Corporate Income Tax

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

Corporate Income Tax

LESSON 5

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

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

Corporate income tax (CIT)

=

Impuesto de sociedades (IS)

“

Tributo de carácter directo y naturaleza

personal cuyo hecho imponible se

corresponde con la obtención de renta por

parte de las sociedades”

Introduction

Corporate income tax (CIT)

Introduction

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

texto refundido de la

Ley del IS

R.D. 1777/2004 por

el que se aprueba el

Reglamento del IS

Different goals

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

The Tax Return

(

Declaración del IS)

is filed with

the Tax Agency

(

Agencia tributaria

) to determine

how much tax the firm must pay to the government.

Accounting income and

taxable income

The

income statement

reports

the results of operations.

http://www.aeat.es/

Income before taxes

is reported in the

Income Statement according to

Generally

Accepted Accounting Principles

(GAAP).

Taxable income

of a corporation is

determined according to the

tax laws

.

They are often different because:

Tax laws

≠

GAAP

taxable income

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

Due to 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

taxable income

Tax return

(Declaración del I.S.)

Tax

Taxable

Income

AIBT

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

Accounting Income

before taxes

(Resultado contable)

Taxable Income

(Base imponible)

≠

Tax expense/revenue

and tax payable/receivable

Tax expense/revenue

Æ

Income Statement

(Gasto/ingreso por IS)

Tax payable/receivable

Æ

Balance Sheet

(Impuesto a pagar/devolver)

≠

Tax expense/revenue

The tax expense/revenue has two components:

Expense/Revenue for

Deferred Tax

Expense/Revenue for

Current Tax

Appears because of transactions

that affect the

amount of tax that

has to be paid this year

that affect the

amount of tax that

has to be paid in the future

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

Tax expense/revenue

Expense/Revenue for Deferred Tax (DT)

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 for DT = ∆Liability for Deferred Tax + ∇Asset for Deferred Tax

∇Liability for Deferred Tax + ∆Asset for Deferred Tax = Revenue for DT

Tax expense/revenue

Registration of the tax expense/revenue, is made based on the origin of the transaction: (630) Income tax = (6300) Current tax + (6301) Deferred tax Income tax expense/ revenue in the Income

Will affect the Equity account

In Income for the year:

(6301) Deferred tax

Debit (expense) or credit (revenue)

Exp/Rev for Deferred Tax

Will affect the Equity account

In Income for the year:

(6300) Current tax

Debit (expense) or credit (revenue)

Exp/Rev for Current Tax

Transactions that are recognized directly in Equity

Transactions that are recognized in Income for the year

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

Current tax (6300)

Amount that the company pays as a result of the tax

return that is filed with the Tax Agency

Current

Tax

Taxable

income

(from

the Tax Return)

Income

tax

rate

=

×

Current tax (6300)

How does the payment of the income tax works?

a) During the year

Æ

Withholdings and payments on account.

During the year, the company has to make

payments on account

of the income tax that will have to 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 to pay as a result of the tax return

Æ

An asset arises:

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

a) During the year

Æ

Withholdings and payments on account.

Payments on account

Withholdings

Current tax (6300)

(570) Cash to

(473) Tax asset for withholdings and payments on account

(545) Dividend receivable (570) Cash

(473) Tax asset for withholdings and payments on account

(76) Revenues from holdings in equity instruments

(545) Dividend receivable

Current tax (6300)

b) At the end of the year

Æ

Tax return is filed

The income tax payable or the income tax overpayment will be

obtained:

Income tax payable

Æ

Liability for current tax

(4752) Tax liability for the income tax

Income tax overpayment

Æ

Asset for current tax

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

= CUOTA DIFERENCIAL (A PAGAR O A DEVOLVER) (+/-)

- Retenciones y pagos a cuenta = Cuota líquida

- Deducciones y bonificaciones = Cuota íntegra

* Tipo de gravamen = Base imponible

- Bases imponibles negativas de ejercicios anteriores

= Base imponible previa Resultado contable antes de impuestos

LIQUIDACIÓN DEL IMPUESTO

DE SOCIEDADES

= INCOME TAX PAYABLE / OVERPAYMENT (+/-)

