At present, under the US tax laws, the profits made by the subsidiary, say the Indian subsidiary are not subject to any taxes in the US in the hands of the US parent. Such profits are subject to tax, only when they are repatriated back to the US.

Going by the same logic, the accounting treatment at present is that no provision for a tax liability is required to be created on 'un remitted' earnings of a foreign subsidiary in its books of accounts.

Similarly, if an Indian company has a branch office or a subsidiary in the US, and its profits are to be reinvested in the US, then it does not have to provide for the tax liability in its books. US-GAAP based financial statements of Infosys, Wipro and other companies that are listed on US stock exchanges and have branches in the US, clearly reflect this.

Take the financial statement of Infosys for the year ended March 31, 2004. It states: As on this date, the US branch net assets amounted to $127.5 million.

The company has not triggered the BPT and intends to maintain the current level of its net assets in the US as it is consistent with its business plan. Accordingly, a BPT provision has not been recorded. Ditto for Wipro, where the branch net assets amounted to $83 million.

The Financial Accounting Standards Board (FASB), that sets out accounting norms for US companies and all companies that follow the US GAAP (such as Indian companies listed on US stock exchanges) is now examining whether it is feasible to require companies to provide for the tax liability they potentially owe on un remitted profits.

"In other words, FASB requires that a provision be made now, and not when profits are actually remitted either by subsidiaries of US companies from India to the US, or by US branches or subsidiaries to India," points out Mr Prabhakar Kalavacherla, partner, US GAAP, KPMG.

"This proposal is fraught with its own difficulties as regards calculation of the exact provision for tax liability that is required to be made. It may be difficult to perceive how much of the profits will be reinvested in the offshore jurisdiction and how much would be eventually remitted.

If any profit is actually reinvested in the other country, the provision made would have to be reversed," adds Mr Kalvacherla.

Let us refer to an illustration. Co XYZ is a wholly-owned subsidiary in India, and it makes a profit of Rs. 100. Under FASB's proposal, XYZ Inc will be required to account for its tax liability on this profit of Rs 100 now, instead of at the time when the sum is actually repatriated to the United States.

Similarly, if say Rs 90 is reinvested back into India, then the provision made, would have to be reversed to this extent.

Philip West, tax partner, based in the Washington office of Steptoe & Johnson states: "Our clients think that the proposal is detrimental. However, it will take time to develop and consider, especially in light of what will undoubtedly be substantial opposition from the corporate sector."

Interestingly, FASB's proposal coincides with two tax bills, which provide a window for US companies to repatriate offshore earnings (including earnings from subsidiaries in India) within a certain period of time, and be subject to tax in the US at a lower rate of 5.25% instead of 35%.

With FASB's proposal, it may be better for US companies to urge their subsidiaries to repatriate profits now. They would thus, escape from having to provide for tax liability in their books at a higher rate.
However, Mr West opines, "As such, even if the FASB proposal is adopted, it will most likely not be effective for periods within which the tax-benefitted repatriations occur."