Corporate Income Tax

Transcription

1 LESSON 5 Corporate Income Tax 1 Outline 1. Introduction. 2. Differences between the accounting value and the tax value of assets, liabilities, revenues and expenses. 3. Current tax. 4. Deferred tax and temporary differences. 5. Accounting for Income Taxes by corporations. 2 1

2 Introduction Corporate income tax (CIT) = Impues de sociedades (IS) Tribu de carácter direc y naturaleza personal cuyo hecho imponible se corresponde con la obtención de renta por parte de las sociedades 3 Introduction Corporate income tax (CIT) P.G.C. Resoluciones del ICAC Código de Comercio T.R.L.S.A. R.D.L. 4/2004 por el que se aprueba el tex refundido de la Ley del IS R.D. 1777/2004 por el que se aprueba el Reglamen del IS Different goals 4 2

3 Accounting income and taxable income The income statement reports the results of operations. The Tax Return (Declaración del IS) is filed with the Tax Agency (Agencia tributaria) determine how much tax the firm must pay the government. 5 Accounting income and taxable income Income before taxes is reported in the Income Statement according Generally Accepted Accounting Principles (GAAP). Taxable income of a corporation is determined according the tax laws. They are often different because: Tax laws GAAP 6 3

4 Accounting income and taxable income Due these differences: Accounting Income before taxes (Resultado contable) Taxable Income (Base imponible) Taxable income will be obtained from the Accounting income before taxes (AIBT), making some adjustments: Accounting income before taxes +/- Adjustments = Taxable income 7 Tax return (Declaración del I.S.) AIBT Adjustments Taxable Income 8 payable Tax 4

5 Tax expense/revenue and tax payable/receivable Accounting Income before taxes (Resultado contable) Taxable Income (Base imponible) Tax expense/revenue Income Statement (Gas/ingreso por IS) Tax payable/receivable Balance Sheet (Impues a pagar/devolver) 9 Tax expense/revenue The tax expense/revenue has two components: Expense/Revenue for Current Tax Expense/Revenue for Deferred Tax Appears because of transactions that affect the amount of tax that has be paid this year Appears because of transactions that affect the amount of tax that has be paid in the future 10 5

6 Tax expense/revenue Expense/Revenue for Current Tax (CT) Expense for CT = Liability for Current Tax + Asset for Current Tax Liability for Current Tax + Asset for Current Tax = Revenue for CT Expense/Revenue for Deferred Tax (DT) Expense for DT = Liability for Deferred Tax + Asset for Deferred Tax Liability for Deferred Tax + Asset for Deferred Tax = Revenue for DT 11 Tax expense/revenue Registration of the tax expense/revenue, is made based on the origin of the transaction: Exp/Rev for Current Tax Transactions that are recognized in Income for the year In Income for the year: (6300) Current tax Debit (expense) or credit (revenue) Transactions that are recognized directly in Equity Will affect the Equity account Exp/Rev for Deferred Tax In Income for the year: (6301) Deferred tax Debit (expense) or credit (revenue) Will affect the Equity account Income tax expense/ revenue in the Income Statement (630) Income tax = (6300) Current tax + (6301) Deferred tax 12 6

7 Current tax (6300) Amount that the company pays as a result of the tax return that is filed with the Tax Agency Taxable income (from the Tax Return) Income tax rate = Current Tax 13 Current tax (6300) How does the payment of the income tax works? a) During the year Withholdings and payments on account. During the year, the company has make payments on account of the income tax that will have pay on the income of the year (which is not known until the end of the year). In a similar way, when the company collects some revenues (as dividends from investments in equity) withholdings are discounted by the payer. Both represent payments in advance of the amount that the company has pay as a result of the tax return An asset arises: (473) Tax asset for withholdings and payments on account 14 7

8 Current tax (6300) How does the payment of the income tax works? a) During the year Withholdings and payments on account. Payments on account (473) Tax asset for withholdings and payments on account Withholdings (570) Cash (545) Dividend receivable (570) Cash (473) Tax asset for withholdings and payments on account (76) Revenues from holdings in equity instruments (545) Dividend receivable 15 Current tax (6300) How does the payment of the income tax works? b) At the end of the year Tax return is filed The income tax payable or the income tax overpayment will be obtained: Income tax payable Liability for current tax (4752) Tax liability for the income tax Income tax overpayment Asset for current tax (4709) Tax asset for tax overpayment 16 8

