Legislative Environment

The first quarter of 2026 was quiet on the legislative front, the tax policy equivalent of a long airport security line with no movement in sight. Congress did not enact any major federal tax legislation, and while discussions of additional reconciliation continue among prominent Republicans, significant reform does not appear imminent. As a result, the developments most relevant to income tax accounting this quarter came from administrative guidance and judicial decisions rather than statutory change.

Nonetheless, the first quarter of 2026 delivered a concentration of taxpayer favorable federal guidance, largely driven by implementation of the One Big Beautiful Bill Act (OBBBA). Key themes included (i) expansion of 100% bonus depreciation, (ii) meaningful CAMT (Corporate AMT) compliance relief, (iii) long awaited relief from irrevocable § 163(j) elections, and (iv) sweeping changes to trade and tariff authority following Supreme Court action.

A Summary of Key Q1 2026 US Updates:

Federal Tax Guidance

Treasury and the IRS issued several notices and proposed regulations during the quarter that reflect the agency’s current priorities, including deregulation and implementing the provisions of the One Big Beautiful Bill Act (OBBBA). Although most guidance remains proposed or interim, companies may generally elect to rely on it, which can affect tax positions and Q1 reporting.

1.) Bonus Depreciation – On January 14, 2026, the IRS previewed forthcoming proposed regulations (Notice 2026-11) on the additional first-year bonus depreciation under § 168(k), as amended by the OBBBA. The guidance clarifies the rules for components of larger self-constructed property and qualified sound recording productions, and for electing to claim a reduced deduction in the first taxable year ending after January 19, 2025. 

On February 20, 2026, the IRS provided guidance (Notice 2026-16) on the elective 100% special depreciation allowance for qualified production property (QPP) under new § 168(n).[1] The election applies to qualifying portions of certain domestic nonresidential real property used in manufacturing, production, or refining activities. The Notice addresses several interpretative questions that arose since enactment to help taxpayers evaluate and ensure eligibility for potentially significant cash tax savings for qualifying capital projects for which construction begins after January 19, 2025, and before January 1, 2029. 

2.) Corporate Alternative Minimum Tax (CAMT) – On February 18, 2026, Treasury and the IRS released additional interim guidance (Notice 2026-7) on the CAMT. Most notably, the Notice allows taxpayers to substitute tax depreciation and amortization for book amounts in computing CAMT. The guidance also clarifies the treatment of several book-tax differences that could otherwise inappropriately increase CAMT liability or create undue compliance burdens, including § 174 domestic research and experimental (R&E) costs, certain repair and maintenance costs, film and production costs, and eligible materials and supplies. It further provides targeted relief for troubled companies and modifies anti-avoidance rules and rules applicable to certain cross-border transfers of intangible property.

A&M TAS Says: 

This recent interim CAMT guidance meaningfully narrows exposure that many companies may have previously modeled as structural, particularly for R&D and capital- intensive taxpayers. Allowing tax based depreciation and amortization in the computation could undermine the assumption that some entities will always be CAMT taxpayers, reframing CAMT as potentially cyclical rather than permanent. This shift has significant ASC 740 implications: Companies may move in and out of CAMT, introducing quarter to quarter effective tax rate volatility. In addition to potentially recording the current and prior period tax impacts of the new guidance in Q1, prior conclusions supporting full US valuation allowances (often premised on perpetual CAMT status driven by R&D addbacks) may no longer hold and warrant reassessment of DTA realizability under regular tax. Taken together, these changes heighten disclosure and audit scrutiny around the CAMT computations and analysis.

3.) Foreign Currency Gains and Losses – On February 25, 2026, Treasury and the IRS previewed proposed § 987 regulations (Notice 2026-17), addressing the computation of taxable income or loss, and foreign currency gain or loss, for “qualified business units” with a functional currency different from that of its owner. The guidance allows the use of a modified equity and basis pool method to compute § 987 gain and loss and includes additional rules intended to reduce compliance burdens and limit the impact on ordinary course transactions. The Notice also announces that future guidance is expected to allow controlled foreign corporations (CFCs) to elect out of the gain and loss recognition rules under § 987(3), subject to certain exceptions.

4.) Energy Tax Credits – On February 3, 2026, Treasury and the IRS released proposed regulations (REG-121244-23) under § 45Z for the clean fuel production credit, as extended and modified by OBBBA. The proposal addresses the calculation of the credit, registration, anti-stacking and anti-abuse rules, limits involving foreign feedstocks and prohibited foreign entities, and substantiation requirements. 

On February 12, 2026, Treasury and the IRS also issued interim guidance (Notice 2026-15) on OBBBA restrictions on claiming certain energy tax credits when a prohibited foreign entity provides “material assistance” related to facility construction or component production. The Notice applies to the clean electricity production credit (§ 45Y), clean electricity investment credit (§ 48E), and advanced manufacturing production credit (§ 45X).

5.) Business Interest Expense – Perhaps the most significant Q1 development was the release of Rev. Proc. 2026 17 on March 18, 2026, allowing eligible taxpayers to retroactively withdraw irrevocable § 163(j)(7) elections made in 2022–2024.g. [2] Most notably, the procedure provides relief for the real property trade or business (RPTOB) election and the CFC group election, giving taxpayers a limited opportunity to revisit prior decisions in light of OBBBA’s changes to the § 163(j) and bonus depreciation under § 168(k).

A&M TAS Says: 

Given that several Q1 notices and proposed regulations permit reliance (subject to certain requirements), companies should evaluate whether and when to apply the guidance and whether related adjustments to tax positions, measurements, or disclosures are required. In some cases the guidance simply offers clarity regarding application and elections available under existing law; accordingly, taxpayers may apply the rules to 2025 taxable years and earlier years, potentially generating significant tax benefits. For example, elections and other implementation decisions made in response to Q1 guidance may affect current period accounting as well as the forecasts used to determine the annual effective tax rate (AETR) and valuation allowances conclusions. Companies should also consider whether enhanced disclosure is warranted for significant judgments, elections, and reliance on non-final guidance.

