Income tax

Income tax – by law, but with a lot of different perks dependent on the country one pays its taxes, businesses and individuals must file federal and state income tax returns every year to determine whether they owe taxes.

Its two basic types are:

  1. Personal income tax, levied on incomes of individuals, households, partnerships, and sole-proprietorships; and
  2. Corporation income tax, levied on profits (net earnings) of incorporated firms.

However, presence of tax loopholes (whose number increases in direct proportion to the complexity of tax code) may allow some wealthy persons to escape higher taxes without violating the letter of the tax laws. For persons paying their personal income tax in many situations part or whole of the tax liable has already been withheld from their monthly pay check as wage taxes.Income tax

Not all types of income are taxes with income tax. Personal income tax is paid on things like:

  • money earned from employment in a job/several jobs,
  • profits made as a self-employed worker in business – including from services sold through websites or apps
  • some state benefits,
  • most pensions, including state pensions, company and personal pensions and retirement annuities,
  • rental income,
  • income from a trust,
  • interest on savings over a savings allowance.

Note that each country has its own tax system with many very detailed exemptions, imputed income or expense items and all sorts of other features.

Corporate income tax

An assessment levied by a government on the profits of a company. The rate of corporate income tax paid by a business varies between countries, although since corporations are legal entities distinct from their owners and operators, they are typically taxed as if they were people.

Personal income tax

Tax paid on one’s personal income as distinct from the tax paid on the firm’s earnings. In an incorporated firm, the owners (shareholders) pay taxes on both their income (salary or dividend from the firm) firm’s income (profits). In partnerships and sole-ownerships, the tax is paid only once on the firm’s profits.

Something else -   Deferred tax assets

IAS 12 Income tax

IAS 12 Income Taxes implements a so-called ‘comprehensive balance sheet method’ of accounting for income taxes which recognises both the current tax consequences of transactions and events and the future tax consequences of the future recovery or settlement of the carrying amount of an entity’s assets and liabilities. Differences between the carrying amount and tax base of assets and liabilities, and carried forward tax losses and credits, are recognised, with limited exceptions, as deferred tax liabilities or deferred tax assets, with the latter also being subject to a ‘probable profits’ test.

IAS 12 only deals with taxes on income, comprising current tax and deferred tax.

Current tax expense for a period is based on the taxable and deductible amounts that will be shown on the tax return for the current year. An entity recognises a liability in the balance sheet in respect of current tax expense for the current and prior periods to the extent unpaid. It recognises an asset if current tax has been overpaid.

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.

Tax payable based on taxable profit seldom matches the tax expense that might be expected based on pre-tax accounting profit.  Tax laws and financial accounting standards recognise and measure income, expenditure, assets and liabilities in different ways.

Deferred tax accounting seeks to deal with this mismatch. It is based on the temporary differences between the tax base of an asset or liability and its carrying amount in the financial statements.

Something else -   Regulatory Deferral Account

For example, an asset is revalued upwards but not sold, the revaluation creates a temporary difference (if the carrying amount of the asset in the financial statements is greater than the tax base of the asset), and the tax consequence is a deferred tax liability.

Deferred tax is provided in full for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, except when the temporary difference arises from:

  • initial recognition of goodwill (for deferred tax liabilities only);
  • initial recognition of an asset or liability in a transaction that is not a business combination and that affects neither accounting profit nor taxable profit; and
  • investments in subsidiaries, branches, associates and joint ventures, but only where certain criteria apply.

Deferred tax assets and liabilities are 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 balance sheet date. The discounting of deferred tax assets and liabilities is not permitted.

Generally, the measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the entity expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities.

The carrying amount of a non-depreciable asset (eg., land) can only be recovered through sale.. For other assets, the manner in which management expects to recover the asset (that is, through use or through sale or through a combination of both) is considered at each balance sheet date.

Something else -   Recognition

An exception has been introduced for investment property measured using the fair value model in IAS 40, with a rebuttable presumption that such investment property is recovered entirely through sale.

Management only recognises a deferred tax asset for deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. This also applies to deferred tax assets for unused tax losses carried forward.

Current and deferred tax is recognised in profit or loss for the period, unless the tax arises from a business combination or a transaction or event that is recognised outside profit or loss, either in other comprehensive income or directly in equity in the same or different period.

The tax consequences that accompany, for example, a change in tax rates or tax laws, a reassessment of the recoverability of deferred tax assets or a change in the expected manner of recovery of an asset are recognised in profit or loss, except to the extent that they relate to items previously charged or credited outside profit or loss.

General model of measurement of insurance contracts

Income tax

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Something else -   Identified asset

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