9 INCOME TAX RETURN Income before taxes +/- Adjustments = Preliminary taxable income - Negative taxable income from previous years = Taxable income * Income tax rate = Total tax - Deductions & discounts = Tax due - Withholdings & payments on account = INCOME TAX PAYABLE / OVERPAYMENT (+/-) LIQUIDACIÓN DEL IMPUESTO DE SOCIEDADES Resultado contable antes de impuess = Base imponible previa - Bases imponibles negativas de ejercicios anteriores = Base imponible * Tipo de gravamen = Cuota íntegra - Deducciones y bonificaciones = Cuota líquida - Retenciones y pagos a cuenta = CUOTA DIFERENCIAL (A PAGAR O A DEVOLVER) (+/-) 17 INCOME TAX RETURN Income before taxes +/- Adjustments = Preliminary taxable income - Negative taxable income from previous years = Taxable income (TI) * Income tax rate = Total tax - Deductions & discounts = Tax due - Withholdings & payments on account = INCOME TAX PAYABLE / OVERPAYMENT (+/-) If preliminary TI > 0 and enough If TI > 0 If Total tax > 0 and enough Total amount that the company pays 18 9

10 Current tax (6300) Example: Accounting income before taxes = Taxable income = 10,000 Withholdings = 200 Payments on account = 260 Deductions and discounts = 150 Tax rate = 30% 19 +/- Adjustments * Income tax rate = Total tax = Tax due INCOME TAX RETURN Income before taxes = Preliminary taxable income - Negative taxable income from previous years = Taxable income - Deductions & discounts - Withholdings & payments on account = INCOME TAX PAYABLE / OVERPAYMENT (+/-) 10,000 10,000 10, ,000 (150) 2,850 (460) 2,

11 Current tax (6300) Example: Expense for current tax 2,850 (6300) Current Tax Asset for current tax (473) Tax asset for withholdings and payments on account (4752) Tax liability for the income tax Liability for current tax 460 2, Current tax (6300) Example: Accounting income before taxes = Taxable income = 1,000 Withholdings = 200 Payments on account = 260 Deductions and discounts = 150 Tax rate = 30% 22 11

12 +/- Adjustments = Taxable income * Income tax rate = Total tax = Tax due INCOME TAX RETURN Income before taxes = Preliminary taxable income - Negative taxable income from previous years - Deductions & discounts - Withholdings & payments on account = INCOME TAX PAYABLE / OVERPAYMENT (+/-) 1,000 1,000 1, (150) 150 (460) (310) 23 Current tax (6300) Example: Expense for current tax (6300) Current Tax (4709) Tax asset for tax overpayment (473) Tax asset for withholdings and payments on account 460 Asset for current tax = =

13 Current tax (6300) Example: Accounting income before taxes = Taxable income = (100) Withholdings = 200 Payments on account = 260 Deductions and discounts = 150 Tax rate = 30% 25 +/- Adjustments * Income tax rate = Total tax = Tax due INCOME TAX RETURN Income before taxes = Preliminary taxable income - Negative taxable income from previous years = Taxable income - Deductions & discounts - Withholdings & payments on account = INCOME TAX PAYABLE / OVERPAYMENT (+/-) (100) (100) (100) (460) (460) 26 13

14 Current tax (6300) Example: 460 (4709) Tax asset for tax overpayment Assetforcurrenttax (473) Tax asset for withholdings and payments on account Current tax (6300) Calculation of Taxable Income Income before taxes (GAAP) Revenues & expenses under GAAP Revenues - Expenses Income before taxes Taxable Income (Tax laws) Revenues & expenses according tax laws Computable revenues - Deductible expenses Taxable income 28 14

15 Current tax (6300) Calculation of Taxable Income Income before taxes +/- Adjustments = Taxable income (+) The company will pay MORE tax this year (-) The company will pay LESS tax this year 29 Current tax (6300) Calculation of Taxable Income ADJUSTMENTS There are two types of adjustments: a) Adjustments derived from differences between the accounting standards and the tax laws in transactions that only affect the current year b) Adjustments derived from differences between the accounting standards and the tax laws in transactions that affect past or future years 30 15