US Tariffs

On February 20, 2026, the U.S. Supreme Court ruled in Learning Resources Inc. v. Trump that tariffs imposed under the International Emergency Economic Powers Act (IEEPA) of 1977 exceeded presidential authority.[3] While the decision invalidated certain tariffs and the Court of International Trade (CIT) subsequently directed U.S. Customs and Border Protection to cease enforcement, the process and timing for refunds remain uncertain. 

In response, the Administration imposed a temporary 10% global tariff under § 122 of the Trade Act of 1974 and initiated expedited § 301 tariff investigations—targeting manufacturing sectors and goods produced with forced labor. These measures are time-limited and may be replaced or expanded depending on the outcome of ongoing trade actions.

A&M TAS Says:

The recent tariff developments create meaningful financial reporting and potentially income tax accounting considerations. While tariffs themselves are not income taxes under ASC 740, changes in tariff regimes can indirectly affect income tax accounting through impacts on pretax income, deferred tax asset realizability, and intercompany transactions of inventories. Ongoing uncertainty surrounding the availability and timing of potential tariff refunds further complicates forecasting and tax provision judgments, as any refunds cannot be anticipated in income tax accounting until realization is legally assured and estimable. The replacement global tariff introduces a new cost structure that may drive earnings volatility and require updates to interim effective tax rate calculations and related disclosures. As trade policy continues to evolve, companies should carefully evaluate the downstream ASC 740 effects of tariff-related cost changes, refund uncertainties, and shifting profitability assumptions.

State and Local   

State and Local Reactions to OBBBA Impacting Corporations

As mentioned in our previous publications, the corporate income tax regimes in many jurisdictions are affected by federal tax law changes, because states conform to the IRC for purposes of administrative ease by either incorporating the IRC, as a whole or in part, and/or by using federal taxable income as the starting point. Generally, states that incorporate the IRC either conform to the IRC as of a specific date (fixed date conformity) or automatically follow the version of the IRC in effect for the current tax year (rolling conformity). However, some states only conform to specific IRC provisions (selective conformity).

We continued to see states grapple with conformity questions this quarter as many legislative bodies have been in regular session for the first time since the enactment of the federal legislation last summer. We expect this trend to continue into the second quarter of the year, and likely beyond that in some jurisdictions. It is important to note that even though we are entering into the second quarter of 2026, some legislative changes may still impact 2025, as well as the current year and beyond, so it is critically important to stay informed.

District of Columbia: The District of Columbia decoupled from many provisions of the OBBBA under emergency legislation enacted in December of 2025, as reported in our previous publication. Since then, the District’s taxing authorities have been locked in a stalemate with Congress, which rejected DC’s attempt to decouple. The District’s Attorney General has argued that Congress acted too late and, for now, filing season is continuing under the rules enacted by DC. It remains to be seen whether the administration or Congress will take further action. 

Georgia: House Bill 1199, signed on March 20, 2026, updates Georgia’s conformity to the IRC. However, the state continues to decouple from IRC § 168(k) (bonus depreciation), § 163(j) (interest deductibility), and the Tax Cuts and Jobs Act’s version of IRC § 174 (R&D capitalization). State-specific limitations to IRC § 179 expensing also continue to apply. 

Indiana: Senate Bill 243 was signed into law on March 5, 2026. This legislation updated the state’s IRC conformity to January 1, 2026, and also addressed a number of OBBBA-related provisions. Specifically, Indiana has decoupled from IRC § 168(n) (qualified production property) and continues to decouple from IRC § 168(k). Indiana also continues to decouple from the interest expense rules in IRC § 163(j), as well as the rules regarding amortization of research and experimental expenses (allowing a current deduction). However, the state has adopted special rules that apply to the election for certain small businesses to amend prior year returns.

New Mexico: New Mexico Senate Bill 151 was signed into law on March 11, 2026. With this legislation, New Mexico joins more than 20 other states in taxing at least some portion of NCTI (formerly GILTI). New Mexico will tax NCTI in full as of January 1, 2027, but will offer factor representation. The state will also fully decouple from both IRC § 168(k) and § 168(n). New Mexico has also decided not to follow the OBBBA’s expansion of the IRC § 163(j) computation to EBITDA. 

Virginia: House Bill 29 was signed into law by Virginia’s governor on January 20, 2026. This legislation updated the state’s IRC conformity from rolling to a fixed date of December 31, 2025, and decoupled from a number of the provisions of the OBBBA. Most notably, the law decouples from IRC § 168(n), the increased IRC § 179 expensing limited, and the immediate research and experimental expensing rules under IRC § 174A; it also reduces the state’s IRC § 163(j) deduction for disallowed business interest to 20% from 50% beginning in taxable periods starting on or after January 1, 2025. 

A&M TAS Says: 

Companies must reflect the impact of a state (or local) law change (and the related federal deduction) on their current tax provision in the period during which the change becomes effective and the deferred tax provision impact during the period of enactment. This will require adjusting the tax provision to account for the new rates or rules for taxable income generated after the effective date. Management should ensure that their systems and processes capture these law changes promptly and that financial statement disclosures clearly explain the impact on current period tax expense and overall tax positions.

Other Developments

California: Two recent California cases are worth noting, as they may have broader applicability.

• Doing business: In a late December 2025 ruling recently released by California Office of Tax Appeals (OTA) in the Appeal of Fishbone Apparel, Inc., the OTA upheld the Franchise Tax Board in finding that an out-of-state business that owned inventory stored in the state through an Amazon fulfillment program had physical presence sufficient to justify the implication of the state’s minimum franchise tax, regardless of the fact that its activities were otherwise below the state’s stated doing business thresholds.
• Apportionment: On February 26, 2026, the Los Angeles County Superior Court ruled that Smithfield Packaged Meats Corporation was entitled to use an alternate, three-factor apportionment formula, that more accurately and fairly reflected its activities in the state. While specific to the agricultural industry, these sorts of cases are typically extremely difficult ones for taxpayers to successfully argue, so the implications of this decision and successful use of a distortion-related argument to prevail will be closely watched.

