Enquiry:
Our client was a manufacturer cum exporter and filing 115 (4) since its incorporation i.e. 2006. Since 2016 and 2017 its exports became around 60:40 but from next year they are again expecting their exports to be more than 80%. Should we calculate and provide for deferred tax provisions in the accounts for tax year 2017?
If yes, the company, since incorporation, is not maintaining fixed assets tax base and therefore it is difficult to calculate deferred tax for 2017. Should they take accounting base of their fixed assets as their tax base?
Opinion:
IAS 12, Income Taxes, prescribes the accounting treatment of incomes taxes. In relation to the deferred taxation, IAS 12 requires an entity to consider whether it is probable that recovery or settlement of the carrying amount of the asset or liability will result in future tax payments larger (or smaller) than they would be if such recovery or settlement had no tax consequences. If it is probable that such a larger or smaller tax payment will arise, IAS 12 requires an entity to recognise deferred tax liability or deferred tax asset.
The definition of deferred tax contained in IAS 12 is as follows:
“Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.”
“Deferred tax assets are amounts of income taxes recoverable in future periods in respect of deductible temporary differences, together with the carryforward of unused tax losses and tax credits.”
The temporary difference is defined as follows:
“Temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. …………………………”
The definition of tax base, contained in IAS 12 is as under:
“The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.”
Further, in accordance with paragraph 51 of IAS 12, the deferred tax is measured by reference to the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of the asset or liability to which it relates.
With regard to the enquired scenario the Board would also like to refer to the Institute’s Accounting Technical Release (ATR) 27 – IAS 12 ‘Income Taxes’ which also provides guidance on the accounting of deferred taxes accounting.
The Board understands that 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.
Conversely, the deferred tax accounting is applicable to those companies whose income is of such nature that it is subject to final tax liability as well as normal tax liability in accordance with the applicable taxation laws. Further, if there is uncertainty about the ratio of income subject to final tax liability and normal tax liability (expected local and export sales) in the future years, a reasonable estimate for sales relating to the normal tax liability (local sales) should be made for the future years and the deferred tax liability provided accordingly.
The tax base is of fundamental relevance in the deferred tax accounting, and accordingly, should be determined with reference to the enquired scenario.
(October 02, 2017)