16 Current tax (6300) Calculation of Taxable Income ADJUSTMENTS a) Adjustments derived from differences between the accounting standards and the tax laws in transactions that only affect the current year Differences between taxable income and income before taxes may arise because: certain expenses are not deductible, or certain revenues are exempt from tax Permanent differences certain expenses are recognized directly in equity, but are deductible in the calculation of taxable income (e.g. in a capital increase) 31 Permanent differences e.g. We have an accounting expense that is not deductible in the taxable income Which adjustment is necessary make the Income before taxes? Positive difference DP(+) Taxable income > Income before taxes e.g. We have an accounting revenue that is not computable in the taxable income Which adjustment is necessary make the Income before taxes? Negative difference DP(-) Taxable income < Income before taxes 32 16

17 Permanent differences Positive difference DP(+) Non-deductible expenses art. 14 Ley IS: Multas y sanciones penales y administrativas Pérdidas del juego Donativos y liberalidades (sí son deducibles los gass de relaciones públicas) Non-computable revenues: Negative difference DP(-) Art. 22: rentas obtenidas en el extranjero procedentes de la realización de actividades empresariales a traves de un establecimien permanente. 33 * Income tax rate = Total tax = Tax due CALCULATION OF INCOME TAX PAYABLE Income before taxes +/- Adjustments (Permanent differences) = Preliminary taxable income - Negative taxable income from previous years = Taxable income - Deductions & discounts - Withholdings & payments on account = INCOME TAX PAYABLE / OVERPAYMENT (+/-) 34 17

18 Current tax (6300) Example: Accounting income before taxes (year 2008) = 15,000 Income for the year includes an expense of 1,000, for a penalty paid by the company, expense that is not deductible. Withholdings and payments on account = 250 Deductions and discounts = 600 Tax rate = 30% 35 Current tax (6300) Example: Income for the year includes an expense of 1,000, for a penalty paid by the company, expense that is not deductible. Tax Expense Accounting Expense Difference (TE AE) Effect this year Deferred effect Penalty 0-1, ,000 (Positive adjustment) Higher payment: 0.30*1,000= 300 None 36 18

19 +/- Adjustments = Taxable income * Income tax rate = Total tax = Tax due INCOME TAX RETURN Income before taxes = Preliminary taxable income - Negative taxable income from previous years - Deductions & discounts - Withholdings & payments on account = INCOME TAX PAYABLE / OVERPAYMENT (+/-) , ,000 16,000 16, ,800 (600) 4,200 (250) 3, Current tax (6300) Example: Expense for current tax 4,200 (6300) Current Tax (473) Tax asset for withholdings and payments on account (4752) Tax liability for the income tax Liability for current tax 250 3,

20 Current tax (6300) Example: Accounting income before taxes (year 2009) = 20,000 60% of the penalty paid by the company in 2008 has been cancelled. Therefore, there is a revenue of 600 that is not computable according the tax laws. Withholdings and payments on account = 200 Deductions and discounts = 600 Tax rate = 30% 39 Current tax (6300) Example: 60% of the penalty paid by the company in 2008 has been cancelled. Therefore, there is a revenue of 600 that is not computable according the tax laws. Tax Revenue Accounting Revenue Difference (TR AR) Effect this year Deferred effect Penalty (Negative adjustment) Lower payment: 0.30* - 600= None 40 20

21 +/- Adjustments = Taxable income * Income tax rate = Total tax = Tax due INCOME TAX RETURN Income before taxes = Preliminary taxable income - Negative taxable income from previous years - Deductions & discounts - Withholdings & payments on account = INCOME TAX PAYABLE / OVERPAYMENT (+/-) ,000 (600) 19,400 19, ,820 (600) 5,220 (200) 5, Current tax (6300) Example: Expense for current tax 5,220 (6300) Current Tax (473) Tax asset for withholdings and payments on account (4752) Tax liability for the income tax Liability for current tax 200 5,

22 Current tax (6300) Calculation of Taxable Income ADJUSTMENTS There are two types of adjustments: a) Adjustments derived from differences between the accounting standards and the tax laws in transactions that only affect the current year b) Adjustments derived from differences between the accounting standards and the tax laws in transactions that affect past or future years 43 Current tax (6300) Calculation of Taxable Income ADJUSTMENTS a) Adjustments derived from differences between the accounting standards and the tax laws in transactions that affect past or future years These determine the Expense/Revenue for Deferred Tax 44 22

