TR 27 – IAS-12, Income Taxes

THE ISSUE

1.0      IAS-12, Income Taxes (Revised) issued by IASC has become effective for the accounting periods beginning on or after January 1, 2002. It is felt that guidance is required on the applicability of deferred taxation where a company has brought forward tax losses or its sources of income are subject to deduction or collection of tax and the said deduction or collection is treated as full and final tax liability for the purposes of assessment under the Income Tax Ordinance 2001. It is therefore, proposed to issue the following as a guidance to the members on the applicability of IAS 12 (Revised) in Pakistan in relation to the afore-mentioned situations.

TECHNICAL COMMITTEE RECOMMENDATIONS

2.0    DEFERRED TAXATION

2.1      The deferred tax accounting does not apply to those companies whose entire income is subject to deduction of tax at source that is taken as a final tax liability (under any provision of the Income Tax Ordinance, 2001), as there will be no temporary differences.

2.2       Difficulty arises in case of those companies that have a portion of income subject to deduction or collection of tax and the said deduction or collection is treated as full and final tax liability for the purposes of assessment under the Income Tax Ordinance 2001 while the remaining portion of the income attracts assessment under normal provisions of the Income Tax Ordinance, 2001. For instance, temporary differences are likely to arise on that portion of profit, which represents non-supplies. If the ratio between supplies remains the same year after year, it would be easy to calculate effect of temporary differences but since this ratio is not expected to be the same year after year, effect of temporary differences cannot be calculated with accuracy. In such instance, a reasonable estimate for sales relating to non-supplies should be made for the future years and the deferred tax liability provided accordingly.

2.3    However, if it is not practicable to develop a reasonable estimate for calculation of deferred tax liability / asset then an entity should evaluate the expectation of future turnover by taking into consideration the turnover trend of at-least three years (including the current year) and recognize and provide deferred tax liability accordingly. If the pattern of supplies and non-supplies remains same in the future also then the company should recognize and provide deferred tax for all temporary differences that could be attributed to non-supplies

2.4     A practical example on the application of Deferred Tax is enclosed assuming that the ratio between non-supplies and supplies is 4:6.

3.0        TAX LOSSES

3.1    In case in a particular year, current tax liability is calculated under provisions of Section 113 due to taxable loss the effect of temporary differences should be calculated and deferred tax liability/ asset should be recognized.

3.2    In Pakistan, normally the tax losses are assessed months or even years after the balance sheet date. While ascertaining the deferred tax asset on the balance sheet date, the loss for the current year

3.3      A deferred tax asset should be recognized for the carry forward of unused tax losses and unused tax credits (as allowed under the provisions of the Income Tax Ordinance, 2001) to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized.