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Accounting and Taxation of Internally Generated Intangible Assets

Received: 2 June 2023     Accepted: 21 June 2023     Published: 8 July 2023
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Abstract

Capitalized intangible assets are part of the company's investing activities. Over the last 5 years, the 27 Member States of the European Union have increased their investments, including those in intangible assets. When a company has an experienced research team, it is able to create intangible assets without having to purchase assets or hire other organizations to create them. However, internally created intangible assets are treated differently for accounting and tax purposes than purchased ones. This study examines the differences made in the legislation in the treatment of the two sets of intangible assets, and attempts to uncover the reasons for this situation. The study aims to address: whether, and if so why, there should be differences in the treatment of internally generated and purchased intangible assets; whether the cost of internally generated intangible assets should be recognized for tax purposes, given that their carrying amount may be disputed, which may lead to litigation; whether internally generated intangible assets should be recognized when intangible asset incentives are granted. From a research perspective, the concept and different types of intangible assets are first considered. Secondly, their reporting for publicity purposes is analyzed, since the financial statements prepared by a company play an important informational role for other companies, for statistical purposes, for the listing of the company on stock markets, etc. Assets are recorded on the company's balance sheet, but are also accounted for in whole or in part as expenses that affect its financial result. The Republic of Bulgaria applies International Accounting Standards (IAS/IFRS) for large companies and groups of companies, but has also adopted National Accounting Standards (NAS) based on Bulgarian accounting tradition and concept. Thirdly, the taxation of intangible assets is examined in terms of corporate tax in Bulgaria rather than indirect taxation. The study focuses on the comparison of Bulgarian taxation and US taxation, as these are two very different models of legal technique in the design of direct corporate income tax. Despite the differences, the analyses indicate that the overall treatment of intangible assets for tax purposes shows similarities. The study does not employ an empirical method, as the analysis is conducted via doctrinal research and comparative study of normative acts and administrative practice. The study ends with conclusions.

Published in International Journal of Law and Society (Volume 6, Issue 3)
DOI 10.11648/j.ijls.20230603.13
Page(s) 186-192
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2023. Published by Science Publishing Group

Keywords

Internally Generated Intangible Assets, Purchased Intangible Assets, Recording, Taxation, Tax Reliefs

References
[1] Anna-Fani Constantatos, Dionysia Dionysiou, Richard Slack, Ioannis Tsalavoutas, Fanis Tsoligkas. The Capitalisation of Intangibles Debate: Accounting for Exploration and Evaluation Expenditure in Extractive Activities. Adam Smith Business School, University of Glasgow. January 2021. IAS38-PI-INTANGIBLES-E&E-EI v4 extracting activities.pdf, accessed 10 May 2023.
[2] BG: Accounting Act, State Gazette, promulgated 2015, amended and supplemented 2016, 2017, 2018, 2019, 2020, 2021.
[3] BG: Corporate Income Tax Act, State Gazette, promulgated 2006, amended and supplemented 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, 2022.
[4] BG: Decree № 46 of 31 Mar. 2005 of the Council of Ministers of adoption of National Accounting Standarts. State Gazette, promulgated 2005, amended and supplemented 2016.
[5] Brezoeva, Bojka. Cryptocurrency Accounting Treatment //Accounting, Taxes and Law. – 2021. - №8. – рр. 18-28.
[6] Council of EU, Press release. (30 June 2022) Digital finance: agreement reached on European crypto-assets regulation (MiCA) - Consilium (europa.eu), accessed 21 Jan. 2023. On 20 April 2023. The EU Parliament voted in favour of the proposed regulation on 20 April 2023, but further action is needed to bring it into force.
[7] Harmful Tax Practices – 2018 Progress Report on Preferential Regimes (oecd-ilibrary.org), accessed 6 May 2023.
[8] Harmful tax practices: Consolidated peer review results of preferential tax regimes (BEPS Action 5) (oecd.org), accessed 6 May 2023.
[9] https://www.mckinsey.com/capabilities/growth..., assessed 1 May 2023.
[10] Intangible assets (iasplus.com), accessed 10 May 2023.
[11] Judith Freedman. Aligning Taxable Profits and Accounting Profits: Accounting Standards, Legislator and Judges, eJournal of Tax Research (2004), pp. 71–99.
[12] Letter No. 20-00-111 of 9 May 2018 of the NRA, Регистър за писмени запитвания - търсене | ЦУ на НАП - Application Server (nra.bg), accessed 25 May 2023.
[13] Lev, B. (2018), The Deteriorating Usefulness of Financial Report Information and How to Reverse It. Accounting and Business Research, 48 (5): 465–93.
[14] Michele Hanlon, Edward L. Maydew & Terry Shevlin, An Unintended Consequence of Book-tax Conformity: A Loss of Earnings Informativeness, Journal of Accounting and Economics (2008), pp. 294–311.
[15] Michelle Hanlon, Stacie Kelley Laplante & Terry Shevlin, Evidence for the Possible Information Loss of Conforming Book Income and Taxable Income, Journal of Law and Economics (2005), pp. 407–442.
[16] Michelle Hanlon & Terry Shevlin, Book-Tax Conformity for Corporate Income: An Introduction to the Issues, Tax Policy and the Economy (2005), pp. 101–134.
[17] Nobes, C. (2006) The Survival of International Differences under IFRS: Towards a Research Agenda. Accounting and Business Research, 36 (3): 233–45.
[18] Plevri, A. (2021). Consumer Protection and Digital Currencies in the EU: A Comparative Analysis Between Fiat Currencies and Blockchain Payment Methods. In: Synodinou, TE., Jougleux, P., Markou, C., Prastitou-Merdi, T. (eds) EU Internet Law in the Digital Single Market. Springer, Cham. https://doi.org/10.1007/978-3-030-69583-5_27.
[19] Stadler, Christian and Nobes, Christopher William, Varied international practice in accounting for extractive activities (April 20, 2022). Available at SSRN: https://ssrn.com/abstract=3627080 or http://dx.doi.org/10.2139/ssrn.3627080, accessed 11 May 2023.
[20] Statistics | Eurostat (europa.eu), assessed 1 May 2023.
[21] The capitalization of intangibles. Debate: Accounting for exploration and evaluation in extractive activities. ACCA and Adam Smith Business School Research Report. University of Glasgow, January 2022, IAS38-PI-INTANGIBLES-E&E-EI v4 extracting activities.pdf.
[22] U.S. Code § 197 - Amortization of goodwill and certain other intangibles | U.S. Code | US Law | LII / Legal Information Institute (cornell.edu), accessed 7 May 2023.
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[24] Wise, T., and Spear, N. (2002), Factors and Forces of the Extractive Industry Environment, and their Implications for Accounting Measurement and Financial Reporting, Petroleum Accounting and Financial Management Journal, 21 (3): 1–28.
[25] Wolfgang Schoen. The Odd Couple: A Common Future for Financial and Tax Accounting?, Tax Law Review (2005), pp. 111–148.
Cite This Article
  • APA Style