23 Deferred tax (6301) The expense/revenue for deferred tax appears as a result of the recognition and cancelation of deferred tax assets and deferred tax liabilities Expense/Revenue for Deferred Tax (DT) Expense for DT = Liability for Deferred Tax + Asset for Deferred Tax Liability for Deferred Tax + Asset for Deferred Tax = Revenue for DT 45 Deferred tax (6301) Deferred tax assets and Deferred tax liabilities appear as a result of: Temporary differences Taxable TD or Deductible TD Unused tax losses Right compensate negative taxable income from previous years 46 23

24 Deferred tax (6301) Temporary differences Taxable TD or Deductible TD Temporary differences appear because of: Temporal differences: revenues and expenses that are recognized in one year for the calculation of tax, and in another year for the calculation of accounting income, Revenues and expenses that are registered directly in equity ( be transferred the income statement in a future year) and that are not a component of the Taxable Income of the year, or Other (e.g. business combinations). 47 Deferred tax (6301) There are two types of Temporary Differences: Taxable temporary differences Deductible temporary differences Will result in a higher tax payment in the future Deferred tax liability Will result in a lower tax payment in the future Deferred tax asset 48 24

25 Deferred tax (6301) Deferred tax liability Obligation pay more tax in the future All derive from taxable temporary differences (479) Tax liability for taxable temporary differences Deferred tax asset Right pay less tax in the future Derive from: Deductible temporary differences (4740) Tax asset for deductible temporary differences Right compensate negative taxable income (4745) Tax asset for compensation of losses of exercise 49 Temporary differences that are temporal differences Some differences between taxable income and income before taxes appear because: revenues and expenses are recognized in one year for the calculation of tax, and in another year for the calculation of accounting income These differences are called Temporal differences These differences reverse or turn around in later years. This is called the reversion of temporal differences

26 = Total tax = Tax due CALCULATION OF INCOME TAX PAYABLE Income before taxes +/- Adjustments (Temporal differences) = Preliminary taxable income - Negative taxable income from previous years = Taxable income * Income tax rate - Deductions & discounts - Withholdings & payments on account = INCOME TAX PAYABLE / OVERPAYMENT (+/-) 51 Temporal differences e.g. We have an accounting expense that is not deductible in the taxable income until the next year Which adjustment is necessary make the Income before taxes? Positive difference TD(+) Taxable income > Income before taxes e.g. The deductible expense is higher than the accounting expense this year, because the deductible expense will be lower next year. Which adjustment is necessary make the Income before taxes? Negative difference TD(-) Taxable income < Income before taxes 52 26

27 Temporal differences Example: Depreciation expense for an asset Art. 11 Ley IS: serán deducibles las cantidades que en concep de amortización del inmovilizado material e inmaterial, correspondan a la depreciación efectiva que sufran los distins elemens por funcionamien, use, disfrute u obsolescencia. Depreciación efectiva la resultante de aplicar los coeficientes de amortización lineal establecidos en las Tablas de amortización oficialmente aprobadas Temporal differences Example: Depreciation expense for an asset Machinery = Useful life = 6 years Depreciation period for tax calculation = 3 years Year Total Accounting expense (12,000) Deductible expense (4,000) (4,000) (4,000) (12,000) DIFFERENCE +2,000 +2,000 +2,000 0 Taxable income < Income before taxes we are deferring the payment of taxes 54 27

28 Year Accounting expense Deductible expense DIFFERENCE Temporal differences 1 (4,000) 2 (4,000) 3 (4,000) , , ,000 Total (12,000) (12,000) 0 DT (-) DT (-) DT (-) DT (+) DT (+) DT (+) The difference that was negative in years 1, 2 and 3, reverse or turn around in years 4, 5 and 6 the difference is now positive. This is the reversion of temporal differences. 55 Year Tax Expense Accounting Expense Difference (TE AE) Effect this year Deferred effect (4,000) (4,000) (4,000) Taxable TD Taxable TD Taxable TD + 2,000 Reversion + 2,000 Reversion Pays less: 0.30* Expense for Current tax Pays less: 0.30* Expense for Current tax Pays less: 0.30* Expense for Current tax Pays more: 0.30*2,000 Expense for Current tax Pays more: 0.30*2,000 Expense for Current tax Obligation pay more in the future Deferred tax liability Expense for Deferred Tax Obligation pay more in the future Deferred tax liability Expense for DT Obligation pay more in the future Deferred tax liability Expense for DT Complies with the obligation pay more Deferred tax liability Revenue for DT Complies with the obligation pay more Deferred tax liability Revenue for DT 6 + 2,000 Pays more: Complies with the obligation Reversion 0.30*2,000 pay more Expense for Deferred tax liability 56 Financial Accounting 08/09 2ºDE LESSON 5 Current tax Revenue for DT Mª Cristina Abad Navarro,

