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In a question of BPP, with respect to Deferred tax it is given as follows:-
“Income tax of $165M on the profit on disposal of a property in 2010 is to be paid in 2014 under the deferral relief provisions of the tax laws of the country” 30% is the taxation rate given
The solution provided in the text treated this item as temporary difference of $550 (165/.30) and included in the Deferred Tax laibility.
I do not understand the logic behind this. My proposition is that as the Tax amount is exactly given and the time to pay the same is also cleared mentioned, it is to be treated as Non current liability and to be discounted with applicable discount rate. Because if it is included this as differed tax liablity, any subsequent change in tax rate happens , the amount of liablity for tax will change accordingly which is quite illogical.
Looking for your valid coment, as I want to assess myself the understanding the Deferred tax which is most complex topic
To be more clear :- Why we can not treat the item as FINANCIAL LIABILITY ” rather than as Deferred tax ?
Hi,
We have deferred tax as there is a difference in the amount that is in our accounts and what the tax authorities would record. In our accounts we have an obligation to the tax authorities to pay the tax on the disposal in 2014, however there would not be anything recorded in the tax accounts as it will only be recognised on a cash payments basis. We therefore have a temporary difference, which gives a deferred tax liability as the carrying value is greater than the tax base.
If there are any changes in the tax rate, which isn’t alluded to in the question, nor would it have an impact as the amount has been calculated already it is just a delay in the payment, then this would be dealt with prospectively.
There is also no longer any provision to discount deferred tax liabilities in IAS 12.
Thanks
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