- Withholdings & payments on account

= Tax due

- Deductions & discounts

= Total tax

* Income tax rate

= Taxable income

- Negative taxable income from previous years

= Preliminary taxable income

+/- Adjustments

Income before taxes

INCOME TAX RETURN

= Tax due

= Total tax

* Income tax rate

= Taxable income (TI)

+/- Adjustments

INCOME TAX RETURN

If preliminary TI > 0 and enough

If TI > 0

If Total tax > 0 and enough

Total amount that the

company pays

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

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%

2,390 (460) 2,850 (150) 3,000 0.30 10,000 10,000 10,000

= Tax due

= Total tax

* Income tax rate

+/- Adjustments

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Current tax (6300)

Example:

460

2,390 (473) Tax asset for

withholdings and payments on account

(4752) Tax liability for the income tax

to (6300) Current Tax 2,850

∆

Liability for current tax

Expense for current tax

∇Asset for current tax

Current tax (6300)

Example:

• Accounting income before taxes = Taxable income = 1,000

• Tax rate = 30%

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

(310) (460) 150 (150) 300 0.30 1,000 1,000 1,000

= INCOME TAX PAYABLE / OVERPAYMENT (+/-)

= Tax due

= Total tax

* Income tax rate

+/- Adjustments

INCOME TAX RETURN

Current tax (6300)

Example:

460 (473) Tax asset for

to (6300) Current Tax (4709) Tax asset for tax overpayment 150

310

∇

Asset for current tax =

460-310= 150

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

Current tax (6300)

Example:

• Accounting income before taxes = Taxable income = (100)

• Tax rate = 30%

(460) (460) 0 -0 0.30 (100) (100) (100)

= Tax due

= Total tax

* Income tax rate

+/- Adjustments

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Current tax (6300)

Example:

460 (473) Tax asset for

to (4709) Tax asset for tax overpayment 460

Asset for current tax

Current tax (6300)

Calculation of Taxable Income

Income before taxes

-

Expenses

Revenues

Income before taxes

(GAAP)

Taxable Income

(Tax laws)

≠

Revenues &

expenses under

GAAP

Revenues &

expenses according

to tax laws

≠

Taxable income

-

Deductible expenses

Computable revenues

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

Current tax (6300)

= Taxable income

+/- Adjustments

Income before taxes

(+) The company will pay

MORE tax this year

(-) The company will pay

LESS tax this year

Current tax (6300)

Æ

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

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

Current tax (6300)

Æ

ADJUSTMENTS

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

• certain expenses are recognized directly in equity, but are

deductible in the calculation of taxable income (e.g. in a capital

increase)

Permanent

differences

Permanent differences

Positive difference

DP(+)

Negative difference

DP(-)

e.g. We have an accounting expensethat is not deductiblein the taxable income

ÆWhich adjustment is necessary to make to the Income before taxes?

Taxable

income

Income

before

taxes

>

e.g. We have an accounting revenuethat is not computablein the taxable income

Taxable

income

Income

before

taxes

<

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

Permanent differences

Positive difference DP(+)

Negative difference DP(-)

Non-deductible expenses

Æ

art. 14 Ley IS:

• Multas y sanciones penales y administrativas

• Pérdidas del juego

• Donativos y liberalidades (

sí son deducibles los gastos de relaciones públicas

)

Non-computable revenues:

•

Art. 22: rentas obtenidas en el extranjero procedentes de la realización de actividades empresariales a traves de un establecimiento permanente

.

= Tax due

= Total tax

* Income tax rate

+/- Adjustments (Permanent differences)

CALCULATION OF

INCOME TAX PAYABLE

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

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

• Tax rate = 30%

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.

None Higher payment: 0.30*1,000= 300 + 1,000 (Positive adjustment) -1,000 0 Penalty Deferred effect Effect this year Difference (TE – AE) Accounting Expense Tax Expense

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

3,950 (250) 4,200 (600) 4,800 0.30 16,000 16,000 + 1,000 15,000

2008

= INCOME TAX PAYABLE / OVERPAYMENT (+/-)

= Tax due

= Total tax

* Income tax rate

+/- Adjustments

INCOME TAX RETURN

Current tax (6300)

Example:

250

3,950 (473) Tax asset for

to (6300) Current Tax 4,200

Liability for current tax

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

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 to the tax laws.

