; a combined tax rate

Although the first variant (1) is far more common, the GTC supports both variants. If you want to use a combined tax rate, create a dummy corporation with an average tax rate as a parent company.
The structure of TRR is not stated in the IAS 12. The GTC uses the most frequently used TRR positions.

Data origin TRR columns
The 'TRR' dialogue consists of the following three (four) columns:

Column:	Local GAAP	Late Adjustments	Adjustment IFRS	IFRS
Content	Calculation of expected income tax expense based on tax balance result before taxes acc. to local GAAP Deferred taxes are not considered in the output value of tax expense acc. to P/L statement; they represent a TRR item	* Calculation of expected income tax expense based on tax balance result before taxes acc. to local GAAP (for late adjustments to current taxes)	* Calculation of expected income tax expense based on tax balance result before taxes (for IFRS result adjustment)	Calculation of expected income tax expense based on tax balance result before taxes acc. to IFRS Sum from prior columns
Display	The column is always displayed	The column is displayed only if the calculation of current taxes from late adjustments is activated in the master data dialogue 'Toolbox'	The column is always displayed	The column is always displayed
Data Origin	'Current Taxes' dialogue	* 'Current Taxes' dialogue (when using Toolbox, for foreign companies) rows 19.1-19.13	Dialogue: B/S Comparison LCF Others Summary	Sum from prior columns

Difference: Germany / other countries
Depending on whether it is a German company (German tax law) or a company from other country (toolbox), the selected rows are displayed or hidden. This will be explained in the next chapter. The dialogue TRR in the main area (Sub-)Group offers an overview of all TRR items.

TRR tooltips
TRR items displayed in the TRR dialogue have tooltips ( ). Click on a green square to view the explanation to a TRR item. It displays the dialogue of origin, the relevant row and the tax base.

Click on to switch to the origin dialogue.

Validation: P/L and tax expense/profit and calculated tax expense/earnings
TRR is validated directly in the dialogue header and any potential differences are displayed here. It is checked, whether TRR items explain the difference between effective income tax expense (original + deferred taxes) and expected income tax expenses (EBT x company tax rate).

TRR item Other tax can amount to max. 5% of the expected income tax expenses. If this amount is exceeded, a yellow warning triangle with an exclamation mark appears and user has to add a comment. Otherwise, the status of the Deferred taxes milestone cannot be changed to data ok. The 5% rule is not fixed in the IAS 12; it has been taken from the earlier US GAAP regulation and is widely used.

{*}{_}Tips for validation errors_*

Creation of a TRR in tax accounting belongs to one of the most time-consuming activities. The GTC facilitates the process significantly. However, there are certain requirements that have to be fulfilled for the highest possible degree of automation. The following points should be considered in case of validation errors:

Allocation of tax balance sheet corrections in tax calculation
Balance sheet differences local GAAP / tax comparison do not correspond tax balance sheet corrections
Rollforward LCF has not been performed
Changes in balance sheet differences IFRS / Local GAAP do not correspond the IFRS / Local GAAP result difference

Allocation of tax balance sheet corrections in tax calculation
In the B/S Comparison dialogue there is a local GAAP / tax balance deviation of 100,000. Thereof 60,000 – temporary and 40,000 – permanent. Tax rate is 30%:

Proposed values for tax profit are displayed for tax calculation purposes (Current Taxes dialogue):

The taxable income of 100,000 has a 20% tax rate, which results in 20, 000 taxes. Deferred tax assets amount to -12,000 (60,000 temporary difference x 20%). The TRR:

There is only one IFRS-TRR item resulting from permanent balance sheet difference:

If the allocation of the tax balance sheet corrections in the Current Taxes dialogue differs from the proposed value, this results in the same taxable income (100,000):

The TRR validation fails because of wrong allocation of tax balance sheet corrections:

Balance sheet differences Local GAAP / Tax Balance do not correspond to local tax balance sheet corrections
In the B/S Comparison dialogue there is a Correction to local tax balance of 100,000 classified as temporary. The tax rate is 20%:

For purposes of tax calculation a proposed value is displayed for the tax profit differences (Current Taxes dialogue). The proposed value can be viewed in the Local GAAP – Tax Comparison report ( / main dialogue Reports / dialogue Tax Reports):

The taxable income amounts to 100,000 and results in 20,000 taxes with the tax rate of 20%. Deferred tax assets amount to -20,000 (100,000 temporary difference x 20%). There are no TRR items in the TRR dialogue:

If the calculated tax balance sheet correction differs from the proposed value in the Current Taxes dialogue, this may arise from the non-considered in the GTC data in the previous year tax return (true-up). In this case another correction amount has to be entered for tax calculation:

The TRR validation fails, because the tax balance sheet correction differs from the proposed value:

The reason for this is that the deferred taxes (P/L statement effect, here 20,000) are calculated based on the balance sheet comparison. If the resulting proposed value is not accepted in the Current Taxes dialogue, the TRR validation fails.
Creation of a true-up effect in the Others dialogue solves the problem: -30,000 x 20% = -6,000. The true-up effect is explained in a separate chapter and can be calculated in the GTC automatically. Then the proposed value is displayed:

A prior-period effect from the adjustment in the previous year results in TRR items in the Deferred taxes related to other periods row. The validation is successful:

Balance sheet differences IFRS / Local GAAP do not correspond to IFRS / Local GAAP result difference
In the B/S Comparison dialogue there is a difference of 100,000 between IFRS and local GAAP. The difference is temporary:

If the tax rate amounts to 20%, deferred taxes are 20,000. IFRS-EBT is 100,000 because of the balance sheet deviation. The validation is successful:

If a deviating IFRS-EBT is detected, the TRR multiplied by the amount of difference does not equal the tax rate. Effect on earnings is traceable in this simple case. In real life it is not always evident whether asset differences between local GAAP and IFRS (documented in the GTC) have the right impact on earnings. The report 'Transition P&L results local GAAP / IFRS' is helpful here. The report shows whether the adjustments of balance sheet differences correspond to result differences: