ENQUIRY

Through the Finance Act, 2015 the rate of tax for companies have been reduced to 32% for 2015-2016, 31% for 2016-2017 and 30% for 2017-2018 and onward.

Keeping in view the requirements of IAS 12 “Income Taxes” and also the recommendation of committees (published in selected opinions dated 10 September 2014) our understanding is that to determine the deferred tax liability of the company as on 30 June 2015 the tax rate of 32% will apply for the temporary differences that will be reversing in the year 2016 and 31% will apply on temporary differences that will be reversing in 2017 and 30% on the temporary differences that will be reversing in 2018 and onward.

On practical grounds it seems impossible for a company to determine (as on 30 June 2015) that how much temporary differences will be reversing in year 2016, 2017 and 2018 onwards because there are many variables that are not predictable are involved to determine the value of these temporary differences.

Please guide us how a company that is preparing its financial statements in accordance with IASs can comply with the requirements of IAS 12 and how the deferred tax liability can be calculated?

COMMITTEE’S VIEWS

The Committee would like to draw your attention to the following paragraphs of IAS 12 ‘Income Taxes’:

15 A deferred tax liability shall be recognized for all taxable temporary differences, except to the extent that the deferred tax liability arises from:

(a) the initial recognition of goodwill; or

(b) 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).

47  Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

51  The measurement of deferred tax liabilities and deferred tax assets shall reflect the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

51A In some jurisdictions, the manner in which an entity recovers (settles) the carrying amount of an asset (liability) may affect either or both of:

a. the tax rate applicable when the entity recovers (settles) the carrying amount of the asset (liability); and
b. the tax base of the asset (liability).

In such cases, an entity measures deferred tax liabilities and deferred tax assets using the tax rate and the tax base that are consistent with the expected manner of recovery or settlement.

IAS 12 states that deferred tax assets and liabilities should be measured based on the tax rates that are expected to apply when the asset/liability will be realised/ settled.

Illustrative Example (IE) No. 2 that accompanies to IAS 12 shows detailed calculation of deferred tax assets and liabilities and illustrative disclosure of its major components.

The Committee is of the view that the ICAP opinion you referred to in your query is self-explanatory and does not need further clarification on the matter.