educating supporting representing 1 module 6 ruth ní dhondúin 2012 accounting for tax
TRANSCRIPT
EDUCATING
SUPPORTING
REPRESENTING
www.charteredaccountants.ie
1
Module 6 Ruth Ní Dhondúin
2012Accounting for Tax
Learning objectives
• On completion of this module, students should be able to: – analyse the financial statements and management
accounts to extract tax information; – Understand “materiality” for accounting for tax– demonstrate how international financial reporting
standards interact with tax law;– Apply relevant FRS/IFRS– compute deferred tax, tax provisions and tax
reconciliations for the financial statements.– Prepare tax reconciliations for GAAP and IFRS
Course content
Analysing the financial statements and management accounts to extract tax information
Accounting for tax
• Financial accounting is the process of identifying, measuring, and communicating information to permit users of such information to make informed decisions
• Accounting for tax is a part of this process
Users of financial statements
FINANCIAL STATEMENT
S
YOU!Owners /
Shareholders
Potential Investors
Employees
Managers
Lenders
Revenue
Customers / Debtors
Suppliers / Creditors
Competitors
Accounts preparation
• Financial Statements of Irish companies are generally prepared in accordance with Irish GAAP
• Transition to IFRS • Accounting characteristics and concepts
broadly the same between two methods of preparation
Financial statements • Key components:
1.Directors and other information
2.Directors’ report
3. Independent auditors’ report
4.Profit & loss account (Income statement)
5.Balance sheet
6.Cash flow statement
7.Notes to the financial statements
Financial statements • Profit & Loss account• Corporation Tax charge on the profits of the
accounting period• Balance Sheet
• Corporation tax due to or back from the Revenue Commissioners
• VAT due to or back from the Revenue Commissioners
• Employer PAYE/PRSI due to or back from the Revenue Commissioners
• Don’t forget the big picture!
Financial statements • Relevant information in the Directors’
report
• Principal activities of the company• Future developments• Important events since year end• Dividend payments
Financial statements • Relevant tax information in the notes to the accounts• Breakdown of profit before tax• Employee and directors’ information• Analysis of tax charge in the Profit &
Loss• Fixed assets • Debtors and creditors• Shareholding and owners of the
company
Financial statements
• Important to understand activities and business of a company as a whole
• Big firm, sole practice or industry –
need to be able to have an informed conversation across all tax heads
Payroll taxes• The focus of the personal tax departments
will be employee, director and pension information included in Financial Statements
• Notes to the accounts will include information on:• Number of employees, staff costs, etc• Employer PAYE/PRSI due to/from Revenue • Directors’ remuneration • Pension schemes• Stock option schemes, etc
VAT
• VAT generates the highest tax revenue for the Revenue Commissioners
• VAT is a key area of focus – important to get VAT advice for your company or clients
• Is VAT being accounted for properly?• VAT department will want to understand the
activities of the company• Financial statements good source of
information• Watch all property related transactions!
Other sources of information
• Management accounts• Trial balance• Audit working papers• Information request list • Meeting with client
Materiality
• Only material items are relevant in ensuring accounts reflect a true and fair view
• Usually % of turnover or profits • Relevant for tax “sign off” role when assisting
auditors and tax figures must be materially correct
• However, tax figures for compliance purposes must be 100% accurate as no materiality threshold
Corporation tax (“CT”)
• Tax advisors can have two roles in assisting clients which will impact your role as users of financial statements:
- Corporation Tax “Sign Off”
- Corporation Tax Compliance
Review of Tax Provision• What does company do?• Irish/foreign trades – withholding taxes?• Employees?• Sources of income and gains – taxable and rates?• Expenses?• Effective tax rate?• Member of CT group?• Trading Losses?• Provisions – specific/general?• FRS/IFRS – first time?• Close company?• How financed – debt?