• Withholdings and payments on account = 200

• Tax rate = 30%

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 to the tax laws.

None Lower payment: 0.30* - 600= - 180 - 600 (Negative adjustment) 600 0 Penalty Deferred effect Effect this year Difference (TR – AR) Accounting Revenue Tax Revenue

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

5,020 (200) 5,220 (600) 5,820 0.30 19,400 19,400 (600) 20,000

2009

= INCOME TAX PAYABLE / OVERPAYMENT (+/-)

= Tax due

= Total tax

* Income tax rate

+/- Adjustments

INCOME TAX RETURN

Current tax (6300)

Example:

200

5,020 (473) Tax asset for

to (6300) Current Tax 5,220

Liability for current tax

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

Current tax (6300)

Æ

ADJUSTMENTS

There are two types of adjustments:

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

Current tax (6300)

Æ

ADJUSTMENTS

transactions that affect past or future years

Æ

These determine the

Æ

Expense/Revenue for

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

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 for DT = ∆Liability for Deferred Tax + ∇Asset for Deferred Tax

Deferred tax (6301)

Temporary

differences

Deferred tax assets

and

Deferred tax

liabilities

appear as a result of:

Unused tax losses

Taxable TD or Deductible TD

Right to compensate negative

taxable income from previous

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

Deferred tax (6301)

Temporary

differences

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 (to

be transferred to 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).

Deferred tax (6301)

Taxable

temporary

differences

Will result in a higher tax payment in the future

Æ

Deferred tax liability

Deductible

temporary

differences

Will result in a lower tax payment in the future

Æ

Deferred tax asset

There are two types of Temporary Differences:

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

Deferred tax (6301)

Deferred tax

liability

Obligation to pay more tax in the future

ÆAll derive from taxable temporary differences

(479) Tax liability for taxable temporary differences

Deferred tax

asset

Right to pay less tax in the future

ÆDerive from:

Deductible temporary differences

(4740) Tax asset for deductible temporary differences

Right to compensate negative taxable income

(4745) Tax asset for compensation of losses of exercise …

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

Æ

Temporal

differences

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009 = INCOME TAX PAYABLE /

OVERPAYMENT (+/-)

= Tax due

= Total tax

* Income tax rate

+/- Adjustments (Temporal differences)

CALCULATION OF

INCOME TAX PAYABLE

Temporal differences

Positive difference

TD(+)

Negative difference

TD(-)

e.g. We have an accounting expensethat is not deductiblein the taxable income until the next year

Taxable

income

Income

before

taxes

>

e.g. The deductible expenseis higher thanthe accounting expense

this year, because the deductible expense will be lower next year.

Taxable

income

Income

before

taxes

<

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

Example:

Depreciation expense for an asset

Art. 11 Ley IS:

“serán

deducibles

las cantidades que en

concepto de

amortización del inmovilizado

material e

inmaterial, correspondan a la

depreciación efectiva

que

sufran los distintos elementos por funcionamiento, use,

disfrute u obsolescencia”.

Depreciación efectiva

Æ

“la resultante de aplicar los

coeficientes de amortización lineal establecidos en las

Tablas de amortización

oficialmente aprobadas”.

http://noticias.juridicas.com/base_datos/Fiscal/rd1777-2004.t7.html#anexo

Example:

Depreciation expense for an asset

Machinery = 12.000 € Useful life = 6 years

Depreciation period for tax calculation = 3 years

0 +2,000 +2,000 +2,000 (2,000) (2,000) (2,000) DIFFERENCE (12,000) 0 0 0 (4,000) (4,000) (4,000) Deductible expense (12,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) Accounting expense Total 6 5 4 3 2 1 Year

Taxable income

<

Income before taxes

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

0 +2,000 +2,000 +2,000 (2,000) (2,000) (2,000) DIFFERENCE (12,000) 0 0 0 (4,000) (4,000) (4,000) Deductible expense (12,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) Accounting expense Total 6 5 4 3 2 1 Year

The difference that was

negative

in years 1, 2 and 3,

reverse or turn around

in years 4, 5 and 6

Æ

the difference is now

positive

.

This is the

reversion of temporal differences

.