Indiana: 

• Revenue Agent Reports (RARs): As part of the larger tax package recently signed into law in Indiana mentioned above, the state has extended its due date for state amended returns following a federal audit and revenue agent’s report (or RAR) from 180 days to one year following the federal determination. This change took effect in 2026.
• Upcoming amnesty window: The Indiana Department of Revenue issued a bulletin in early February announcing that the tax amnesty program established via legislation last summer will run for eight weeks this summer, from July 15 through September 15, 2026. This program, which was recently expanded by Senate Bill 243, will allow taxpayers to settle liabilities from before January 1, 2024, without interest, penalties, or collection fees. Those who are eligible and do not participate may be subject to additional penalties in the future.

Michigan: The Michigan Department of Treasury issued a notice to taxpayers on February 19, 2026, discussing the impact of the state high court’s decision not to review the Court of Appeals’ 2024 ruling in the matter of the Nationwide Agribusiness Insurance Company. The case involved whether a unitary group of insurance companies should be permitted to file a unitary return for premium and retaliatory tax purposes, similar to non-insurance taxpayers subject to the corporate income tax regime. The Court of Appeals reversed the Michigan Tax Tribunal and found that a unitary return should be filed. Impacted groups should review their Michigan filing obligations in light of this decision.

New Jersey: On March 2, 2026, the U.S. Supreme Court denied the taxing authority’s petition to hear a corporate business tax case involving Lorillard Tobacco Co. and the state’s related party royalty expense addback provisions. This leaves standing a state court ruling favoring the Division of Taxation in defining when an addback may be considered “unreasonable” under a 2020 law change. This could lead to broader and more aggressive enforcement by the state in this area.

New York: On February 24, 2026, a New York appellate court confirmed that all members of a combined group must qualify as qualifying emerging technology corporations (QETCs) in order to receive the corresponding reduced rate of tax applicable to QETCs. While the years at issue pre-dated the state’s 2015 corporate tax changes, similar definitions still apply, so this case is one that should be closely considered by potentially impacted groups. 

Texas: In mid-March, the Texas Supreme Court agreed with the comptroller in finding that NuStar Energy LP’s sales of crude oil were delivered in Texas and therefore included in the sales factor based upon the purchaser’s place of delivery. This decision against the taxpayer denied their refund claim in which they argued that the place of use should be controlling when looking to the definition of the market for sourcing purposes.

Utah: On March 23, 2026, Utah’s governor signed into law Senate Bill 60, effective May 6, 2026, and retroactive to January 1, 2026. This legislation lowers the corporate income tax rate from 4.5% to 4.45%. 

A&M TAS Says:

These developments collectively underscore a continued trend of states asserting broader nexus positions, scrutinizing apportionment methodologies, and expanding enforcement mechanisms, each of which carries direct implications under ASC 740. Certain items are largely procedural or administrative in nature (e.g., Indiana’s extended amended return/RAR timing and the upcoming amnesty window), while others reflect substantive law, litigation outcomes, or potentially more assertive enforcement postures (e.g., nexus, apportionment, addbacks, and sourcing). Taxpayers will need to reassess their state tax footprint, for example, inventory-driven nexus in California, evaluate the sustainability of existing filing positions, including alternative apportionment and combined reporting positions, and revisit uncertain tax positions in light of increasingly taxpayer-adverse rulings, such as New Jersey addbacks and Texas sourcing. From a measurement perspective, these changes may drive adjustments to state effective tax rates, including the impact of rate changes in Utah and shifts in apportionment factors. Overall, companies should ensure that their state tax positions, reserves, and disclosures appropriately reflect this evolving and more aggressive state tax landscape.

[1] Rayth Myers et al., “IRS Provides Practical Roadmap for 100% Depreciation of Qualified Production Property (Notice 2026‑16),” Alvarez & Marsal, February 23, 2026.

[2] Kevin M. Jacobs et al., “IRS Creates Limited Opportunity to Revisit “Irrevocable” § 163(j) Elections,” Alvarez & Marsal, March 25, 2026.

[3] Kevin M. Jacobs et al., “Tariff Turbulence: SCOTUS Invalidates IEEPA Powers for Imposing Global Tariffs,” Alvarez & Marsal, February 20, 2026.

Featured Experts

Emilio Martinez 

Leanne Scott 

Reintroduction of Dividend Withholding Tax 

The enactment of Law 15,270/2025 in Brazil represents a fundamental change to the country’s dividend taxation regime, introducing a 10% withholding tax on cross-border distributions effective January 1, 2026. This shift has immediate and potentially material implications for multinational groups with Brazilian subsidiaries and existing earnings previously considered exempt from repatriation tax.[4]

A&M TAS Says: 

The reintroduction of a 10% dividend withholding tax necessitates a reassessment of outside basis differences and indefinite reinvestment assertions. Additionally, companies should anticipate increased effective tax rates and cash tax costs associated with future distributions. As this legislation is now effective, it is appropriate to consider this in both the current and deferred tax provision.

[4] Adriano Jose Ponciano, “Tax News Alert | Brazil – Law 15,270/2025: Dividend Withholding Tax Returns in 2026,” Alvarez & Marsal, December 16, 2025.