Course content
Demonstrate how international financial reporting standards interact with tax law
Accounts preparation
• Financial Statements of Irish companies are generally prepared in accordance with Irish GAAP
• Transition to IFRS • Accounting characteristics and concepts
broadly the same between two methods of preparation.
IFRS and tax law
• Accounting rules:– Convergence of GAAP and IFRS – Public companies post 1 January 2005– Other companies opt in– What have you seen?
IFRS and tax law
• Historical position:– Legislation silent on how trading profits of a
company prepared – Income tax rules - tax calculated on “the full
amount of profits or gains” of a trade or profession under s.65 TCA 1997
– Case law
IFRS and tax law
• Finance Act 2005 – Post Finance Act 2005, tax legislation has a
definition of “generally accepted accounting practice” in Section 4(1) TCA 1997
– Other provisions also introduced as part of 76A-D and Schedule 17A TCA 1997
IFRS and tax law
• Transitional rules– Schedule 17A TCA 1997– Purpose to ensure no adjustments required on
adoption are double counted for tax purposes and that no amounts fall out of the charge to tax.
IFRS and tax law
• Transitional rules – Schedule 17A, TCA97 deals with:
• Changeover of non-specific items of Irish GAAP to IFRS
• Financial instruments• Bad debts
IFRS and tax law
• Transitional rules – Reminder – purpose?– Treatment gives rise to deductible amounts
or taxable amounts
IFRS and tax law• Transitional rules
Example – A fee of €600k is received in respect of a 3 year
contract which is received, accounted for and taxed up-front. If the company moves to IFRS in year 2 and that requires this fee to be accounted for over the period of the contract i.e. €200k p.a.
– In the absence of the transitional rules, the fee of €600k would be taxed as income of €1m (income of years 1, 2 and 3), double counting €400k of income. This amount is identified and allowed under Schedule 17A as a deductible amount but is allowed as a tax deduction over a period of 5 accounting periods.
IFRS and tax law• Transitional rules
Gains and losses on financial instruments (Paragraph 4, Schedule 17A)
Example – A financial instrument cost €1m in year 1. It had a fair
value of €1.1m at the end of that year and was sold for €1.15m in year 2.
– Year 1 is pre-IFRS – taxed on realisations basis – no income and no tax payable
– Year 2 is IFRS – taxed on movements in fair value – income is €50k and tax is payable on this
– Actual gain is €150k but taxable income is €50k – this income would not have been taxed but for the transitional adjustment rules. The €100k is identified as a taxable amount.
IFRS and tax law
• Transitional rules
– Bad debts (Paragraph 3, Schedule 17A)• IAS 39 sets out that a provision is only allowed so
far as the loss (i.e. a present obligation arising from a past event) has already been incurred.
• Transitional adjustment allowed
IFRS and tax law
• Sec 76B TCA 1997– Taxation of unrealised gains and losses– Certain financial assets and liabilities– Accounted for under IFRS or Irish GAAP on
unrealised or “fair value basis”
• Significant for financial sector• Interacts with FRS 26 and IAS 39
IFRS and tax law
• Section 76C TCA 1997– Anti avoidance provisions– Group companies using different accounting
policies– IFRS v Irish GAAP
• All group members must move to IFRS at same time
• EU Regs – exception if good reasons and disclosure in accounts
IFRS and tax law
• Sec 76C applies single framework for transactions between associated companies
• Rules apply if tax advantage arises by use of different accounting standards
• Anti avoidance motive not required• View totality of transactions• Does a net tax advantage arise?
