03 C The Income Statement-Current&deferred Taxes

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Strategy & Finance Standard Version 2015

Area: Manual of Accounting Procedures


The Income Statement: Current and Deferred Taxes
Chapter:

The Income Statement: Current and Deferred Taxes

Purpose: This standard deals with current tax and deferred tax.

Key points:
-Current tax is calculated from the statutory income adjusted for temporary and permanent differences,
to which the national tax rate is applied.
-Deferred tax is either calculated from temporary adjustments of restated income and statutory income,
or from taxable income (in the case of tax losses, tax credit, and carry-back).
-The deferred tax base is the temporary difference between the restated balance sheet carrying amount
and the balance sheet tax amount.
-Deferred tax is recognised either in income or in equity.
-The tax proof explains the differences between the theoretical tax expense and the actual tax expense.
-When a tax adjustment is made, a provision must be recognised in the statutory accounts on receipt of
the reassessment notice. In the consolidated accounts, this provision is cancelled and replaced by a
deferred tax expense.
-The applicable standard is IAS 12.
-The SUIG headings used are: RI1000 (Statutory taxes), RI2000 (Deferred taxes), RI3000 (Tax adjustment)

1 CURRENT AND DEFERRED TAX ............................................................................................................................................ 1

1.1 CURRENT TAX .......................................................................................................................................................................... 1


1.1.1 Permanent differences............................................................................................................................................ 2
1.1.2 Temporary differences............................................................................................................................................ 2
1.1.3 Accounting principles .............................................................................................................................................. 3
1.2 DEFERRED TAX......................................................................................................................................................................... 3
1.2.1 Types of deferred tax ............................................................................................................................................. 3
1.2.2 Accounting principles .............................................................................................................................................. 4
1.2.3 The tax proof ............................................................................................................................................................ 4
1.3 TAX ADJUSTMENTS ................................................................................................................................................................... 5
1.4 PRESENTATION OF THE SNET REPORTING STATEMENT ..................................................................................................................... 5

2 ACCOUNTING ENTRIES ........................................................................................................................................................ 8

2.1 CURRENT TAX .......................................................................................................................................................................... 8


2.2 DEFERRED TAX......................................................................................................................................................................... 8
2.3 TAX ADJUSTMENT..................................................................................................................................................................... 8
2.3.1 VAT tax adjustment ................................................................................................................................................. 8
2.3.2 Income Tax adjustment........................................................................................................................................... 8

1 Current and deferred tax

1.1 Current tax


Current tax is calculated by applying the national tax rate to the statutory income adjusted according to
local tax regulations.
The adjustments consist of:

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The Income Statement: Current and Deferred Taxes

Permanent differences: these are expenses or income recorded in accounting for which
deductibility or taxation is irreversibly disallowed in whole or in part by the tax authorities: such
is the case of fines and penalties, of certain excessive expenses, of current tax and of some
dividends or profits earned in non-taxable free zones.
Temporary differences: these are expenses or income recorded in accounting for which
deductibility or taxation is disallowed by the tax authorities for the financial year in which they
are recognised, and the reversibility of which will result in a future tax saving or expense:
differences in depreciation expenses, provision expenses, potential foreign exchange differences
arising from the revaluation of foreign currency receivables and payables when the tax rule differs
from the accounting rule, are examples of temporary differences.
A future tax saving or future tax expense is called a deferred tax asset or a deferred tax liability.

1.1.1 Permanent differences

1.1.1.1 Permanent difference between restated income and statutory income


It is mainly the impairment of goodwill or depreciation of assets not recognised in the statutory accounts.
This difference can only exist in the Group holding companies that have carried out acquisition transactions.