DT (+) DT (-) DT (-) DT (-) DT (+) DT (+)

Complies with the obligation to pay more

∇Deferred tax liability Æ

Revenue for DT Pays more: 0.30*2,000 ∆Expense for Current tax + 2,000 Reversion (2,000) 5

Obligation to pay more in the future

∆Deferred tax liabilityÆ

Expense for DT Pays less: 0.30*(2,000) ∇ Expense for Current tax (2,000) Taxable TD (2,000) (4,000) 2

Expense for DT Pays less: 0.30*(2,000) ∇ Expense for Current tax (2,000) Taxable TD (2,000) (4,000) 3

Complies with the obligation to pay more

∇Deferred tax liability Æ

Revenue for DT Pays more: 0.30*2,000 ∆Expense for Current tax + 2,000 Reversion (2,000) 4

Expense for Deferred Tax

Pays less: 0.30*(2,000) ∇ Expense for Current tax (2,000) Taxable TD (2,000) (4,000) 1

Complies with the obligation to pay more Pays more: + 2,000 (2,000) 6 Deferred effect Effect this year

Difference (TE – AE) Accounting Expense Tax Expense Year

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3,150 3,150 3,150 0.30 10,500 10,500 10,500

2

3,300 3,300 3,300 0.30 11,000 11,000 11,000

3

3,450 3,450 3,450 0.30 11,500 11,500 11,500

4

3,600 3,600 3,600 0.30 12,000 12,000 12,000

5

3,000 3,000 3,000 0.30 10,000 10,000 10,000

1

3,750 3,750 3,750 0.30 12,500 12,500 12,500

6

= INCOME TAX PAYABLE / OVERPAYMENT (+/-)

= Tax due

= Total tax

* Income tax rate

+/- Temporary differences +/- Permanent differences

INCOME TAX RETURN

Without any temporal differenceÆtotal payment over the 6 years = Σtax due = 20,250

2,550 2,550 2,550 0.30 8,500 8,500 (2,000) 10,500

2

2,700 2,700 2,700 0.30 9,000 9,000 (2,000) 11,000

3

4,050 4,050 4,050 0.30 13,500 13,500 +2,000 11,500

4

4,200 4,200 4,200 0.30 14,000 14,000 +2,000 12,000

5

2,400 2,400 2,400 0.30 8,000 8,000 (2,000) 10,000

1

4,350 4,350 4,350 0.30 14,500 14,500 +2,000 12,500

6

= Tax due

= Total tax

* Income tax rate

+/- Temporary differences +/- Permanent differences

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59

Temporal differences

Current tax

600 (479) Tax liability for taxable temporary differences to (6301) Deferred Tax 600

Deferred tax

2,400 (4752) Tax liability for

the income tax to

(6300) Current Tax 2,400

Year 1:

Tax expense = Current tax + Deferred tax = - 2,400 - 600 = - 3,000

Temporal differences

Current tax

600 (479) Tax liability for taxable temporary differences to (6301) Deferred Tax 600

Deferred tax

the income tax to

(6300) Current Tax 2,550

Year 2:

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61

Temporal differences

Current tax

600 (479) Tax liability for taxable temporary differences to (6301) Deferred Tax 600

Deferred tax

the income tax to

(6300) Current Tax 2,700

Year 3:

Temporal differences

Current tax

600 (6301) Deferred Tax

to (479) Tax liability for taxable temporary differences 600

Deferred tax

4,050 (4752) Tax liability for

the income tax to

(6300) Current Tax 4,050

Year 4:

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Temporal differences

Current tax

600 (6301) Deferred Tax

Deferred tax

4,200 (4752) Tax liability for

(6300) Current Tax 4,200

Year 5:

Tax expense = Current tax + Deferred tax = - 4,200 + 600 = - 3,600

Temporal differences

Current tax

600 (6301) Deferred Tax

Deferred tax

4,350 (4752) Tax liability for

(6300) Current Tax 4,350

Year 6:

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65

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 total 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 total

amount of taxes paid does not change. Only the timing of the payment

of taxes is affected.

• Since temporary differences reverse in later years

Æ

they do not

change the total amount of taxable income over the life of a business.

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.