IFRS and tax law
• Section 76D TCA 1997• Income from finance leases• Ensures no change to tax comp by move
to IFRS• Tax treatment of finance lessor preserved
– Taxed on gross payment– Claim for capital allowances
Course Content
• Calculate accounting provisions for– Current and deferred tax– Reconcile expected and actual tax charges
• FRS 16 Current Tax• FRS 19 Deferred Tax• IAS 12 Income Taxes
Tax in Financial Statements
• CT charge/credit in P&L– Split in notes – current and deferred items
• CT tax creditor or debtor – current tax• Deferred tax asset or liability• Tax reconciliation note
Accounting for Tax FRS 16
• Current Tax• Withholding tax and tax credits• Current tax recognised in P&L
– Exclude amount recognised in statement of total recognised gains and losses
• FRS 19 – full provision of deferred tax assets/liabilities on timing differences
FRS 16
• Recognition of items of income and expenditure that have suffered tax
• Dividends, interest and other items– Include withholding taxes paid wholly on behalf
of recipient– Exclude taxes not payable wholly on behalf of
recipient
• Current tax measured using rates and laws enacted by balance sheet date
FRS 16 DefinitionsCurrent TaxPara 2
•“Tax” estimated to be payable /recoverable for taxable profit/loss•Include adjustment to previous period estimates
Tax Credit •Tax credit given to recipient of dividend from company•Acknowledging income has already been charged to tax•May reduce or discharge recipient’s liability•Non-taxpayers may/may not be able to recover tax credit
Taxable Profit/Loss
•Profit/Loss for period•Determined using rules of tax authorities
FRS 16 DefinitionsWithholding Tax
Tax on dividends and other income deducted by payer and paid to Tax Authorities wholly on behalf of recipient
Para 8-11 FRS 19Outgoing dividends paid and proposed, interest and other income•Include withholding taxes and exclude other tax credits
Incoming dividends, dividends and other income•Include withholding taxes and exclude other
•Withholding taxes taken into account in tax charge
•Exclude attributable tax credits as defined in FRS
•Irish companies and credit for underlying tax of overseas dividends
Current Tax P&L
• Para 5 FRS 16• Recognise current tax in P&L or STRGL
– Tax charge based on CT computation– Excluding adjustments for DIRT, PSWT, TRS– Close company surcharge– Adjustments for prior periods*
*can include amounts arising from Revenue audits
Current Tax Balance Sheet
• CT tax charge/credit:– Adjustments for PT paid in year– Unpaid balance for prior years– DIRT, PSWT, RCT– Refunds due to CT loss claims
Current CT ExampleXYZ Ltd Year Ended 31st December 2011
Opening CT liability paid Sep 2011 €30,150
PT payments made in 2011 €145,000 June€150,000 December
DIRT €5,600
PSWT €45,000
Close Co Surcharge €4,163
TRS €8,000
CT Charge on profits €320,000
Current CT ExampleXYZ Ltd Year Ended 31st December 2011
Journals
CT and Close Company SurchargeDr CT tax charge P&L €324,163Cr CT liability creditors €324,163PSWTDr CT tax liability €45,000Cr Trade debtors €45,000DIRTDr CT tax liability €5,600Cr Deposit interest received €5,600TRSDr Wages and Salaries €8,000Cr CT tax liability €8,000
CT Control Account DR €Payment of balance CT 30,150PT paid June 145,000PT paid November 150,000DIRT 5,400PSWT 45,000 375,550
Closing balance b/d 13,237
CR €Opening Balance 30,150CT charge 320,000Close Co Surcharge 4,163TRS 8,000Closing Balance c/d 13,237 375,550
Under/Over-provisions
• Adjustment in current year to reflect additional tax or reduction in tax liability
• Disclose separately in tax note
Withholding Taxes• TRS• Private medical insurance for employees• 20% of premium withheld and paid to
Revenue• Part of CT liability for PT• Salary cost for accounting – not CT• Included in P&L• TRS due to Revenue in Balance Sheet
as other creditors
Withholding Taxes
• Dividends Paid• Statement of changes in Equity - IAS• Reconciliation of Movement in
Shareholders Fund – Irish GAAP• Accounting adjustments needed for
DWT
Withholding Taxes
