We have some arrangements with our working employees to give some share of profit (after tax) at year end. In this year our Auditor has made provision of deferred taxation over and above of normal tax provision (as per rate pervading to Pvt Companies). As per Income tax return of our company the tax calculated is almost same as normal provision of tax calculated by our auditor.
Now we need your technical advice whether we should calculate incentive to our employee after deduction of normal provision of Income tax or also deduct amount of deferred taxation for calculating their incentive. As they claimed that calculation of deferred taxation is based on timing differences of lives of assets and not actually paid expense of the company. And incentive to employees should be calculated after deduction of normal provision of income tax and not deferred tax calculation is included in this calculation.
You are requested to please give your technical opinion about the status of deferred taxation, application of IAS -12 on private limited companies in Pakistan and also advise either it is deducted by calculating incentive to employees of the company.
The determination of incentive will be based on two factors i) framework used for preparation of accounts and ii) provisions of the scheme.
For determining appropriate framework applicable to your Company, your attention is drawn to paragraph 2.4.3 of Technical Release 5 (Revised 2006) which defines the qualifying criteria of the entity as ESE, MSE or SSE. If your Company meets the criteria of ESE then full IFRS is applicable and if it is MSE or SSE then you are required to comply with the requirements of Accounting and Financial Reporting Standards for Medium-Sized Entities or Small-Sized Entities respectively.
The employee incentive is a policy matter of the Company and the method of determination of incentive, including definition of profit and additions/deductions there from, would be defined in the scheme.
Therefore, in the absence of appropriate information about the Company to determine applicable framework and without reviewing the provisions of the scheme the Committee is unable to advice on the deductibility or otherwise of deferred tax from profits for the purposes of determination of incentive.
(April 15, 2011)