Brief facts of the enquiry:

The Accounting Standards Board (the Board) received an enquiry wherein the Board’s guidance had been sought on the recognition (or non-recognition) of deferred tax asset/liability under IAS 12 Income Taxes, in a specific fact pattern where a company expects to pay only minimum tax (under section 113 of Income Tax Ordinance, 2001) for a foreseeable future.

Opinion:

The Board observed that under the Income Tax Ordinance, 2001, entities that pay ‘minimum tax’ (under section 113) are allowed to carry forward the minimum tax paid in excess of normal income tax liability. This carryforward of minimum tax is for a period of five (5) years, and is available to reduce normal tax of future years but not below minimum income tax liability of such future year.

The Board noted that IAS 12 defines deferred tax liability as the amount of income tax payable in future periods in respect of taxable temporary differences.

IAS 12 paragraph 15 sets out the principle that deferred tax liability should be recognised for all taxable temporary differences, except the following circumstances:

(a) on the initial recognition of goodwill; or

(b) on the initial recognition of an asset or liability in a transaction which:

(i) is not a business combination; and

(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

Therefore, the Board noted that above listed circumstances are the only exceptions when deferred tax liability is not required to be recognised. In all the other circumstances, deferred tax liability is required to be recognised for taxable temporary differences.

With regards to the deferred tax asset, the Board noted that under IAS 12, it could be recognised on account of:

(a) Deductible temporary differences

(b) Carry forward of unused tax losses

(c) Carry forward of unused tax credits

With regards to the recognition of deferred tax asset, paragraph 34 of IAS 12 requires an entity to recognise a deferred tax asset only to the extent it is probable that future taxable profit will be available against which the deferred tax asset can be utilized and recovered.

Paragraph 37 of IAS 12, requires reassessment of deferred tax assets at the end of each reporting period.

Further, the Board noted that application guidance on above requirements of IAS 12 pertaining to recognition of deferred tax liability/asset, in the circumstances where a company only pays minimum tax under section 113 of the Income Tax Ordinance, 2001 is also covered under section 3.0 of TR 27. Paragraphs 3.1 and 3.3 of TR 27 are reproduced below:

“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.”

“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.”

Accordingly, the Board understands that guidance contained in TR 27 can be applied in the circumstances where a company expects to pay only minimum taxes for foreseeable future.

In the submitted fact pattern, the Board noted that:

• Temporary differences can arise regardless of the fact that the company expects to pay only minimum taxes in the foreseeable future. This is because the determination of tax profit or loss and tax bases of assets and liabilities is the prerequisite for determining whether or not the company is required to pay minimum tax under section 113 of the Income Tax Ordinance, 2001.

Such taxable temporary differences also do not fall under the exceptions outlined in paragraph 15 of IAS 12 (consequent to which entities are not required to recognise a deferred tax liability).

• The timing of reversal or ability to delay reversals for the foreseeable future does not alleviate the requirement to establish a deferred tax liability.
• An assumption inherent in an entity’s statement of financial position is that the reported amounts of assets and liabilities will be recovered and settled.
• It cannot be predicted that an entity will always be a minimum tax taxpayer.
• Also it would be counterintuitive to assume that an entity would permit its minimum tax credit carryforward to expire unused, which would have to occur if that entity was always a minimum tax taxpayer.

Based on the above discussion, the Board concluded that in the submitted fact pattern, a company is required to:

• recognise deferred tax liability for all the taxable temporary differences regardless of the fact that the company expects to pay only minimum taxes in the foreseeable future.

Further, since the company would be required to compute the taxable temporary differences and recognise deferred tax liability, therefore, the company would need to determine the tax profit or loss and maintain record of tax bases of its assets and liabilities.

• consider recognition of deferred tax asset on its deductible temporary differences, carryforward of unused tax credits and losses. The company shall recognise a deferred tax asset only to the extent it is probable that future taxable profit will be available against which the deferred tax asset can be utilized and recovered.

(Issued in November 2020)