• Dividends/Interest/Royalties received• Recorded inclusive of withholding tax• Underlying tax credit not reflected in
financial statements
R&D Credit
• Accounting treatment - choice• Irish GAAP – substance over form• Government grant v reduction in CT• IFRS – Investment tax credit• Management to use judgement• Option – reduction of payroll or reduction
in CT • Above the line v below the line
Disclosure of Current Tax
• Companies Act 1986• FRS 16, para 17• Disclose separately
– Irish tax– Foreign tax
• Analyse current and prior year adjustments
Deferred Tax
• Accounting Concept• Timing differences• Balance Sheet – deferred tax asset or
liability• FRS 19 and IAS 12
FRS 19 – Deferred tax
Deferred tax (FRS 19)• Estimated future tax consequences of past
transactions and events recognised in the financial statements of the current and previous periods
• Deferred tax is provided for on timing differences only
• No deferred tax is to be provided on permanent differences
FRS 19 – Permanent and timing differences
Permanent differences (FRS 19)• Differences between an entity’s taxable
profits and its results as stated in the financial statements that arise because certain types of income/expenditure are non-taxable or disallowable, or because certain tax charges or allowances have no corresponding amount in the financial statements
FRS 19 – Permanent and timing differencesExamples of permanent differences• Amortisation of goodwill• Client entertainment (s840)• Employment grants (s225)• Motor lease restriction add-back (s377)• Depreciation on assets not qualifying for capital
allowances• Disallowed legal & professional fees• Disallowed donations and subscriptions• Certain FX on non-trading items (i.e. loans, tax
payments)• TRS deduction
Timing differences (FRS 19)• Differences between an entity’s taxable
profits and its results as stated in the financial statements that arise because from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements
FRS 19 – Permanent and timing differences
Examples of timing differences• Capital allowances in excess of depreciation (or vice versa)• Items allowed for tax on a paid basis i.e. pension, patent royalties,
section 247 interest expense• Movements in general provisions i.e. general bad debts provision,
general stock provisions• Interest receivable accrued but taxed on receipts basis• Trading losses generated or utilised during period• Profit/loss on disposal of assets qualifying for capital allowances v
balancing allowances/charges• Finance leased assets• Unrealised marked to market gains/losses• Some tax planning initiatives that defer rather than reduce
corporation tax liabilities• Unrealised FX gains/losses on foreign currency hedges on non-
trading items (CGT implications)
FRS 19 – Permanent and timing differences
FRS 19 – Deferred tax
Example• Year ended 31 December 2011• Profit before tax is €100,000• Pension charge is €10,000• Tax rate = 12.5%• Scenario 1 – pension paid on 31 December
2011• Scenario 2 – pension not paid by 31 December
2011
FRS 19 – Deferred taxScenario 1 Scenario 2
€ €Profit before tax 100,000 100,000Add-back: pension accrual - 10,000
Adjusted Case I income 100,000 110,000
Current tax charge @ 12.5% 12,500 13,750
Deferred tax charge/(credit) - (1,250)
Total tax charge 12,500 12,500
Balance sheet - DTA - 1,250
FRS 19 – Deferred tax
• Recognise TD on timing differences for:– Accelerated Capital Allowances– Fair Value revaluation of assets through P&L– Accruals for pension costs and post-retirement
benefits deductible on paid basis– Elimination of unrealised intra group profits on
consolidation– Unrelieved tax losses– Other sources of short term timing differences
FRS 19 – Deferred tax
• Prohibits recognition of DT on timing differences when– Fixed non monetary asset is revalued without
commitment to sell – The gain on sale of non-monetary asset is rolled over
into replacement assets– The remittance of a subsidiary, associate or joint
venture’s earnings would give rise to tax, but there is no commitment to remit the earnings
FRS 19 – Deferred tax
