Levies

Purpose

This chapter explains when to account for liabilities for levies, in accordance with IFRIC 21, an interpretation issued by the IFRS Interpretations Committee. 

What is a levy?

Levies are taxes imposed by governments, other than:

• income taxes,
• taxes that subsequently are deductible from income taxes and that are presented as income taxes (e.g. withholding taxes on dividends),
• fines or other penalties that are imposed for breaches of the legislation, and
• payments made by an entity for the acquisition of an asset, or for the rendering of services under a contractual agreement with a government. Those do not meet the definition of a levy because they do not stem from law, rather they originate from a contract.

Examples of levies include property taxes, revenue based taxes, VAT, import duties, etc.

How does this guidance affect previous practice?

As explained in detail below, the liability for a levy is recognized when the obligating event occurs. As a result of this, in many cases, the liability for the levy will be recognized at an earlier point in time compared to previous practice. For example, in certain jurisdictions, a property tax is due when the entity is legal owner of the property on January 1 (Q1). In accordance with previous practice, the liability generally was recognized upon receipt of the notification to make payment (often Q2 or Q3). In accordance with IFRIC 21, the liability generally will be recognized on January 1.

On the other hand, in other cases, the liability would be recognized at a later point in time . For example, some jurisdictions have taxes due on sales that are only payable if the entity still exists on January X of the following year. In accordance with previous practice, the liability generally was recognized gradually over the period as sales were recognized. In accordance with IFRIC 21, the liability will be recognized on January X of the following year.

Lastly, in some instances, there will not be any change in practice, because under previous practice, recognition of the liability already coincided with the obligating event.

When to recognize the liability for a levy?

An entity recognizes a liability for a levy when the activity that triggers payment (the “obligating event”), as identified by the relevant legislation, occurs. In other words, the obligating event determines the moment of recognition of the liability for a levy, and can occur at a point in time or over time. In order to account for the levy properly, it is important to understand the underlying legal framework that gives rise to the levy. As such, the accounting for a levy that at first glance seems similar, e.g. property taxes, can be different in different jurisdictions. Examples below illustrate how to conclude on the appropriate recognition pattern.

When a levy becomes due progressively, for example as the entity generates revenues, the entity recognizes the levy liability over a period of time, based on the generation of revenues. This is because the obligating event is the activity of generating revenues.           

To the contrary, if the levy is measured based on the revenues of the previous year, but will only be due if the entity still exists on January 1 of the following year, the obligating event is the entity’s existence on January 1 of the following year. In this case, the levy is recognized at a point in time, i.e. on January 1 of the year following the year during which the revenues were generated. The very high probability that the entity will still exist in the following period does not influence the timing of recognition of the liability of the levy.

A property tax levy that, in case of a sale of the property during the year, can be claimed back from the government, proportionate to the number of days the entity is no longer the legal owner has to be recognized gradually over the year.            

To the contrary, a property tax levy that, in case of a sale of the property during the year, cannot be claimed back from the government, will be fully recognized when the obligating event occurs, e.g. being legal owner on a certain date.

Further examples have been provided in attachment.

How to account for the debit side of the accouting entry?

IFRIC 21 does not provide guidance on how to recognize the ‘debit side’ of the accounting entry. This is governed by other IFRSs. Examples are provided below.

Property tax levies, directly attributable to production of inventory items are integrated in the cost of the inventory, and recognized in profit or loss (cost of goods sold) as the inventory items are sold. An important portion of levies identified in the Group relates to property taxes on production assets.

Example

• Annual levy: 100 €
• Obligating event: Q1
• Payment: Q3
• Expected production units per year: 1,200 units

Non-recoverable VAT and custom duties directly attributable to the acquisition of an item of property, plant and equipment, an intangible asset, or an inventory item are recognized as part of the cost of the respective item.

Prepaid levies are recognized as prepaid assets.

Levies that are recognized in profit or loss on initial recognition of the liability for the levy include:

• property tax levies, that are not directly attributable to production of inventory items (e.g. on administrative buildings),
• levies based on revenue generated,
• non-recoverable VAT and custom duties not directly attributable to the acquisition of an item of property, plant and equipment, an intangible asset, or an inventory item.  

Interim financial statements

IFRIC 21 clarifies that the same recognition principles shall be applied in the interim financial statements.

This is essentially different from the accounting for income taxes, which, in interim financial statements, are measured based on tax rates that would be applicable to expected annual earnings. For example if quarter 1 earnings are in absolute amounts subject to taxation at a rate of 20%, and expected annual earnings will be subject to a taxation at a blended rate of 25%, such due to progressive tax rates, interim income tax expense is measured based on the 25% tax rate.

Contrary to what applies for income taxes, in interim financial statements, a liability for a levy shall not be recognized if there is no present obligation to pay the levy at the end of the interim reporting period. This means that, in the interim periods, the entity does not accrue a portion of the annual amount that it expects to be liable for at the end of the year. For example, when the legislation stipulates that a levy is due by an entity only if it exists on the last day of the annual reporting period, no liability is recognized until the last day of the annual reporting period. As such, interim financial statements for quarters 1 through 3 will not include (a portion of) the liability for the levy.

Similarly, a (part of a) liability for a levy shall not be deferred at the end of an interim reporting period to subsequent reporting periods if a present obligation to pay the levy exists at the end of the interim reporting period.

Materiality threshold

The materiality threshold is set at 500 K€. Solvay Group entities can choose to lower the threshold. Levies in excess of the threshold are mandatorily accounted for in accordance with this guidance. 

Effective date

The Group applies IFRIC 21 as from January 1, 2015.      

Illustrative examples