Featured Experts

Rodrigo Kurayama

Kleiton Nakumo 

Canadian Appeal Court Overturns Tax Court, Invokes GAAR in Cross-Border Continuance Case[5] 

On February 20, 2026, the Federal Court of Appeal (FCA) reversed the decision of the Tax Court of Canada and held that the General Anti-Avoidance Rule (GAAR) applied to deny the tax benefit of “non-CCPC” planning because of the abuse of certain anti-deferral rules. Such “non-CCPC” planning was quite common in Canadian M&A transactions until legislative changes introducing the “substantive CCPC regime” were introduced in the 2022 federal budget specifically targeting such planning. The FCA found that the taxpayer, DAC Investment Holdings, Inc., intentionally ceased to qualify as a Canadian Controlled Private Corporation (CCPC) immediately before selling shares of a subsidiary to a purchaser in a M&A transaction after re-domiciling to the British Virgin Islands, defeating the object, spirit, and purpose of the anti-deferral rules contained in the Income Tax Act by maintaining central management and control in Canada (prior to the implementation of the new substantive CCPC regime). Please refer A&M Tax Alert[6] for detailed analysis.

A&M TAS Says:

The FCA’s application of GAAR reinforces the need for heightened scrutiny of cross border structuring positions that rely on formalistic changes in residency or status. Even where transactions predate subsequent legislative amendments, the decision underscores that tax benefits remain vulnerable if viewed as inconsistent with the object, spirit, and purpose of the underlying rules. For income tax accounting purposes, the ruling may constitute new information affecting ASC 740 uncertain tax position conclusions, including whether recognition thresholds continue to be met and whether measurement should be adjusted to reflect a principles based challenge by tax authorities. Companies with similar historical structures should reassess reserves and related disclosures around significant judgments, as GAAR can have a direct and immediate impact on the income tax provision.

[5] Canada v. DAC Investment Holdings Inc., Federal Court of Appeal, 2026 FCA 35, February 20, 2026, correction made March 11, 2026.

[6] Andrew Morreale and Joey Bogle, “FCA Overturns TCC in DAC Investments GAAR Decision,” Alvarez & Marsal, March 13, 2026.

Featured Experts

Carla Hannemann

Joey Bogle 

China Reinvestment Regime

China has strengthened its profit reinvestment incentive regime under the Ministry of Finance (MOF), State Taxation Administration (STA), and Ministry of Commerce (MOC) Public Notice [2025] No. 2 (PN2),[7] signaling a clear policy intent to encourage foreign investors to recycle onshore profits back into China. PN2 enhances the attractiveness of reinvestment by combining cash tax deferral with an additional tax credit mechanism, thereby potentially reshaping how multinational groups plan around dividend distribution, cash pooling and reinvestment timing in China.

How does it work?

PN2 introduces a more flexible incentive framework for qualifying reinvestments made with profits distributed from China entities during the policy window (which expires on December 31, 2028).

Key differentiators from prior regimes include:

• The ability to defer withholding tax at the point of profit distribution when profits are directly reinvested in China; and
• The creation of a tax credit pool, which can be used to offset future China withholding taxes (e.g., on dividends, interest, or royalties) arising from the same China entity.

Together, these changes elevate PN2 from a pure “tax deferral benefit” to a broader cash tax optimization tool, which is particularly relevant and beneficial for groups with ongoing China operations rather than one-off exits.

What are the potential scenarios where PN2 may be relevant?

From a practical standpoint, PN2 is most relevant in situations where groups are already generating distributable profits in China and are making strategic decisions around capital deployment.

Common scenarios include:

• Groups with excess onshore cash in China that are weighing repatriation versus reinvestment options
• Multinationals expanding China operations, whether through capital increases, greenfield projects, or acquisitions of domestic businesses
• Treasury-driven groups seeking to better align China cash movements with global liquidity planning
• Long-term China investors that expect continued dividend, royalty, or interest flows from China entities over the medium term.

In these cases, PN2 may offer a way to improve cash efficiency without changing the underlying commercial footprint.

While PN2 is framed as a tax incentive, its implications go beyond pure current tax calculations. 

From an accounting standpoint, there are considerations such as:

• Whether historical repatriation and funding strategies remain optimal, given the enhanced value of reinvestment
• How reinvestment decisions interact with group capital allocation priorities and China growth plans
• Whether existing holding structures and cash flow pathways are well positioned to access the incentive efficiently

For many groups, PN2 is less about immediate execution and more about reevaluating medium-term China cash and investment strategy.

How does it interact with wider global tax and regulatory developments?

PN2 does not operate in isolation. Multinational groups will typically need to view it alongside:

• Home country tax considerations, including foreign tax credit and participation exemption regimes; and
• Broader global minimum tax developments (e.g., Pillar Two), which may influence the overall benefit profile of China tax incentives

A&M TAS Says:

PN2 is not just a cash tax incentive; it has direct tax accounting consequences. For groups with China profits, the enhanced reinvestment framework may call into question existing permanent reinvestment assertions, the timing and recognition of withholding tax deferred tax liabilities, and how China cash is factored into medium‑term capital planning. As a result, this may warrant a reassessment of whether deferred taxes previously unrecognized remain appropriate and whether reinvestment strategies are still aligned with group accounting positions under an evolving global tax landscape.

[7] The Ministry of Finance (MOF), the State Taxation Administration (STA), and the Ministry of Commerce (MOC) jointly issued the Public Notice on June 27, 2025.

Featured Experts

Yvette Chan 

Aska Li 

The first quarter of 2026 brought several important rulings from the German Federal Fiscal Court (BFH) with significant implications for income tax accounting:

Bundesministerium der Finanzen (BMF) Modernizes Rules on Capitalization vs. Maintenance for Building Renovations 

With its circular of January 26, 2026, the BMF has updated and modernized the tax framework for distinguishing capitalizable acquisition/production costs (AK/HK) from immediately deductible maintenance expenses in the context of building renovations.

In essence, capitalization is required when renovation works significantly improve or upgrade a building. In contrast, maintenance expenses can be deducted immediately when works simply preserve the existing condition or replace elements with comparable quality. This distinction is crucial because capitalized costs are depreciated over many years, while maintenance expenses reduce taxable profit immediately.