• Requires DT assets to be recognised to extent that it is more likely than not that they will be recovered
• Para 23. 24,25 – all available evidence• Suitable taxable profits from which future
reversal of TD can be deducted• Para 26 – Assumption that future reversal of
DT liabilities will give rise to taxable profits• Asset recoverable to extent future profits
suitable for deduction of DT asset
FRS 19 – Deferred taxDeferred tax assets that cannot be recovered
against DT liabilities – Para 27-3227 DT asset not recoverable against reversal of DT liability
28 All available evidence – historical information on financials objective
29 Unrelieved tax losses is evidence that no suitable future profits
30 Unrelieved trading losses – non recurring cause and otherwise profits, may be suitable evidence
31 Unrelieved capital losses for offset against future capital gains = suitable evidence if future gain likely
32 DT asset not recognised if losses will take some time to be relieved
Losses and Deferred Tax
• Order of relief for tax1st Claim Trading losses forward Sec 396(1) TCA 1997
2nd Claim Relevant trading loss against relevant trading income in current AP
Sec 396A(3) TCA 1997
3rd Claim Relevant trading loss against relevant trading income in preceding AP
Sec 396A(3) TCA 1997
4th Claim Relevant trading loss against passive income in current AP – value basis
Sec 396B(3) TCA 1997
5th Claim Relevant trading loss against passive income in preceding AP – value basis
Sec 396B(3) TCA 1997
6th Claim Carry forward against future trading profits Sec 396(1) TCA 1997
DT and Losses
• TD for unrelieved losses carried forward• Can be set against DT liabilities in
balance sheet• Losses carried back – DT asset• Must be reliable evidence that future
profits will be generated
DT – Charges on Income
• Excess non trade charges• Trading losses are deemed to have been
claimed where claim for non trade charges or management expenses in same year
• Permanent difference• Exclude from DT
FRS 19 – Recognition of DT
• Recognise in P&L unless attributable to gain/loss in STRGL
• Changes in circumstances from last balance sheet date may require adjustment to DT asset
• DT rate = average rate expected in periods in which TD reverse
• Based on tax rates and laws enacted at balance sheet date
• Permitted to discount DT amounts
FRS 19 – Disclosure
• Balance Sheet– DT liabilities classified as provisions for
liabilities and charges– DT FRS 17 Retirement Benefits excluded– DT Assets classified as debtors– Separate heading where material
FRS 19 – Disclosure• Income statement
– Include DT within “tax on profit or loss on ordinary activities”
– Disclosure note to show amount of DT within • Tax on ordinary activities in P&L and• Tax charged directly to STRGL
• As a tax advisors you may quantify the deferred tax asset. The recognition of the asset should be decided by the client and audit colleagues.
Calculating deferred tax – FRS 19
Closing provision
1. Identify all adjustments (i.e. add-backs and deductions) in the tax computation
2. Identify if adjustments arise from permanent or timing differences
3. Take account of the cumulative impact of the timing items identified that have not reversed up to the balance sheet date
4. Identify any tax losses forward at the balance sheet date
5. Calculate deferred tax at 12.5% (or other rate eg 25% on particular items) on the cumulative timing differences identified
6. Ensure there is an analysis of the total deferred tax split into deferred tax assets and deferred tax liabilities
Calculating deferred tax – FRS 19
Current period movement - charge/(credit)
1.Calculate closing provision per previous slide
2.The closing provision in the final financial statements of the prior period = opening provision for the current period
3.Difference between 1 and 2 is the current period movement
Calculating deferred tax – FRS 19Analysis of current period movement - charge/(credit)
1. Identify all adjustments (i.e. add-backs and deductions) in the current period tax computation
