Question

Target’s Note 23 indicates that “We have not recorded deferred taxes when earnings from foreign operations are considered to be indefinitely invested outside the U.S. These accumulated net earnings relate to certain ongoing operations and were $685 million at January 30, 2016 and $328 million at January 31, 2015.” Are these amounts treated as temporary or permanent differences by Target? If Target decides to repatriate earnings in the future, what will be the effect on net income in the year of repatriation.

Answer 1

As per para 39 of IAS 12 Income taxes:

An entity shall recognize a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, except to the extent that both of the following conditions are satisfied:

• the parent, investor, joint venturer or joint operator is able to control the timing of the reversal of the temporary difference; and
• it is probable that the temporary difference will not reverse in the foreseeable future.

As a parent, the company can control the dividend policy of its subsidiary and therefore is able to control the timing and reversal of temporary differences associated with that investment whether those differences arise from undistributed profits or whether they arise from foreign exchange translation differences.Same considerations apply to other investments. So the first condition of not recognising the DTL is satisfied.

Now the question itself states that "earnings from foreign operations are considered to be indefinitely invested outside the U.S.". Hence the temporary differences will not reverse in the foreseeable future.

These type of Investments are called permanently reinvested earnings. Therefore Target is treating these amounts as permanent differences and not recognising deferred taxes as per Para 39.

If Targets decides to repatriate the earnings in future, this amount will be taxable in the year of repatriation and will reduce the after tax book income by the amount of tax liability.

Hope this answers your question!