A central clarification of the new circular concerns the criteria for a “standard increase” (Standardhebung). According to the BMF, an increase in standard exists only if renovation measures lead to a significant improvement in three out of four core building systems: heating, sanitary installations, electrical systems, and windows. Other measures, including energy‑efficiency upgrades such as façade insulation, do not influence the standard‑increase assessment. Likewise, the installation of a heat pump or a solar thermal system alone does not constitute a “very high standard.”

The BMF also confirms the shortening of the observation period for staged renovations from five to three years, which applies retroactively and even to measures that were still ongoing when the circular was published. Additionally, the BMF emphasizes that commercial‑law accounting (German GAAP/IFRS) does not determine the tax treatment but rather that the tax rules apply independently.

Overall, the circular replaces the previous guidance from 2003 and 2017 and generally expands the scope for classifying renovation measures as immediately deductible maintenance, particularly for energy‑related works.

Key Practical Implications

• Energy-related renovations are now more frequently treated as deductible maintenance rather than capitalized improvement costs.
• Only four building components determine whether the building’s standard has been improved; all other measures are irrelevant for the standard test.
• The reduced three‑year period simplifies the assessment of staged renovations and may lead to more favorable classifications for ongoing or recent projects.

A&M TAS Says:

The revised BMF guidance can materially influence current and deferred tax positions.
More renovation measures may now qualify as immediately deductible expenses, thereby reducing current tax expense in the period in which the renovation is carried out. Where classifications change from capitalization to expensing (or vice versa), corresponding temporary differences will arise or disappear, requiring adjustments to deferred tax balances.

Because the circular applies retroactively, companies should revisit ongoing and prior‑year renovation projects to assess potential adjustments and to determine whether existing uncertain tax positions relating to standard‑increase discussions may now be released. 

BFH Confirms: Refund Interest on Trade Tax Is Taxable – Tax Accounting Implications

The German Federal Fiscal Court (BFH) ruled on September 26, 2025 (case code: IV R 16/23), that refund interest on trade tax (§ 233a German Fiscal Code) must be treated as taxable operating income. An extra‑balance‑sheet neutralization under § 4(5b) German Income Tax Act is explicitly excluded, as this provision applies only to the trade tax itself and related late‑payment interest.

A&M TAS Says: 

The BFH ruling clarifies that refund interest on German trade tax must be recognized as taxable operating income, which can require mandatory P&L recognition and may affect the interim and annual effective tax rate through increased taxable income. Companies should review open years and ongoing audits to confirm historical treatment (including any prior tax-neutral presentation), assess whether current and deferred tax positions and documentation remain supportable, and determine whether provision adjustments and enhanced disclosures are needed.

BFH Clarifies Timely Settlement Requirements for Profit Transfer Agreements

The German Federal Fiscal Court (BFH) has issued its first fundamental ruling on the timing requirements for settling claims under a profit transfer agreement (PLTA) for purposes of recognizing a tax group (Organschaft). In its judgment on November 5, 2025 (I R 37/22), the BFH held that profit transfer claims must be fulfilled “promptly,” which generally means within 12 months after their due date.

In the case at hand, the subsidiary had only booked the profit transfer amounts to a liabilities account without actual settlement, and the offsetting did not occur until several years later. The BFH concluded that this significant delay meant the PLTA had not been properly executed, and therefore the tax group could not be recognized.

The Court emphasized two requirements for proper execution: recognition of the claims in the accounts and actual settlement, either through payment or valid set‑off within an appropriate timeframe.

A clearing account may be acceptable only if it functions as a true current account with reciprocal entries and regular account closures. 

A&M TAS Says:

From an uncertain tax position standpoint under ASC 740 and IAS 12, the BFH decision may represent new authoritative evidence affecting the sustainability of previously assumed German tax group positions. Where entities have concluded that an Organschaft exists despite delays in settling profit transfer claims, this ruling heightens the risk that the position would not be sustained upon examination, as the court has now clearly articulated a “prompt settlement” requirement. As a result, companies should reassess whether recognition or measurement of related tax benefits continues to meet the more likely than not (ASC 740) or probable (IAS 12) threshold, and whether an increase in unrecognized tax benefits is required for periods in which profit transfer settlements were delayed beyond an acceptable timeframe.

Featured Experts

Nadine Lange 

Wladlena Binstain 

Ireland’s Anticipated Reform of Taxation Regime for Interest

Ireland’s interest taxation framework is currently the subject of a significant reform program being progressed by the Department of Finance following its public consultation on the tax treatment of interest. While no legislative changes were enacted during the quarter, the publication of an Action Plan and the associated Phase One Feedback Statement signals a clear policy direction with potentially significant implications for corporate taxpayers.

Draft legislation is anticipated in April 2026, with a view to inclusion in Finance Bill 2026 expected to be published in October 2026 with changes to take effect from January 1, 2027. Given the scale of the proposed changes, this remains a key “watch this space” area for businesses. 