2. Identify if adjustments arise from permanent or timing differences
3. Identify any tax losses generated or utilised during the period
4. Calculate deferred tax at 12.5% (or other rate e.g. 25% on particular items) on the timing items identified above
5. This amount should equal amount calculated in previous slide. However, in practice there are likely to be differences (e.g. DT
amounts not recognised in prior period)
Finance Act 2005
• Transitional arrangements to IFRS• May impact on deferred tax • To the extent that the total of the “taxable
amounts” matches the total of the “deductible amounts” for a company, no current or deferred tax impact and no cash flow implication
• However, if the “taxable amounts” do not match the “deductible amounts”, there will be differences
Tax Account Corporation Tax Control Account
DR CR
Opening Balance 2010 €3,000
CT payment – balance of tax from prior year
€3,000 Current Tax Charge €32,250
PT Payments €31,725
Balance c/d €3,525 Bal c/d €-
€38,250 €38,250
Bal b/f –CT Creditor €3,525
Tax Account Deferred Tax Control Account
CR DR
Opening Bal €1,650
P&L movement €150
Bal c/d Bal c/d €1,500
€1,650 €1,650
Balance b/f DT Asset €1,500 €0
IAS 12
• Balance sheet method• On temporary differences• Exceptions• Presentation in financial statements and
tax reconciliation required• Scope limited to income taxes• Sales or payroll taxes excluded
IAS 12 – Deferred Tax
IAS 12
• Under IAS 12, deferred tax arises on differences between
• the carrying amount of assets and liabilities in the balance sheet, and
• the tax base of the assets and liabilities
• Balance sheet approach, therefore differs from FRS 19 (which is a P&L based approach). A tax balance sheet is calculated
• Carrying amount is the amount per balance sheet
• Gives a true reflection of future tax consequences of assets and liabilities
• DT is to be provided on all revaluations
IAS 12 – Deferred Tax
• Focuses on concept of “temporary differences”
• Differences between the carrying amount of an asset or liability in the balance sheet and its tax base
• Temporary differences include all timing differences and some permanent differences
Summary T Accounts
Tax Account Opening provision 1/1/2011
Paid/Refunded 2011
P&L Charge/(credit) 2011
Closing B/S Current Tax Provision 31/12/2011
Current Tax € € € €
Prior period 2010
3,000 (3,000)
2011 (31,725) 35,250 3,525 Cr Bal Sheet
Current Tax Total
3,000 (34,725) 35,250
Deferred Tax
Prior period 2010
(1,650) 150 (1,500) B/S provision
Total P&L 35,400
IAS 12 – Deferred Tax
Example 1
Asset cost €5,000
Capital allowances of €1,000 claimed to dateDepreciation charged to date of €500Revenue generated by using the asset (i.e. recovering the carrying amount of the machine) and any gain or loss on disposal is taxable
What is the tax base of the machine?
IAS 12 – Deferred Tax
Example 1
Tax base = future deductible amount = 4,000
The tax base of the machine is:
Carrying amount 4,500
Less: taxable amounts - 4,500
Plus: deductible amounts + 4,000
Tax base = 4,000
IAS 12 – Deferred Tax
Example 2
A company has pensions prepaid at year end of €2,000. For tax purposes, a deduction can be claimed for pension payments on a paid basis.
What is the tax base of the prepaid pension?
IAS 12 – Deferred Tax
Example 2
Tax base = future deductible amount = Nil
The tax base of the pension is:
Carrying amount 2,000
Less: taxable amounts – 2,000
Plus: deductible amounts + 0
Tax base = Nil
IAS 12 – Deferred Tax
Tax base of liability
• Tax base of a liability is its carrying amount, less any amount that will be deductible for tax in future periods
• In the case of revenue received in advance (rather than an actual liability), the tax base is its carrying amount, less any amount of the revenue which will not be taxable in future
• Carrying amount – future deductible amount + future taxable amount
IAS 12 – Deferred Tax
Example 3
A company has recognises a provision of €5,000 related to the settlement of a legal action suit. The payment is not deductible for tax purposes.
What is the tax base of the provision?
