Deferred tax liabilities arising from undistributed earnings, typically referred to as deferred tax liabilities related to unremitted profits, are calculated based on the difference between the taxable income and the accounting income for a subsidiary or joint venture where profits have not been distributed to the parent company. These liabilities arise because the parent company will have to pay taxes on these undistributed earnings when they are eventually repatriated or distributed. The calculation involves the following steps:
- Determine the undistributed earnings of the subsidiary or joint venture that have not been taxed at the parent company level.
- Calculate the temporary differences between the carrying amount of these undistributed earnings in the financial statements and their tax basis.
- Apply the applicable tax rate to these temporary differences to determine the deferred tax liability.
The data required for this calculation includes the undistributed profits of the subsidiary or joint venture, the applicable tax rates, and any relevant tax laws or regulations governing the taxation of such profits when they are remitted to the parent company. It's important to note that the recognition of such a liability is subject to the expectation that the parent company will eventually receive and be taxed on these earnings. If there's uncertainty about the ability to recover these earnings, the recognition of the deferred tax liability may be limited.
