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An entity operates in a jurisdiction where the tax rate is 30% for retained profits and 40% for distributed profits. Management has declared a dividend of
$10 million, which is payable after the year-end. A liability has not been recognized in the financial statements at the year-end. The taxable profit before
tax of the entity was $100 million.
Required
Calculate the current income tax expense for the entity for the current year.
Solution
$30 million (30% of $100 million). The tax rate that should be applied should be that relating to retained profits.
CURRENT AND DEFERRED TAX RECOGNITION
Current and deferred tax should both be recognized as income or expense and included in the net profit or loss for the period.
However, to the extent that the tax arises from a transaction or event that is recognized outside profit or loss, either in other comprehensive income or directly in
equity, then the tax that relates to these items should also be recognized in other comprehensive income or directly in equity. For example, a change in the carrying
amount of property due to a revaluation may lead to tax consequences, which will be recognized in other comprehensive income.
Any tax arising from a business combination should be recognized as an identifiable asset or liability at the date of acquisition.
Current tax assets and current tax liabilities should be offset in the statement of financial position only if the enterprise has the legal right and the intention to settle
these on a net basis and they are levied by the same taxation authority.
The tax expense relating to profit or loss for the period should be presented on the face of the statement of comprehensive income, and the principal elements of the
expense should also be disclosed.
PRACTICAL INSIGHT
Rockwood International A/S, a Danish entity, discloses that in its financial statements within deferred tax assets, a setoff of €63 million has taken place;
within deferred tax liabilities, a set-off of €37 million has occurred. There are certain conditions set out in IAS 12 as to the situations where setoffs of
deferred tax assets and liabilities can occur.
DIVIDENDS
There are certain tax consequences of dividends. In some countries, income taxes are payable at different rates if part of the net profit is paid out as dividend.
IAS 12 requires disclosure of the potential tax consequences of the payment of dividends.
The Effect of Share-Based Payment Transactions
In some jurisdictions, tax relief is given on share-based payment transactions. A deductible temporary difference may arise between the carrying amount, which will
be zero and its tax base which will be the tax relief in future periods. A deferred tax asset may therefore be recognized.
Facts
CASE STUDY 11
A parent has recognized in its own financial statements a dividend receivable of $500,000 from an 80%-owned subsidiary. The dividend is not taxable in
the country in which the entity operates.
Required
Calculate the temporary difference arising from the recognition of the dividend receivable in the accounts of the parent.