0

(3,000)

+3,000

DIFFERENCE

0

Taxable

0

+3,000

(3,000)

Accounting

Total

2

1

Year

Taxable income

>

Income before taxes

Æ

we are anticipating the payment of taxes

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Financial Accounting 08/09 2ºDE – LESSON 5 © Mª Cristina Abad Navarro, 2009

Temporal differences

Applies the right to pay less in the future

∇Deferred tax asset

ÆExpense for DT Pays less: 0.30*(3,000) = (900) ∇Current tax (3,000) Reversion +3,000 0 2

Right to pay less in the future

∆Deferred tax asset

ÆRevenue for deferred tax Pays more: 0.30*3,000 = 900 ∆Current tax +3,000 Deductible TD (3,000) 0 1 Deferred effect Effect this year

Difference (TE – AE) Accounting Exp/Rev Tax Exp/Rev Year 3,150 3,150 3,150 0.30 10,500 10,500 10,500

2

3,000 3,000 3,000 0.30 10,000 10,000 10,000

1

= INCOME TAX PAYABLE / OVERPAYMENT (+/-)

= Tax due

= Total tax

* Income tax rate

+/- Adjustments

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69

2,250 2,250 2,250 0.30 7,500 7,500 (3,000) 10,500

2

3,900 3,900 3,900 0.30 13,000 13,000 +3,000 10,000

1

= INCOME TAX PAYABLE / OVERPAYMENT (+/-)

= Tax due

= Total tax

* Income tax rate

+/- Adjustments

INCOME TAX RETURN

Current tax

900 (6301) Deferred Tax

to (4740) Tax asset for deductible temporary differences

900

Deferred tax

3,900 (4752) Tax liability for

(6300) Current Tax 3,900

Year 1:

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71

Temporal differences

Current tax

900 (4740) Tax asset for

deductible temporary differences to (6301) Deferred Tax 900

Deferred tax

the income tax to

(6300) Current Tax 2,250

Year 2:

Deferred tax (6301)

Expense for DT = ∆Liability for Deferred Tax + ∇Asset for Deferred Tax

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Deferred tax (6301)

Temporary

differences

Deferred tax assets

and

Deferred tax

liabilities

Unused tax losses

years

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 to compensate or take

away the negative taxable income from the positive

taxable income that the company earns in the

following 15 years.

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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

to be negative.

= Preliminary taxable income

< 0

+/- Adjustments

Income before taxes

> 0

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

Æ

Taxable income

can not become negative after

subtracting the

negative taxable income from

previous years

(39)

77

= Tax due

= Total tax

* Income tax rate

(

≥

0 )

+/- Adjustments

CALCULATION OF

INCOME TAX PAYABLE

Negative taxable income

When the company has a

negative taxable income

one year, the company has the

right to compensate

or take away the negative taxable income from the

positive taxable income that the company earns in the

following 15 years.

(4745) Tax asset for the compensation of losses

(40)

79

Tax asset for the compensation

of losses

(4745) Tax asset for the compensation of losses

In order to be allowed to 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 impuesto diferido en la medida en

que resulte probable que la empresa disponga de ganancias

fiscales futuras que permitan la aplicación de estos activos

”.

Æ

The same applies for the Tax assets for

deductible temporary differences

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 previsto (15

años)”.

Tax asset for the

compensation of losses

(41)

81

CALCULATION OF

INCOME TAX PAYABLE

= INCOME TAX OVERPAYMENT

= Tax due

= Total tax < 0

* Income tax rate

= Taxable income

< 0

+/- Adjustments

Tax asset for the

Example:

• Accounting income before taxes = Taxable income = (100)

• Tax rate = 30%

(42)

83

(460) (460) 0 -(30) 0.30 (100) (100) (100)

= INCOME TAX PAYABLE / OVERPAYMENT (+/-)

= Tax due

= Total tax

* Income tax rate

+/- Adjustments

INCOME TAX RETURN

Current tax

Deferred tax (if the conditions are met)

460 (473) Tax asset for

to (4709) Tax asset for tax overpayment 460

30 (6301) Deferred tax

to (4745) Tax asset for the compensation of losses

30

Asset for current tax

Tax asset for the

(43)

85

Tax asset for the

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% (3,000) (3,000) 0 -(15,000) 0.30 (50,000) 0 (50,000) (50,000)