IAS 12 – Deferred Tax
Example
Tax base = carrying amount – future deductible amount
= €5,000 – Nil = €5,000
The tax base of the provision is:
Carrying amount €5,000
Less: deductible amounts – 0
Plus: taxable amounts + 0
Tax base = €5,000
Balance sheet liability method to calculate deferred tax:
Carrying amount of asset / liability X
Tax base of asset / liability (X)
Temporary difference X
Apply applicable tax rate X%
Deferred tax asset / liability X
IAS 12 – Deferred Tax
Deferred tax
Deferred tax calculation for earlier examples
1 2 3
Carrying amount of asset/liability 4,500 2,000 5,000
Tax base of asset/liability 4,000 Nil 5,000
Temporary difference 500 2,000 Nil
@ applicable tax rate 12.5% 12.5% 12.5%
Deferred tax asset/(liability) (62.5) (250) Nil
Total deferred tax asset/(liability) (312.5)
Recognition of deferred tax liabilities and assets
Liabilities
• IAS 12 requires that a deferred tax liability should be recognised for all taxable temporary differences except to the extent they arise from
• initial recognition of goodwill
• initial recognition of an asset or liability in a transaction which affects neither accounting profit nor taxable profit
• Deferred tax liabilities also to be recognised on investments in subsidiaries, branches, etc, unless:
• parent can control timing of reversal of temporary differences, and
• probable that temporary difference will not reverse in the foreseeable future
Assets
• IAS 12 requires that a deferred tax asset should be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available, unless the DTA arises from the initial recognition of an asset or liability in a transaction which affects neither accounting profit nor taxable profit
• Deferred tax assets also to be recognised on investments in subsidiaries, branches, etc, but only if it is probable that temporary differences will reverse and taxable profit is available in future
• As a tax advisor you quantify the deferred tax asset. The recognition of the asset should be decided by the client and audit colleagues.
Recognition of deferred tax liabilities and assets
Reporting requirements
• Summary comparison– IFRS v GAAP 3.6.6 table– Which companies under each?
• Current tax and Deferred tax– Difference in disclosure requirements– Share based remuneration
Tax Reconciliation
• FRS 16 – reconcile current tax charge• IAS 12 - reconcile total tax charge
– Current + deferred tax v theoretical tax on profits
Tax Reconciliation
• FRS 16 Tax Reconciliation Note• Disclosure note• Reconcile current tax charge/credit on
ordinary activities in P&L to expected tax charge on ordinary activities
• Monetary amounts or % of profits• IAS 16 disclosure
Reconciliation of tax charge
• Remember:
Financial profits ≠ taxable profits• Therefore:
Financial profits @ 12.5% ≠ tax charge• Difference explained/reconciled in the
financial statements
Reconciliation of tax charge
Common examples of reconciling items include:• Income taxed at higher or lower rates• Irrecoverable taxes written off • Expense items not deductible for tax purposes• Exempt income or gains• Items only allowed as a tax deduction on a paid
basis• Transitional adjustments due to adoption of
IFRS• Losses carried forward
Reconciliation of tax charge
Under/over provisions • An under-provision is where the corporation tax
charge in a prior period financial accounts was less than the corporation tax actually due for the period – an adjustment is required to reflect the additional tax paid
• An over-provision is where the prior period corporation tax charge was more than the corporation tax actually due
• Adjustment to current year tax charge required
Reconciliation of tax charge
Guide to reconciliation:
1.Calculate the expected tax per the financial statements i.e. profit/(loss) before tax @ tax rate (eg 12.5%)
2. Identify the current corporation tax charge for the year per the corporation tax computation (this is what you are reconciling to)
3.Adjust expected tax charge under sample headings on next slide to take account of tax effect
Reconciliation of tax charge
Profit before tax per accounts X
Tax at the standard rate (12.5%) X
Adjusted for the effect of:
Expenses not deductible X
Tax expenses
Income not taxable X
Income taxable at a higher rate X
Prior year (over)/under provision X
Total tax X
Reconciliation of tax charge
• Corporation tax charge in the P&L excludes: – Irish withholding taxes suffered i.e. DIRT, PSWT– Irish withholding taxes payable i.e. DWT, TRS– but includes foreign tax credits
• Foreign tax (i.e. foreign tax payable on foreign branch profits and foreign WHT on foreign income) should be separately identified as a corporation tax charge in the P&L
Reconciliation of tax charge
• Withholding taxes suffered (i.e. DIRT, PSWT) will be claimed as a credit against the corporation tax liability for the period
• The corporation tax charge in the P&L should be the gross corporation tax payable for the period i.e. before credit for DIRT and PSWT
• These credits should be treated as payments on account in the corporation tax account
Reconciliation of tax charge
• Foreign taxes payable include:– Foreign tax on profits of a foreign branch– Foreign withholding tax suffered on foreign
dividends/interest/royalties received
Reconciliation of tax charge
• Foreign tax on profits of a foreign branch– A foreign tax charge should be separately
identified, for the foreign tax on income from a foreign branch, under the corporation tax charge in the P&L for the period
– The Irish corporation tax charge should also reflect any credit for the foreign tax (i.e. the Irish CT charge should be net of FTC). The Irish corporation tax charge should be disclosed before and after double tax relief.