1.1.1.2 Permanent differences between statutory income and taxable income


These revenues and expenses are permanently excluded from the tax base according to tax regulations.
They do not give rise to deferred tax. The following categories are commonly encountered:
Non-taxable income: Dividends for companies holding a certain percentage of their subsidiary
("participation exemption" method of taxation), revenues earned in free zones.
Non-deductible expenses:
Excessive expenses
Representation costs
Loan interest (thin capitalisation rules)
Communication expenses (mobile), transport expenses (company car, fuel, etc.)
Gifts, sponsorship
Fraction of executive compensation
Fines and penalties
Corporation tax
Accrued expenses if they relate to an expense that itself is not deductible

1.1.2 Temporary differences

1.1.2.1 Temporary differences between restated income and statutory income:


This refers mainly to restatements related to IFRS, when these standards are not recognised by local
accounting rules, and to the cancellation under IFRS of tax-related accounting provisions. To cite a few
examples:
Restated depreciation (different depreciation rules: method/period)
Extraordinary depreciation (French tax rule)
Adjustments related to leasing (IAS 17)
Provisions for IFC and IDR (IAS 19)
Regulated provisions (French tax rule)

1.1.2.2 Temporary differences between statutory income and taxable income


These are chiefly:
Non-deductible provisions
Temporarily non-deductible accrued expenses (their payment will give rise to the deductibility)
Accelerated tax depreciation
Loan interest
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The Income Statement: Current and Deferred Taxes

Miscellaneous expenses for which deductibility or taxation (for capital gains on disposal of assets)
is spread out

1.1.3 Accounting principles


Current tax for the period and prior periods should be recognised as a liability to the extent that it is not
paid. If the amount already paid in respect of the period and prior periods exceeds the amount due for
these periods, the excess should be recognised as an asset.
The benefit relating to a tax loss that can be carried forward or back to recover the tax liability for a prior
or future period should be recognised as an asset.

1.2 Deferred tax


1.2.1 Types of deferred tax
They are of two types:
Deferred taxes calculated on temporary adjustments of restated income and statutory income
Deferred taxes related to taxable income:
Deferred tax related to tax loss
Tax credit that can be carried forward
Carry-back receivables
The deferred tax base is the temporary difference between the restated balance sheet carrying amount and
the balance sheet tax amount.

Example 1: a company depreciates its lorries on a straight-line basis over 8 years under the accounting rules.
The tax rule allows depreciation over 5 years. The tax rate is 30%.

Accounting Temporary Deferred tax


Tax base
base base liability
Value of lorries 1000 1000
Accounting depreciation year N -125
Tax depreciation year N -200
Net value 875 800 -75 -75 * 30% = -22.5

Example 2: The accounting provision for doubtful receivables is not tax deductible

Accounting Temporary Deferred tax


Tax base
base base asset
Trade receivables 10,000 10,000
Provision doubtful receivables -100
Tax provision doubtful receivables 0
Net value 9,900 10,000 100 * 30% = 30

Deferred taxes related to taxable income:


The tax loss, when it is carried forward to future tax results, gives rise to the recognition of a
deferred tax asset. The value of the deferred tax becomes nil if the corresponding tax loss cannot
be charged against it before the period of limitation expires.
Tax credits that can be carried forward: these are recognised in the statutory accounts as current
tax. For the purposes of the consolidated accounts they are transferred to deferred tax if they are

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The Income Statement: Current and Deferred Taxes

not charged to the current tax in the year in which they originate. In the year in which they are
used they are transferred to current tax.

1.2.2 Accounting principles

1.2.2.1 The distinction between long-term and short-term deferred tax


The distinction is made:
according to the classification in the balance sheet of assets and liabilities giving rise to deferred
tax for Group restatements
according to the provisional reversal date for temporary tax adjustments

1.2.2.2 Recognition of deferred taxes in income or equity


Deferred taxes will be charged or credited on the income statement if the Group restatement to which it is
related is recognised in income.
It will be debited or credited to equity for a Group restatement that is recognised in equity.

1.2.2.3 Offsetting of deferred taxes


An entity must offset deferred tax assets and liabilities if, and only if:
The entity has the legal right to offset tax assets and liabilities due
The deferred tax assets and liabilities relate to income taxes, levied by the same tax authority on
the same taxable entity

1.2.2.4 Tax rate to be used


This should be the last known tax rate enacted.
In the case of progressive rates, the rate of the last tax band should be used.
In the case of different rates depending on the nature of the benefits, the rate for each temporary base
must be applied.

