Tax Base and Temporary Differences (Deferred Tax)

Tax base relates to the company. Temporary differences, as the name implies, are only temporary but will eventually have to be leveled up. They occur because the basis on which the company prepares its financial statements is different from that used by tax authorities. For example … Depreciation calculated and recorded for corporate assets is not considered by tax authorities but they give capital allowances which don’t equal the depreciation charged by the companies in the SAME period…hence there will be a temporary difference which will be solved with time as the depreciation and capital allowances vary with time. Since depreciation and capital allowances affect profit for the period, the company needs to be able to estimate what it will have to pay as tax, and since this is unknown for sure, they make a provision called ‘Deferred tax’.