If a profit-making business makes a retroactive adjustment to the reduction in retained earnings at the beginning of the period due to a change in the version of accounting standards, it should be recorded as a reduction in retained earnings in the year o

The Taipei National Taxation Bureau of the Ministry of Finance stated that after a profit-seeking enterprise adopts the International Financial Reporting Standards or the Statement of Corporate Accounting Standards, the net decrease in beginning retained earnings due to a retrospective adjustment of the accounting standards version should be listed as a reduction in the retained earnings in the year of change.

The bureau further explained that according to the Ministry of Finance's Order No. 10800614920 issued on January 15, 2020, starting from fiscal year 2018, for profit-seeking enterprises that change the accounting standards version of the International Financial Reporting Standards or the Statement of Enterprise Accounting Standards, adopt newly released accounting statements, or change from the Statement of Enterprise Accounting Standards to the International Financial Reporting Standards, the "net increase" in the beginning retained earnings resulting from the retroactive adjustment in the current year of the change in accounting standards shall be the "amount of net profit items other than the net profit after tax of the current period included in the retained earnings of the current year" as stipulated in Article 66-9, Paragraph 2 of the Income Tax Act, and the "net decrease" in the beginning retained earnings resulting from the retroactive adjustment shall be the "amount of net loss items other than the net profit after tax of the current period included in the retained earnings of the current year" as stipulated in Paragraph 2, Item 7 of the same article, and the retained earnings amount of the year of the change in accounting standards should be included in the calculation of the profit-seeking enterprise income tax to be levied.

The bureau gave an example of Company A's undistributed earnings declaration for 2012, reporting a deduction of NT$40 million (hereinafter the same) from "the amount of net loss items other than the current period's after-tax net profit included in the undistributed earnings of the current year". Upon investigation, it was found that the net decrease in beginning retained earnings was caused by the retrospective adjustment of Company A's change from the Statement of Corporate Accounting Standards to the International Financial Reporting Standards in 2012. According to the above regulations, it should be listed as a reduction in undistributed earnings for the year (2012) when the accounting standards were changed. Company A mistakenly listed it as a reduction in undistributed earnings for 2011. The bureau increased its undistributed earnings by NT$40 million and imposed an additional tax of NT$2 million (NT$40 million x tax rate of 5%).

The bureau called on profit-making enterprises to pay special attention to relevant laws and regulations when reporting deduction items from undistributed profits to avoid being required to pay additional taxes by tax authorities.

(Contact person: Liang, Section Chief of the Business Taxation Group; Tel: 2311-3711 ext. 1250)