|Gain from Bargain Purchase Should Be Recognized as Unrealized Profit Based on Tax Regulations|
National Taxation Bureau of Taipei (hereinafter referred to as NTBT), Ministry of Finance (hereinafter referred to as MOF) expressed that gain accruing from bargain purchase which occurs when profit-seeking enterprises acquire assets, including stock acquisition, of other companies at a price lower than fair value should be recognized as unrealized profit based on relevant laws and regulations. Furthermore, the said gain should be excluded from the tax base of profit-seeking enterprise income tax return.
The NTBT stated that stock acquisition must follow rulings of IAS 28 (No. 28 of International Accounting Standards) or EAS 6 (No. 6 of Enterprise Accounting Standards) in issue of “Investments in Associates and Joint Ventures.” Gain from bargain purchase is the amount by which the fair value of acquired asset’s identifiable net assets, i.e. the amount of total assets minus the amount of total liabilities, exceeds the purchase price and must be recognized as profit on the date of acquisition based on IAS 28 or EAS 6. However, the said gain should be recognized unrealized profit and is excluded from filing profit-seeking enterprise income tax.
Take Company B as an example. Company B is a listed company that has prepared its financial statements in accordance with International Financial Reporting Standards (IFRSs) since 2013. In March 2018, it acquired 60% ownership of Company C for NT$100 million (NT$100 per share). At that time Company C’s fair value of identifiable net assets of the acquired shares was equivalent to NT$120 million on pro rata basis, indicating a difference with the purchase price (investment cost). Although this difference must be recognized as profit (gains from bargain purchase) based on the said rulings, it should be excluded from profit-seeking enterprise income tax return filing in accordance with tax regulations.
The NTBT stated that gain from bargain purchase recognized as profit in accordance with IAS 28 and EAS 6 should be recognized as unrealized profit and should be excluded from tax return filing. Profit or loss from the acquired shares, i.e. selling price minus purchase price, should be recognized only on the date the said shares are sold. Plus, the said profit or loss are subject to profit-seeking enterprise income tax in accordance with Income Tax Act or Income Basic Tax Act.
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