Phase One of the reform focuses on modernizing and simplifying Ireland’s interest taxation regime, with the following key proposals under consideration:

• A unified corporation tax interest deductibility framework 
  A new default interest deductibility framework is proposed for corporation tax, intended to apply consistently across trading and non‑trading activities and replace the current fragmented provisions with a simplified, unified approach, in particular broadening access to relief in non‑trading contexts.
• A new profit motive test 
  The centerpiece is a new “profit motive” test, under which interest deductibility would be linked to borrowings applied to trading or non‑trading purposes undertaken with a genuine “intention” to realize profits or gains. Relief would be available once the funds are used for the relevant purpose, even if that purpose does not ultimately generate a profit, provided there was a genuine intention to do so. The “intention” test would be assessed in each accounting period in which the interest accrues. This “profit motive” approach is in contrast with stakeholder submissions, which had generally advocated for a broader “commercial” or “business purpose” test for interest deductibility.
• Targeted simplifications to existing provisions 
  The proposal envisages retaining § 247, the current complex and highly prescriptive regime that governs the deductibility of interest in non‑trading situations. This would be on an elective, loan‑by‑loan basis as an alternative route to relief for qualifying loans. The Qualifying Financing Company regime, which provides for a deduction for interest payable to third-party lenders that is matched against interest income earned from qualifying loans to group companies, is set to be repealed. Loss utilization is expected to continue to broadly follow existing case-based rules.
• Align trading and passive interest income; move Case III/IV interest to an accrual’s basis.
  A major simplification proposal is to compute interest income taxable under Schedule D Cases III and IV on an accrual’s basis for both income tax and corporation tax, aligning treatment more closely with accounting recognition and reducing the current receipts/accrual mismatch. Currently, non‑trading interest income is generally taxed on a receipt’s basis.
• Expand scope to “interest equivalents.”
  The proposals aim to treat certain items that are economically equivalent to interest as “interest equivalents” so that they are brought into the same tax framework symmetrically for payers and recipients. This should include items such as discounts on securities issued at a discount, amounts under certain derivative/hedging arrangements connected with raising finance, certain finance‑driven returns on financial assets/liabilities, and fees directly connected with raising finance, as well as FX gains/losses on interest/interest equivalents. 
• Enhance “international guardrails” (ILR and transfer pricing).
  Alongside broader deductibility, the reform includes proposals to strengthen guardrails, amendment to the Interest Limitation Rule to include changes to the de minimis mechanics and group concepts, and to extend transfer pricing to certain medium‑sized enterprises. 

A&M TAS Says:

As of Q1 2026, Ireland’s proposed reform of the taxation regime for interest does not represent enacted or substantively enacted tax law for purposes of ASC 740/IAS 12, and therefore no remeasurement of deferred tax balances or recognition of tax effects is appropriate in the current period. Accordingly, the proposals should be treated as non-recognized subsequent tax law developments, although companies with material Irish financing arrangements should monitor the legislative process closely, given the anticipated timeline (draft legislation expected April 2026 and potential inclusion in Finance Bill 2026). 

Featured Experts

David Smyth 

Gavin Brady 

Italy’s 2026 Budget Law (Law No. 199 of December 30, 2025; effective January 1, 2026) includes several corporate tax changes that may affect income tax accounting primarily through timing (current vs. deferred) and eligibility for exemption regimes. 

Key Developments (Highlights):

• Capital gains timing (paragraphs 42–43)
  As a general rule, gains on business assets and participations that do not qualify for PEX are taxed in the year of realization, with installment taxation materially narrowed (limited exceptions remain, e.g., business/branch transfers held ≥ three years).
• Optional 10% “affrancamento” (paragraphs 44–45)
  Reintroduced substitute tax to release tax‑suspended reserves/surpluses, generally payable in four equal instalments (with FY2025 return mechanics for calendar-year taxpayers) 
• Dividend/PEX access thresholds (paragraphs 51–55)
  Partial exclusion/exemption for dividends and capital gains is restricted to participations meeting minimum thresholds (e.g., ≥5% or tax basis ≥ €500,000, depending on the instrument), with parallel consequences for EU/EEA recipients seeking the 1.20% WHT regime 
• IFRS adopters—intangibles (paragraph 131(c))
  Deductibility of goodwill/brands/indefinite‑life intangibles is aligned more closely to impairment recognition, altering the timing profile of tax benefits. 
• Hyper-depreciation (paragraphs 427–436) 
  Hyper‑depreciation tax uplift reintroduced (progressive +180% / +100% / +50%), with operational procedures and documentation requirements central to eligibility 
• Credit offset restriction (paragraph 116) 
  The debt threshold that can block certain “horizontal” offsets in F24 is reduced to €50,000, potentially affecting timing of credit utilization and cash‑tax planning assumptions.

A&M TAS Says:

These changes may require re‑profiling deferred taxes where taxable income/deductions are accelerated, reassessing recoverability assumptions where participation exemption access is constrained, and strengthening tax‑basis discipline/documentation for incentive claims (including hyper-depreciation), given potential ETR volatility and audit scrutiny.

Recent Trends in Japan Tax Audits: Renewed Focus on International and Transfer Pricing Matters

Japan’s National Tax Agency reports that audit activity involving international transactions has returned to elevated levels following the COVID era slowdown. Before the pandemic, the NTA conducted approximately 13,000 on-site audits of corporations engaged in cross-border transactions. Activity declined in FY2020 (July 2020 through June 2021) when fieldwork was constrained, then increased in FY2021 and has remained at approximately 10,000 audits per year across FY2022 through FY2024.

Transfer pricing and controlled foreign corporation reviews continue to be key focus areas and continue to drive material adjustments. Recent transfer pricing audits have produced aggregate adjustments of approximately JPY 30 to 50 billion annually. Controlled foreign corporation outcomes have been more variable, including a significant increase in the latest administrative year, with identified underreported income exceeding JPY 50 billion.

Overall, the audit program appears increasingly targeted and data-driven, with sustained attention on cross-border risk. Japan-headquartered multinational groups and inbound groups should expect continued scrutiny and confirm that transfer pricing documentation, international tax positions, and audit readiness are aligned with Japanese practice.

Audit Cycles and Practical Considerations

Although Japan has an extended statute of limitations, many companies are audited on a recurring cycle. When an examination begins, the NTA often reviews multiple years at once, commonly three to four, and addresses several issues in parallel.

This multi-year, multi-issue approach can strain internal resources if the company is responding without a clear plan. Companies that prepare in advance, including defining roles, organizing support, and validating key positions, are generally better able to manage scope and timing. In practice, exam teams focus on whether the facts are consistent, the files are complete, and the support for the return position is readily available.