29 INCOME TAX RETURN Income before taxes +/- Permanent differences +/- Temporary differences = Preliminary taxable income - Negative taxable income from previous years = Taxable income * Income tax rate = Total tax - Deductions & discounts = Tax due - Withholdings & payments on account = INCOME TAX PAYABLE / OVERPAYMENT (+/-) 1 10,000 10,000 10, ,000 3,000 3, ,500 10,500 10, ,150 3,150 3, ,000 11,000 11, ,300 3,300 3, ,500 11,500 11, ,450 3,450 3, ,000 12,000 12, ,600 3,600 3, ,500 12,500 12, ,750 3,750 3,750 Without any temporal difference tal payment over the 6 years = Σ tax due = 20, INCOME TAX RETURN Income before taxes +/- Permanent differences +/- Temporary differences = Preliminary taxable income - Negative taxable income from previous years = Taxable income * Income tax rate = Total tax - Deductions & discounts = Tax due - Withholdings & payments on account = INCOME TAX PAYABLE / OVERPAYMENT (+/-) 1 10,000 8,000 8, ,400 2,400 2, ,500 8,500 8, ,550 2,550 2, ,000 9,000 9, ,700 2,700 2, ,500 +2,000 13,500 13, ,050 4,050 4, ,000 +2,000 14,000 14, ,200 4,200 4, ,500 +2,000 14,500 14, ,350 4,350 4,350 With temporal difference tal payment over the 6 years = Σ tax due =20,

30 Temporal differences Year 1: Current tax 2,400 (6300) Current Tax (4752) Tax liability for the income tax 2,400 Deferred tax 600 (6301) Deferred Tax (479) Tax liability for taxable temporary differences 600 Tax expense = Current tax + Deferred tax = - 2, = - 3, Temporal differences Year 2: Current tax 2,550 (6300) Current Tax (4752) Tax liability for the income tax 2,550 Deferred tax 600 (6301) Deferred Tax (479) Tax liability for taxable temporary differences 600 Tax expense = Current tax + Deferred tax = - 2, = - 3,

31 Temporal differences Year 3: Current tax 2,700 (6300) Current Tax (4752) Tax liability for the income tax 2,700 Deferred tax 600 (6301) Deferred Tax (479) Tax liability for taxable temporary differences 600 Tax expense = Current tax + Deferred tax = - 2, = - 3, Temporal differences Year 4: Current tax 4,050 (6300) Current Tax (4752) Tax liability for the income tax 4,050 Deferred tax 600 (479) Tax liability for taxable temporary differences (6301) Deferred Tax 600 Tax expense = Current tax + Deferred tax = - 4, = - 3,

32 Temporal differences Year 5: Current tax 4,200 (6300) Current Tax (4752) Tax liability for the income tax 4,200 Deferred tax 600 (479) Tax liability for taxable temporary differences (6301) Deferred Tax 600 Tax expense = Current tax + Deferred tax = - 4, = - 3, Temporal differences Year 6: Current tax 4,350 (6300) Current Tax (4752) Tax liability for the income tax 4,350 Deferred tax 600 (479) Tax liability for taxable temporary differences (6301) Deferred Tax 600 Tax expense = Current tax + Deferred tax = - 4, = - 3,

