Taxation in Financial Statements

Question 1

What is Current Tax?

Answer 1

Amount of income tax payable in respect to the taxable profit for the period.
Treat as an expense.
Under/overestimates of current tax in previous years adjust for in current period.
Current tax unpaid at end of period = liability.

Question 2

What is Deferred Tax under IAS 12?

Answer 2

Income/expense health with in a different period.
IAS 12 requires “temporary differences” to be dealt with:
* In period where taxable profits are lower than accounting profits, tax expense for period increased by a transfer to a deferred tax account.
* In period where taxable profits are higher than accounting profits, tax expense for period reduced by a transfer from deferred tax account.

Non-current liability/asset.

Question 3

What are the Different Types of Temporary Differences Defined by IAS 12?

Answer 3

Taxable temporary differences
Deductible temporary differences

Question 4

What are Taxable Temporary Differences?

Answer 4

Temporary differences that will result in taxable amounts in future periods. Result in differed tax liabilities.

Question 5

What are Deductible Temporary Differences?

Answer 5

Temporary differences that will result in amounts that are deductible in future periods.
Results in deferred tax assets.

Question 6

What is the Tax Base Concept under IAS 12?

Answer 6

Tax base of asset/liability = amount attributed to that asset/liability for tax purposes.

Question 7

What is the Tax Base of an Asset?

Answer 7

Amount deductible for tax purposes against any taxable economic benefit that will flow to entity when CA of asset is recovered.

Question 8

What is the Tax Base of a Liability?

Answer 8

CA - any amount deductible for tax purposes of that liability in future periods.
Liabilities tend not effect profit, so don’t cause deferred tax problems.

Question 9

What are the IAS 12 Requirements for Deferred Tax?

Answer 9

• Deferred tax liability recognised for all taxable temporary differences.
• Deferred tax asset recognised for a deductible temporary difference if probable that temporary difference will be utilised in future.
• CA of deferred tax assets must be reviewed at the end of each accounting period.
• Deferred tax assets & liabilities measured at tax rates that are expected to apply to period which asset is realised, or liability is settled.
• Deferred tax assets and liabilities must not be discounted.
• Transfers to or from deferred tax account usually recognised in calculation of P/L.

Question 10

What are the Assumed Accounting Treatment Over the Life of an Asset?

Answer 10

• Equipment costs £10,000
• Straight-line depreciation over 5 yrs
• Tax capital allowance = 25% per annum straight-line
• Taxable rate 40%

Question 11

What are the IAS 12 Disclosure Requirements?

Answer 11

• Amount of tax recognised in SoCI
• Explanation of relationship between accounting profit and tax expense for period
• For each temporary difference, amount of deferred tax asset/liability recognised in SoFP and amount of deferred tax expense/income recognised in SoCI

Question 12

What are the Reasons for Tax Transparency?

Answer 12

• Better Political Decision Making - helps lawmakers determine effectiveness of laws and loopholes.
• Healthier Economic & Security for Investors - clear of risking tax scandals, incentives reducing tax risks. More info = more informed tax decisions.
• More stable & fair environment for MNEs - avoiding tax = constant risk on brand = sudden/dramatic increases in amount of tax gov demand them to pay.
• Non-Transparency to avoid Financial/Reputational Risks is Foolhardy from a Professional Risk Management Perspective - gambling, not good corporate governance.

Question 13

What is the Argument Against Tax Transparency?

Answer 13

• Tax too complicated to explain to wide range of audiences
• More available info reduces MNEs ability to optimise tax structure (which could = competitive advantage)
• More info available = more administrative costs
• Increased disputes. New info = new misinterpretations and uncertainty

Question 14

What is the Argument For Tax Transparency?

Answer 14

• MNE simply try harder to explain/implement less “unexplainable” structures.
• Company needs functional tax control framework to ensure it can file returns timely. Tax transparency shouldn’t lead to serious additional admin costs as company needs functional tax control framework
• The argument that “company secrets” assumes data is safe within the company. Much (big) data is already publicly available. Also, information to be disclosed will not consist of secret formulas, merely basic information on the tax affairs on the company.