    Ganeta Minkova. (2023). Accounting and Taxation of Internally Generated Intangible Assets. International Journal of Law and Society, 6(3), 186-192. https://doi.org/10.11648/j.ijls.20230603.13

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    ACS Style

    Ganeta Minkova. Accounting and Taxation of Internally Generated Intangible Assets. Int. J. Law Soc. 2023, 6(3), 186-192. doi: 10.11648/j.ijls.20230603.13

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    AMA Style

    Ganeta Minkova. Accounting and Taxation of Internally Generated Intangible Assets. Int J Law Soc. 2023;6(3):186-192. doi: 10.11648/j.ijls.20230603.13

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  • @article{10.11648/j.ijls.20230603.13,
      author = {Ganeta Minkova},
      title = {Accounting and Taxation of Internally Generated Intangible Assets},
      journal = {International Journal of Law and Society},
      volume = {6},
      number = {3},
      pages = {186-192},
      doi = {10.11648/j.ijls.20230603.13},
      url = {https://doi.org/10.11648/j.ijls.20230603.13},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijls.20230603.13},
      abstract = {Capitalized intangible assets are part of the company's investing activities. Over the last 5 years, the 27 Member States of the European Union have increased their investments, including those in intangible assets. When a company has an experienced research team, it is able to create intangible assets without having to purchase assets or hire other organizations to create them. However, internally created intangible assets are treated differently for accounting and tax purposes than purchased ones. This study examines the differences made in the legislation in the treatment of the two sets of intangible assets, and attempts to uncover the reasons for this situation. The study aims to address: whether, and if so why, there should be differences in the treatment of internally generated and purchased intangible assets; whether the cost of internally generated intangible assets should be recognized for tax purposes, given that their carrying amount may be disputed, which may lead to litigation; whether internally generated intangible assets should be recognized when intangible asset incentives are granted. From a research perspective, the concept and different types of intangible assets are first considered. Secondly, their reporting for publicity purposes is analyzed, since the financial statements prepared by a company play an important informational role for other companies, for statistical purposes, for the listing of the company on stock markets, etc. Assets are recorded on the company's balance sheet, but are also accounted for in whole or in part as expenses that affect its financial result. The Republic of Bulgaria applies International Accounting Standards (IAS/IFRS) for large companies and groups of companies, but has also adopted National Accounting Standards (NAS) based on Bulgarian accounting tradition and concept. Thirdly, the taxation of intangible assets is examined in terms of corporate tax in Bulgaria rather than indirect taxation. The study focuses on the comparison of Bulgarian taxation and US taxation, as these are two very different models of legal technique in the design of direct corporate income tax. Despite the differences, the analyses indicate that the overall treatment of intangible assets for tax purposes shows similarities. The study does not employ an empirical method, as the analysis is conducted via doctrinal research and comparative study of normative acts and administrative practice. The study ends with conclusions.},
     year = {2023}
    }
    

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Author Information
  • Institute of the State and the Law, Bulgarian Academy of Sciences, Sofia, Bulgaria

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