33 Temporal differences From the example, it can be seen that: For the calculation of taxable income, we recognize more depreciation in the early years, but less depreciation in the later years. The tal depreciation expense is the same for both methods over the life of the asset. Temporal differences affect only the timing of when revenues and expenses are recognized for tax purposes. As a result, the tal amount of taxes paid does not change. Only the timing of the payment of taxes is affected. Since temporary differences reverse in later years they do not change the tal amount of taxable income over the life of a business. 65 Temporal differences Example: Impairment of accounts receivables Year 1: Accounting expense = 3,000 It is not deductible for the calculation of tax. Year 2: The impairment is cancelled. Year 1 2 Total Accounting (3,000) +3,000 0 Taxable DIFFERENCE +3,000 (3,000) 0 Taxable income > Income before taxes we are anticipating the payment of taxes 66 33

34 Temporal differences Year Tax Exp/Rev Accounting Exp/Rev Difference (TE AE) Effect this year Deferred effect 1 0 (3,000) +3,000 Deductible TD Pays more: 0.30*3,000 = 900 Current tax Right pay less in the future Deferred tax asset Revenue for deferred tax ,000 (3,000) Reversion Pays less: 0.30*(3,000) = (900) Current tax Applies the right pay less in the future Deferred tax asset Expense for DT 67 INCOME TAX RETURN Income before taxes +/- Adjustments = Preliminary taxable income - Negative taxable income from previous years = Taxable income * Income tax rate = Total tax - Deductions & discounts = Tax due - Withholdings & payments on account = INCOME TAX PAYABLE / OVERPAYMENT (+/-) 1 10,000 10,000 10, ,000 3,000 3, ,500 10,500 10, ,150 3,150 3,

35 INCOME TAX RETURN Income before taxes +/- Adjustments = Preliminary taxable income - Negative taxable income from previous years = Taxable income * Income tax rate = Total tax - Deductions & discounts = Tax due - Withholdings & payments on account = INCOME TAX PAYABLE / OVERPAYMENT (+/-) 1 10,000 +3,000 13,000 13, ,900 3,900 3, ,500 (3,000) 7,500 7, ,250 2,250 2, Temporal differences Year 1: Current tax 3,900 (6300) Current Tax (4752) Tax liability for the income tax 3,900 Deferred tax 900 (4740) Tax asset for deductible temporary differences (6301) Deferred Tax 900 Tax expense = Current tax + Deferred tax = - 3, = - 3,

36 Temporal differences Year 2: Current tax 2,250 (6300) Current Tax (4752) Tax liability for the income tax 2,250 Deferred tax 900 (6301) Deferred Tax (4740) Tax asset for deductible temporary differences 900 Tax expense = Current tax + Deferred tax = - 2, = - 3, Deferred tax (6301) The expense/revenue for deferred tax appears as a result of the recognition and cancelation of deferred tax assets and deferred tax liabilities Expense/Revenue for Deferred Tax (DT) Expense for DT = Liability for Deferred Tax + Asset for Deferred Tax Liability for Deferred Tax + Asset for Deferred Tax = Revenue for DT 72 36

37 Deferred tax (6301) Deferred tax assets and Deferred tax liabilities appear as a result of: Temporary differences Taxable TD or Deductible TD Unused tax losses Right compensate negative taxable income from previous years 73 Negative taxable income When the company has a negative taxable income one year, the tax laws (art. 25, Ley del IS) establish that, for the calculation of tax payable: The company has the right compensate or take away the negative taxable income from the positive taxable income that the company earns in the following 15 years. The firm will pay less tax in the future 74 37

38 Negative taxable income The taxable income can be negative because: Income before taxes is negative, or Income before taxes is positive, but the adjustments make the preliminary taxable income be negative. Income before taxes > 0 +/- Adjustments = Preliminary taxable income < 0 75 Negative taxable income from previous years There are two limits for the compensation of the negative taxable income: Temporal limit: 15 years Quantitative limit: the amount of preliminary taxable income Taxable income can not become negative after subtracting the negative taxable income from previous years 76 38

39 Income before taxes +/- Adjustments * Income tax rate = Total tax - Deductions & discounts = Tax due CALCULATION OF INCOME TAX PAYABLE = Preliminary taxable income - Negative taxable income from previous years = Taxable income ( 0 ) - Withholdings & payments on account = INCOME TAX PAYABLE / OVERPAYMENT (+/-) 77 Negative taxable income When the company has a negative taxable income one year, the company has the right compensate or take away the negative taxable income from the positive taxable income that the company earns in the following 15 years. This right will be recorded as an ASSET: (4745) Tax asset for the compensation of losses 78 39