1.2.2.5 Change in the tax rate

1.2.2.5.1 Tax legislation amending the tax rate as of year N


Deferred tax relating to temporary bases at the start of the year should be recalculated using the new rate.

1.2.2.5.2 Tax legislation amending the tax rate as of year N+1


Single rate: Deferred taxes have to be recalculated with the rate foreseen for N+1.
Different rates depending on the year: To the temporary bases are applied the rate for the
estimated year of reversal of these temporary bases.
Example:
A non-deductible litigation provision of 1,000 is made in year N. In all likelihood it will be reversed in N+2.
The latest tax rates enacted at balance sheet date are: 28% for N+1 and 26% for N+2.
The provision gives rise to a deferred tax asset: 1,000 x 26% = 260
In N+2, the non-taxable reversal of a litigation provision (as it was not deductible previously) will result
in:
A reversal of deferred tax asset: -260
A current tax gain: 260
Impact 0

1.2.3 The tax proof


The tax proof aims to explain the differences between the theoretical tax expense and the actual tax
expense.
It is also a verification tool for calculating deferred tax.

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The Income Statement: Current and Deferred Taxes

Theoretical tax expense = (Group income before tax + permanent differences) x tax rate + non-base tax.
Theoretical tax expense = current tax + deferred tax + non-base tax

Items constituting non-base tax:


Tax losses with nil value
Tax credits carried forward
Effect of change in deferred tax rate
Change in deferred taxes unrecognised in prior years
Tax adjustments

1.3 Tax adjustments


Upon receipt of the tax reassessment notice, an estimation of the risk must be made in conjunction with
the Group Tax Department and the local tax consultant.
A provision for tax risk must be recognised in the statutory accounts.
In the restated accounts, this provision must be cancelled and replaced by a deferred tax expense,
for the portion of the restatement relating to Corporation Tax including penalties.
Default interest must be recognised in "Other financial expenses" (SUIG heading RF 4100)

1.4 Presentation of the SNET reporting statement


This statement shows:
The passage of restated net worth to statutory net worth
The calculation of taxable income and current tax
The calculation of deferred taxes
The change of the deferred tax on the balance sheet, in relation to the relevant temporary bases
(depreciation, provisions, tax loss carried forward)

Consistency checks are included in the consolidation system. They verify:


The total current tax expense in the income statement with the current tax amount recorded in
SNET and the change in the tax account payable
The total deferred tax in the income statement with the deferred tax amounts recorded in SNET
and the change on the balance sheet of the deferred tax account

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The Income Statement: Current and Deferred Taxes

SNET (Part I): Passage of the restated net worth to statutory net worth

SNET (Part II): Passage of statutory net worth to taxable income

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The Income Statement: Current and Deferred Taxes

SNET (Part III): Components of the change in deferred tax on the balance sheet

SNET: Tax proof

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2 Accounting entries

2.1 Current tax


PC01 Title Debit Credit SUIG Flow
Account

6951 Current tax X RI 1000 MTD

4443 Tax payable X PD 3100 F20

4443 Tax payable X PD 3100 F30

5120 Bank X AE 1300 F15

2.2 Deferred tax


PC01 Title Debit Credit SUIG Flow
Account

9695 Deferred taxes X RI 2000 MTD

9165 LT Deferred taxes X PC 2000 F25

2.3 Tax adjustment


2.3.1 VAT tax adjustment

PC01 Title Debit Credit SUIG Flow


Account

6358 Non-deductible VAT 500 RC 5450 MTD

6181 Public Revenue default interest 50 RF 4100 MTD

4455 VAT to be disbursed 500 PD 5120 F15

4673 Sundry creditors 50 PD 9100 F15

2.3.2 Income Tax adjustment


PC01 Title Debit Credit SUIG Flow
Account

6954 Corp. tax adjustments to prior year 1000 RI 3000 MTD

6181 Public Revenue default interest 100 RF 4100 MTD

4486 State accrued expenses 1000 PD 5130 F20

4670 Sundry creditors 100 PD 9100 F15

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