X1

(2,000) (2,000) 0 0 0 (10,000) 10,000 10,000

X2

= INCOME TAX PAYABLE / OVERPAYMENT (+/-)

= Tax due

= Total tax

* Income tax rate

+/- Adjustments

(44)

87

Year X1

Current tax

3,000 (473) Tax asset for

to (4709) Tax asset for tax overpayment 3,000

15,000 (6301) Deferred tax

to (4745) Tax asset for the compensation of losses

15,000

Tax asset for the

Tax expense = Current tax + Deferred tax = 0 + 15,000 = + 15,000

Year X2

Current tax

2,000 (473) Tax asset for

to (4709) Tax asset for tax overpayment 2,000

3,000 (4745) Tax asset for the

compensation of losses to

(6301) Deferred tax 3,000

Tax asset for the

(45)

89

Tax expense/revenue

The tax expense/revenue has two components:

Expense/Revenue for

Deferred Tax

Expense/Revenue for

Current Tax

that affect the

amount of tax that

has to be paid this year

that affect the

amount of tax that

has to be paid in the future

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 for DT = ∆Liability for Deferred Tax + ∇Asset for Deferred Tax

(46)

91

Deferred tax (6301)

Expense for DT = ∆Liability for Deferred Tax + ∇Asset for Deferred Tax

Deferred tax (6301)

Temporary

differences

Deferred tax assets

and

Deferred tax

liabilities

Unused tax losses

(47)

93

Deferred tax (6301)

Temporary

differences

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 (to

be transferred to 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).

Deferred tax (6301)

Revenues and expenses registered directly in equity

When will group 9 revenues be computable and group 8 expenses

be deductible?

Revenues

(group 9)

Expenses

(group 8)

They are registered in Equity to be transferred to Incomein a later year

as a group 7 revenue

They are registered in Equity to be transferred to Incomein a later year

(48)

95

They are registered in Equity to be transferred to Incomein a later year as a group 7 revenue.

Obligation to pay more tax in the future: 0.30 * Revenue (G.9) Æ

Expense for DT (G.8) = ∆Liability for Deferred Tax

(8301) Deferred tax to (479) Tax liability for taxable TD

When the revenue istransferred to the income statement:

The obligation to 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 to (8301) Deferred Tax

Revenues registered directly in equity (Group 9)

They are registered in Equity to be transferred to Incomein a later year as a group 6 expense.

Right to pay less tax in the future: 0.30 * Expense (G.8) Æ

∆Asset for Deferred Tax = Revenue for DT (G.8)

(4740) Tax asset for deductible TD to (8301) Deferred tax

When the expense istransferred to the income statement:

The rigth to pay less is cancelled: 0.30 * Transfer of Expenses (G.9)

Expense for DT (G.8) = ∇Asset for Deferred Tax

(49)

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) ÆRecognition:

(800) Losses from available for sale financial assets

to (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

to (900) Profits from available for sale financial assets

(8301) Deferred tax

(130) Official capital grants

to (940) Revenues of official capital grants

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) ÆTransfer:

(8301) Deferred tax

(133) Adjustments for change

to (902) Transfer of losses from available for sale financial assets

(802) Transfer of profits from available for sale financial assets to

(8301) Deferred tax

(133) Adjustments for change in value of available for sale financial assets

(840) Transfers of official capital grants

to (8301) Deferred tax

(50)

99

INFORMATION REPORTED

ON THE ANNUAL

ACCOUNTS

Income from continuing operations (Profits /

Losses)

- Corporate Income Tax

A + B = Income (Losses) Before Taxes

= Financial Income (Loss)

(B)

Financial revenues – Financial expenses

= Operating Income (Loss)

(A)

Operating revenues – Operating expenses

Income statement

(51)

101

Balance Sheet

B) Current assets

III. Trade accounts receivables and other receivables

1. Trade acc. receivables for sale & s. …

5. Assets for current tax. …

A) Non-current assets I. Intangible assets …

VI. Deferred tax assets

ASSETS

C) Current liabilities

V. Trade accounts payable and other payable.

1. Trade accounts payable for purchases and services.

…

5. Liability for current tax. …

A) Equity

B) Non-current liabilities I. Long-term provisions. …

IV. Deferred tax liability. …