Reconciliation of tax charge
• Foreign withholding tax on foreign dividends/interest/royalties received
• A foreign tax charge should be separately identified for the foreign withholding tax under the corporation tax charge in the P&L for the period
• The Irish corporation tax charge should also reflect any credit for the foreign tax (i.e. the Irish CT charge should be net of FTC). The Irish corporation tax charge should be disclosed before and after double tax relief.
US GAAP
• FIN 48 – US GAAP Accounting• Companies with US parent• FASB• 50% change of success for tax benefit• Assume examined by tax authorities and
highest court
Income Tax
• Unincorporated business• Information gaps• No requirement to use Irish GAAP or
IFRS• Key consideration is completeness• All income sources• Abridged tax reconciliation
Income Tax
• Sole trade or partnership accounts• Profit and Loss account• Capital account
– Drawings, income tax, pension, capital introduced
• Accounting software • DIRT, PSWT, RCT, DWT – capital account• Form 1 Firms
Capital Gains Tax
• CGT rules – difference in carrying value and tax base of assets
• Consolidated deferred tax ≠ sum of entity DT
• Impact of inter-group transactions• Disposals between connected persons• Group relief – IAS 12• Temporary difference • Where DT provided no difference in tax
reconciliation
Capital Gains Tax
• Disposals to and from trading stock• Carrying value and tax base• Sec 596 TCA 1997• Capital to trading stock treated as CGT
disposal• DT should be provided on taxable
temporary differences
Capital Gains Tax
• Group financial statements• Inter-group profits/losses on transactions
between same company groups are eliminated on reconciliation
• Temporary and permanent differences arise
• Impact at company level• Impact at consolidation level
VAT
• Is the business VAT registered?• NO – VAT forms part of cost of items• Reverse charges – obligation to register
for Intra Community acquisitions• YES – Account separately for VAT• VAT nominal accounts• Reconcile VAT per returns with accounts
sales and purchases
VAT
• Identify Irrecoverable VAT• Sec 60(2) VATCA 2010
– Entertainment, food ,drink, petrol etc
• Recovery entitlement of < 100%• Annual review for dual use inputs• Accounting for under/over recovery• Cash receipts v invoice basis
VAT
• Check changes in VAT rates – accounting packages
• VAT Rate Index on www.revenue.ie• Zero v Exempt classifications• Foreign VAT – separate nominal ledger• Reclaiming foreign VAT - EVR
Capital Acquisitions Tax• Valuation of assets• Tax liabilities to date of death• Administration period – income tax• Estate Accounts
– Valuation of assets at date of death– Income/gains/losses during administration period– Debts including taxes– Funeral expenses– Expenses– Legacies– Final distribution Account
Module Round Up
• On completion of this module, students should be able to: – analyse the financial statements and management
accounts to extract tax information; – demonstrate how international financial reporting
standards interact with tax law;– Calculate accounting provisions for current and
deferred tax under FRS 19 and IAS 12– Reconcile expected and actual tax charges under
FRS 16 and IAS 12– Prepare tax note for disclosure under Irish GAAP
and IFRS