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Deferred tax liability

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Deferred tax liability

  • This topic has 3 replies, 2 voices, and was last updated 10 years ago by MikeLittle.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • September 8, 2014 at 6:40 am #194254
    zaca
    Member
    • Topics: 18
    • Replies: 37
    • ☆☆

    Dear Mike,
    Please help me to clear this problem

    Based on the balance sheet data, Berkshire also appears to finance part of its capital expenditure using tax deductions for accelerated depreciation of property, plant and equipment as provided for under the IRS rules. E.g., Berkshire reports $28 Billion of such deferred tax liabilities in 2011 (page 49 of the Annual Report). Accelerating depreciation is similar to an interest-free loan in the sense that (i) Berkshire enjoys a tax saving earlier than it otherwise would have, and (ii) the dollar amount of the tax when it is paid in the future is the same as the earlier savings (i.e. the tax liability does not accrue interest or compound).

    The problem here i got : Using tax deduction for accelerated depreciation just make the accounting profit become small and create a difference between the accounting profit and taxable income.
    in my country tax liability = (taxable income – exempt income – loss carried forward-…)* tax rate
    (tax liability is calculate base on the tax law requirement ), so, you have to pay the tax liability subject to the law, not the tax from accounting profit, why the author said : Berkshire will enjoy a tax saving?

    September 8, 2014 at 8:23 am #194274
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    But surely, that’s the same with any company / organisation that has a deferred tax liability – it’s similar to an interest free loan. The taxman has allowed you to claim capital allowances “early” against the cost of PPE but this will “catch up” with you when you are no longer spending large amount s on new PPE.

    I would take issue with you about the applicable tax rate. As the tax rate changes, so too will the deferred tax computations change each year so the extent of the deferred tax liability IS amended for changes in tax rates. Yes, there is no interest charged on the liability and the liability is not compounded. But that same liability is subject to adjustment as a result of changes in tax rates

    Does that answer it for you?

    September 8, 2014 at 9:43 am #194289
    zaca
    Member
    • Topics: 18
    • Replies: 37
    • ☆☆

    When you said ” the taxman has allowed you to claim capital allowances “early” against the cost of PPE “, it mean i can choose the policy for dep’, say, i choose the reducing balance basic is 30%, tax only allow 15%, cost of asset 1mil, the tax you will pay is still the tax liability with 15% dep’ but the you also have a tax relief = capital allowance (30%.1mil) *tax rate which reduce the tax liability.

    September 8, 2014 at 6:34 pm #194350
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    Not sure I understand you there.

    Depreciation is not allowed by the taxman! Instead, HMRC allows you capital allowances. So in a tax computation, we add back to profit before tax the depreciation that has been charged (as well as other adjustments) and then deduct the appropriate capital allowances

    This way, it makes absolutely NO DIFFERENCE AT ALL which depreciation rates you apply. They will all be added back and then, from that adjusted profit before tax will be deducted the appropriate capital allowance

    OK?

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