Tax Governance as an Increasing Area of Attention

Tax governance is also a current area of focus in Japanese audits. Examiners increasingly assess not only the technical position, but also the company’s governance and controls, including who approved the position, how it was implemented, and how it is monitored. Recent NTA communications indicate concern that some taxpayers lack appropriate internal controls, clear ownership, and adequate segregation of duties within tax processes, and they emphasize an expectation of senior management oversight.

Where a company can demonstrate clear accountability, consistent execution, and well-maintained documentation, audits are often conducted more efficiently. While strong governance does not eliminate technical debate, it can influence the conduct and intensity of an examination.

The Value of Proactive Audit Readiness

Audit readiness in Japan typically begins with a targeted diagnostic to identify higher risk areas, confirm the underlying facts, and evaluate whether support is available. Companies can then prioritize technical analysis, refresh documentation, and remediate process gaps before they become audit issues.

A&M TAS Says: 

From a tax accounting perspective, proactive audit preparation can help companies:

• Support deferred tax asset recognition and measurement through clear fact patterns, supportable forecasts, and documentation that links return positions to the provision
• Reduce late-stage audit developments that may drive deferred tax asset write-downs, valuation allowance changes, or provision true-ups
• Improve identification, measurement, and support for uncertain tax positions by aligning technical analyses with positions the company can sustain under examination
• Maintain consistency across tax filings, transfer pricing outcomes, and IAS 12 and ASC 740 judgments, reducing reconciliation noise and disclosure risk
• Promote a more stable effective tax rate and reduce provision volatility across reporting periods

A&M TAS Says: 

Japan’s renewed focus on international, transfer pricing, and CFC matters increases the likelihood of multi-year, high-impact examinations and late-stage adjustments. Companies should consider whether audit readiness activities (e.g., refreshing documentation, validating key cross-border positions, and strengthening governance) represent new information that could affect ASC 740/IAS 12 judgments, including uncertain tax positions, deferred tax measurement, and interim effective tax rate forecasting and disclosures.

Featured Experts

Ichiro Suto 

Samuel Costa 

Mexican General Tax Rules for 2026: Changes Applicable to the Financial Sector

Mexico enacted its 2026 tax reform package,[8] including updates to the General Tax Rules and financial sector–specific provisions, upon publication in the Official Gazette on November 7, 2025, with an effective date of January 1, 2026. The rules introduce a series of targeted changes affecting financial institutions, including a temporary capital repatriation regime, refinements to VAT creditability (particularly for insurance and financial services entities), and updated rules governing the deductibility and timing of bad debt losses. 

The capital repatriation program allows Mexican taxpayers to return offshore funds at a preferential 15% tax rate, subject to compliance with specific procedural and investment requirements. In parallel, changes to VAT rules may limit recoverability of input VAT for certain exempt or mixed-activity taxpayers, while updated bad debt provisions refine the criteria and timing for deductibility, potentially deferring or accelerating tax recognition depending on fact patterns. These measures are complemented by expanded administrative guidance and compliance obligations, particularly for regulated financial entities.

A&M TAS Says: 

The introduction of a preferential capital repatriation regime necessitates careful evaluation of outside basis differences and indefinite reinvestment assertions. Additionally, modifications to VAT creditability and bad debt deductibility may affect the timing and realizability of deferred tax assets, requiring reassessment of valuation allowances and, in certain cases, uncertain tax positions where application depends on evolving administrative guidance.

[8] Francisco Xavier Hoyos Hernandez, “Mexican General Tax Rules for 2026: Changes Applicable to the Financial Sector,” Alvarez & Marsal, January 12, 2026.

Featured Experts

Alfredo Garcia 

Eduardo Salinas 

As noted in our Q4 2025 update,[9] the Dutch Accounting Standards Board’s clarification on the accounting for deferred taxes at initial recognition applies to financial years beginning on or after January 1, 2026, and is therefore effective for the 2026 reporting year.

The clarification confirms that, under Dutch GAAP, entities have an accounting policy choice as to whether deferred taxes are recognized on temporary differences arising from transactions (other than business combinations) that, at initial recognition, affect neither accounting profit nor taxable profit. In effect, this guidance clarifies the application of the initial recognition exemption by highlighting that its use under Dutch GAAP is permitted but not mandatory.

[9] Michael Noreman et al., “Navigating Q4 2025: Essential Income Tax Accounting," Alvarez & Marsal, January 20, 2026.

Featured Experts

Patrick Van Min 

Oscar Traast 

Andreea Butnaru 

Accounting and Tax Treatment of Business Combinations With Earn-Out Agreements

Business combinations between unrelated parties frequently include contingent consideration mechanisms such as earn outs, giving rise to complex accounting and tax considerations. Under IFRS 3 Business Combinations and its Spanish equivalent, NRV 19ª of Spanish GAAP, such arrangements require careful assessment both at the acquisition date and in subsequent periods.

Under the applicable accounting framework, the acquirer must recognize, at the acquisition date, the identifiable assets acquired and liabilities assumed at their fair value, including any contingent consideration agreed as part of the purchase price. Where the initial accounting is provisional, entities are allowed to adjust the valuation of the acquired assets and liabilities during the so-called “measurement period” (up to one year from the acquisition date), provided that such adjustments reflect facts and circumstances that existed at that date.

Once the measurement period has elapsed, any subsequent changes in the valuation of contingent consideration must be recognized in profit or loss, based on their fair value at the date of remeasurement. This accounting treatment is particularly relevant in transactions where part of the consideration is contingent upon future performance, as is commonly the case in share purchase agreements including earn-out clauses.

From a Spanish corporate income tax (CIT) perspective, the treatment of such contingent consideration remains only partially addressed by the legislation, as the Spanish CIT Law does not contain specific provisions governing the taxation of deferred or contingent price components that are not fully determined at the time of the transfer. As a general rule, in those cases where there is no specific provision, tax treatment follows accounting principles. Therefore, any accounting income is also taxable income for CIT purposes.