40 Tax asset for the compensation of losses (4745) Tax asset for the compensation of losses In order be allowed record this ASSET, the company must comply with the conservatism principle: Norma de valoración Nº13 PGC: de acuerdo con el principio de prudencia, sólo se reconocerán activos por impues diferido en la medida en que resulte probable que la empresa disponga de ganancias fiscales futuras que permitan la aplicación de ess activos. The same applies for the Tax assets for deductible temporary differences 79 Tax asset for the compensation of losses Resolución del ICAC de 9/10//1997: Se puede entender que la realización futura está razonablemente asegurada, cuando: El origen de la base imponible negativa se haya producido como consecuencia de un hecho no habitual en la gestión de la empresa. Que razonablemente se considere que las causas que originaron la pérdida han desaparecido en la actualidad. Que se prevea que se van a obtener beneficios fiscales que permitan su compensación en un plazo no superior al previs (15 años)

41 = Tax due CALCULATION OF INCOME TAX PAYABLE Income before taxes +/- Adjustments = Preliminary taxable income - Negative taxable income from previous years = Taxable income < 0 * Income tax rate = Total tax < 0 - Deductions & discounts - Withholdings & payments on account = INCOME TAX OVERPAYMENT 81 Tax asset for the compensation of losses Example: Accounting income before taxes = Taxable income = (100) Withholdings = 200 Payments on account = 260 Deductions and discounts = 150 Tax rate = 30% 82 41

42 +/- Adjustments = Taxable income * Income tax rate = Total tax = Tax due INCOME TAX RETURN Income before taxes = Preliminary taxable income - Negative taxable income from previous years - Deductions & discounts - Withholdings & payments on account = INCOME TAX PAYABLE / OVERPAYMENT (+/-) (100) (100) (100) 0.30 (30) - 0 (460) (460) 83 Tax asset for the compensation of losses Current tax Assetforcurrenttax 460 (4709) Tax asset for tax overpayment (473) Tax asset for withholdings and payments on account 460 Deferred tax (if the conditions are met) 30 (4745) Tax asset for the compensation of losses (6301) Deferred tax 30 Tax expense = Current tax + Deferred tax = =

43 Tax asset for the compensation of losses Example: Year X1 Accounting income before taxes = Taxable income = (50,000) Withholdings and payments on account = 3,000 Deductions and discounts = 1,500 Tax rate = 30% Year X2 Accounting income before taxes = Taxable income = 10,000 Withholdings and payments on account = 2,000 Tax rate = 30% 85 +/- Adjustments * Income tax rate = Total tax = Tax due INCOME TAX RETURN Income before taxes = Preliminary taxable income - Negative taxable income from previous years = Taxable income - Deductions & discounts - Withholdings & payments on account = INCOME TAX PAYABLE / OVERPAYMENT (+/-) X1 (50,000) (50,000) 0 (50,000) 0.30 (15,000) - 0 (3,000) (3,000) X2 10,000 10,000 (10,000)

44 Tax asset for the compensation of losses Year X1 Current tax 3,000 (4709) Tax asset for tax overpayment (473) Tax asset for withholdings and payments on account 3,000 Deferred tax (if the conditions are met) 15,000 (4745) Tax asset for the compensation of losses (6301) Deferred tax 15,000 Tax expense = Current tax + Deferred tax = ,000 = + 15, Tax asset for the compensation of losses Year X2 Current tax 2,000 (4709) Tax asset for tax overpayment (473) Tax asset for withholdings and payments on account 2,000 Deferred tax (if the conditions are met) 3,000 (6301) Deferred tax (4745) Tax asset for the compensation of losses 3,000 Tax expense = Current tax + Deferred tax = 0-3,000 = - 3,

45 Tax expense/revenue The tax expense/revenue has two components: Expense/Revenue for Current Tax Expense/Revenue for Deferred Tax Appears because of transactions that affect the amount of tax that has be paid this year Appears because of transactions that affect the amount of tax that has be paid in the future 89 Tax expense/revenue Expense/Revenue for Current Tax (CT) Expense for CT = Liability for Current Tax + Asset for Current Tax Liability for Current Tax + Asset for Current Tax = Revenue for CT Expense/Revenue for Deferred Tax (DT) Expense for DT = Liability for Deferred Tax + Asset for Deferred Tax Liability for Deferred Tax + Asset for Deferred Tax = Revenue for DT 90 45

