Important Differences between Taxation and Accounting Rules

Enterprises listed on national stock exchanges must follow financial accounting and reporting rules aimed at providing investors with a true and fair view of the financial situation of the enterprise. These rules increase transparency and international comparability of the results of an enterprise or a group. International Accounting Standards (IAS) or US Generally Accepted Accounting Principles (US GAAP) are widely used by Multinational Enterprises (MNEs).

Financial accounting and reporting rules are quickly shifting away from traditional legal concepts applied in commercial and fiscal laws. They are increasingly based on a fair presentation approach. The results shown for financial purposes (normally the consolidated group results) may differ considerably from the profits shown in the books of single enterprises or in the tax returns. MNEs therefore risk being confronted with unwarranted requests for tax profits adjustments or with the requirement that profits shown for financial purposes in a given country be taxable in that country.

The international business community is of the view that it is important for tax authorities and policy makers to understand the reasons why the results shown in financial statements of an enterprise or a group differ from the taxable results of such enterprise or group.