In this context, the Spanish General Tax Directorate issued binding ruling V0062-26 (January 15, 2026), further developing its administrative doctrine on the accrual of income derived for the seller from share transfers involving contingent consideration. In line with prior rulings, the Tax Directorate reiterates that the tax effects associated with additional consideration must be analyzed under the general accrual principle applicable to income derived from the transfer.

According to the Spanish General Tax Directorate, two scenarios must be distinguished in respect of the variable component of the price, whose amount depends on a future uncertain event. Where, at the time of the transfer, it is possible to reliably estimate the contingent consideration, such amount should be deemed accrued for CIT purposes at the date of the transaction and taxed accordingly. Conversely, where it is not possible to determine the contingent price with a reasonable degree of certainty at the date of the transaction, the corresponding income should be recognized for CIT purposes in the period in which the relevant uncertain events materialize, rather than in the period in which the transfer took place.

The latest ruling addresses a scenario in which the contingent component is only determined after the expiry of the one-year measurement period, concluding that such income must be taxed in the period in which the earn-out conditions are met.

Notwithstanding the timing of recognition, the Spanish Tax Authorities confirm that, for the purposes of applying the participation exemption regime under Article 21.3 of the CIT Law, the relevant requirements must be assessed at the time of the transfer of the shares. As a result, the exemption may apply to the contingent consideration recognized in subsequent periods, to the extent that the qualifying conditions (in particular, the minimum shareholding threshold and holding period) were met at the date of disposal.

A&M TAS Says:

The Spanish General Tax Directorate’s ruling constitutes new administrative guidance that may affect the sustainability of tax positions related to the timing of income recognition for contingent consideration. Where taxpayers previously assumed taxation at the disposal date despite an inability to reliably estimate the earn out amount, the ruling increases the likelihood that such positions would not be sustained upon examination. As a result, companies should reassess whether related tax benefits continue to satisfy the more-likely-than-not threshold or whether an unrecognized tax benefit is required. 

Featured Experts

Patricia Alonso de la Fuente

Jesus Gonzalez 

Claudia Fraga Bugallo

Laura Fernandez Parrado  

In Q1 2026, Swiss tax policy developments were characterized more by technical updates and less by structural reforms.

• Switzerland is in the final stages of the legislative process to extend the tax loss carryforward period from seven to 10 years. The amendment was approved by the Parliament, triggering the optional referendum period. The new rules are expected to enter into force on January 1, 2028, (unless the referendum is called) and apply to losses incurred as from the 2020 tax period.
• Effective January 1, 2026, the Swiss Federal Tax Administration updated the annually applicable safe‑harbor interest rates for related party debt, as well as the rates for late‑payment interest on open tax liabilities, to 4%, while the prepayment interest rate was set at 0%.
• The Federal Council confirmed its medium term legislative roadmap for withholding tax, stamp duties, and the digitalization of tax procedures, signaling a continued shift toward simplification and modernization rather than immediate rate driven reforms.

A&M TAS Says:

From a tax accounting perspective, the extended loss carryforward is particularly relevant for the recognition and valuation of deferred tax assets, as a longer carryforward period increases the likelihood that tax losses can be utilized within the foreseeable future in situation where DTAs had to be impaired due to tax loss expiry before amortization potential was reached. As a result, entities may see a positive impact on the recognition threshold and the recoverability assessment of deferred tax assets. The topic also gains importance in the context of OECD Pillar Two, where the availability and timing of loss utilization should be ensured not to affect Covered Taxes adversely, such as to avoid any unexpected consequences in regard to top-up taxes.

In addition, the update to Swiss safe harbor and late payment interest rates may affect the measurement of current tax expense and interest components of tax positions.

Featured Experts

Kersten A. Honold 

Finance Act 2026 

Finance Act 2026 was substantively enacted on March 11, 2026, having passed through its Third Reading at the House of Commons on that date and is now enacted having received Royal Assent on March 18, 2026. 

This Act includes changes to UK tax legislation introduced in the last Autumn Budget on November 26, 2025.

A summary of key contents of the Act is as follows:

• No changes to the main rate of UK corporation tax—this remains at 25% (with the small profits rate remaining at 19%)—therefore no revaluations are needed in respect of deferred tax assets and liabilities, assuming these are already recognized at the applicable rates for the period in which they are expected to unwind. These rates are not expected to change for the remainder of the current parliament (until 2029).
• Main rate of writing-down allowances for plant and machinery decreasing from 18% to 14% per annum
• New UK-to-UK exemption from transfer pricing providing certain qualifying conditions are met in respect of the transactions and participating companies, and there is no material loss of tax as a result of not applying transfer pricing rules.
• Single valuation standard of related party intangible assets for tax purposes which may result in permanent/temporary differences where these differ from accounts valuations
• Closer alignment of the UK definition of permanent establishment and allocation of profits to permanent establishments to OECD principles and latest international consensus. Transfer pricing in relation to financial transactions will also align UK rules with OECD transfer pricing guidelines.

A&M TAS Says:

The absence of changes to UK corporation tax rates means no remeasurement of existing deferred tax balances is required, assuming deferred taxes have already been recorded at enacted rates applicable to their expected reversal periods. However, the reduction in writing down allowances for plant and machinery may affect the timing of tax depreciation, potentially increasing temporary differences and future cash tax payments, with corresponding impacts on deferred tax assets and liabilities. In addition, changes to transfer pricing rules, the introduction of a UK to UK exemption, and the adoption of a single valuation standard for related party intangibles may give rise to new permanent and temporary differences, requiring reassessment of current and deferred tax positions as well as related uncertain tax position conclusions, particularly where tax and accounting valuations or profit allocations diverge.

Featured Experts

Tom Lobb 

Niko Nicolasora