46 Deferred tax (6301) The expense/revenue for deferred tax appears as a result of the recognition and cancelation of deferred tax assets and deferred tax liabilities Expense/Revenue for Deferred Tax (DT) Expense for DT = Liability for Deferred Tax + Asset for Deferred Tax Liability for Deferred Tax + Asset for Deferred Tax = Revenue for DT 91 Deferred tax (6301) Deferred tax assets and Deferred tax liabilities appear as a result of: Temporary differences Taxable TD or Deductible TD Unused tax losses Right compensate negative taxable income from previous years 92 46

47 Deferred tax (6301) Temporary differences Taxable TD or Deductible TD Temporary differences appear because of: Temporal differences: revenues and expenses that are recognized in one year for the calculation of tax, and in another year for the calculation of accounting income, Revenues and expenses that are registered directly in equity ( be transferred the income statement in a future year) and that are not a component of the Taxable Income of the year, or Other (e.g. business combinations). 93 Deferred tax (6301) Revenues and expenses registered directly in equity Revenues (group 9) They are registered in Equity be transferred Income in a later year as a group 7 revenue Expenses (group 8) They are registered in Equity be transferred Income in a later year as a group 6 expense When will group 9 revenues be computable and group 8 expenses be deductible? 94 47

48 Revenues registered directly in equity (Group 9) They are registered in Equity be transferred Income in a later year as a group 7 revenue. Obligation pay more tax in the future: 0.30 * Revenue (G.9) Expense for DT (G.8) = Liability for Deferred Tax (8301) Deferred tax (479) Tax liability for taxable TD When the revenue is transferred the income statement: The obligation pay more is cancelled: 0.30 * Transfer of Rev (G. 8) Liability for Deferred Tax = Revenue for DT (G.8) (479) Tax liability for taxable TD (8301) Deferred Tax 95 Expenses registered directly in equity (Group 8) They are registered in Equity be transferred Income in a later year as a group 6 expense. Right pay less tax in the future: 0.30 * Expense (G.8) Asset for Deferred Tax = Revenue for DT (G.8) (4740) Tax asset for deductible TD (8301) Deferred tax When the expense is transferred the income statement: The rigth pay less is cancelled: 0.30 * Transfer of Expenses (G.9) Expense for DT (G.8) = Asset for Deferred Tax (8301) Deferred Tax (4740) Tax asset for deductible TD 96 48

49 Revenues and expenses registered directly in equity As a result, the equity account will appear in the balance sheet for the net value (net of taxes) Recognition: (940) Revenues of official capital grants (8301) Deferred tax (130) Official capital grants (900) Profits from available for sale financial assets (8301) Deferred tax (133) Adjustments for change in value of available for sale financial assets (8301) Deferred tax (133) Adjustments for change in value of available for sale financial assets (800) Losses from available for sale financial assets 97 Revenues and expenses registered directly in equity As a result, the equity account will appear in the balance sheet for the net value (net of taxes) Transfer: (8301) Deferred tax (130) Official capital grants (840) Transfers of official capital grants (8301) Deferred tax (133) Adjustments for change in value of available for sale financial assets (802) Transfer of profits from available for sale financial assets (902) Transfer of losses from available for sale financial assets (8301) Deferred tax (133) Adjustments for change in value of available for sale financial assets 98 49

50 INFORMATION REPORTED ON THE ANNUAL ACCOUNTS 99 Income statement Operating revenues Operating expenses = Operating Income (Loss) (A) Financial revenues Financial expenses = Financial Income (Loss) (B) A + B = Income (Losses) Before Taxes -Corporate Income Tax = Income tax expense Income from continuing operations (Profits / Losses)

51 Balance Sheet ASSETS A) Non-current assets I. Intangible assets VI. Deferred tax assets B) Current assets III. Trade accounts receivables and other receivables 1. Trade acc. receivables for sale & s. 5. Assets for current tax. LIABILITIES A) Equity B) Non-current liabilities I. Long-term provisions. IV. Deferred tax liability. C) Current liabilities V. Trade accounts payable and other payable. 1. Trade accounts payable for purchases and services. 5. Liability for current tax