By Professor George St. Alyfantis
Topics for Understanding Deferred Taxes on Depreciation (1)
Generally
Income tax is calculated by corporations on the basis of the provisions of tax law on taxable profits.
Taxable profit is calculated as the difference between taxable income minus taxable expenses.
Taxable income in most cases coincides with accounting income with the exception of intra-group dividends which are exempt from income tax when the shareholders who collect them meet the cumulative requirements of article 48, paragraph 1, of L. 4172 / 2013 (2) .
Also, for the proceeds from the measurement of assets at fair value according to article 24 of Law 4308/2014 no income tax is paid to the State at the time they arise because they are not certain and cleared at that time (3) , but in the future when they become sure and clear.
We must present this temporary benefit of the tax today to the liabilities as a liability to pay in the future. Benefit is also created when we deduct a greater amount of tax deductions from the corresponding accounting.
On the contrary, tax expenses do not coincide with accounting eg. annual depreciation of fixed assets, predictions such actions by third parties against the company.
In the above cases where an income tax benefit is created this benefit is temporary, since for that benefit we will eventually pay the income tax attributable to that income in the future and therefore we must present this future liability to liabilities. The same is true when, as a result of these events, damage is caused.
The concept of accounting differences. Business expenses, which, while recorded as expenses in the business accounts, cannot at the same time be deducted in determining taxable profits, are called ‘accounting differences’.
Accounting differences are divided into two categories: (a) permanent or permanent and (b) temporary.
Permanent differences (or accounting differences) are expenses recorded in business accounts and, therefore, have affected the accounting result (profit or loss) for the year, excluding, however, cannot be deducted from the taxable results of the same year (profit or loss) because these expenses do not comply with the principles of tax deduction of expenses or specific provisions of tax law do not allow it. In this case, it is primarily the expenditure referred to in article 23 of Law 4172/2013, as well as any other tax provision eg. par. 4, article 48, Law 4172/2013.
A temporary difference under the definition in Annex A to Law 4308/2014 is the difference between the carrying amount of an asset, liability or other element of the financial statements and the tax base that the entity expects to affect in the future. results when the carrying amount of the asset or liability is recovered or settled, or in the case of other elements of the financial statements, when the taxable income is affected.
Temporary differences mainly arise:
- a) When there are differences between accounting and tax depreciation. It should be noted that until 31.12.2014, this issue did not exist because the depreciations recorded in the business accounts were only taxable, since the companies were not allowed, as of 1.1.2015, to perform depreciation which may be different from the tax deductions provided by article 24 of Law 4172/2013. As of 1.1.2015, companies, where the depreciations accounted for each year are different from their respective tax departments, have to keep a special account in the fixed assets register, as well as the tax depreciations.
- b) From the time of the tax deduction of provisions made to deal with losses, expenses and liabilities. Until 31/12/2014, companies reported as a difference in accounting the provision for the year in which they were formed and deducted it for future tax purposes from the taxable income when the risk for which they had formed was realized. However, it was not required, until 31.12.2014, to account for that difference in accounting. This different treatment of the above provisions from the accounting and tax legislation is required from 1.1.2015 to be monitored accounting.
Monitoring of differences between accounting and tax bases. From 1.1.2015 the taxable profits of the companies are still determined on the basis of the above. However, as of 1.1.2015, the provisions of Law 4308/2014 on “Greek Accounting Standards” apply where in paragraph 5, article 3, it states that: “The accounting system of the entity is required to monitor the accounting basis of the revenue data; expenses, assets, liabilities and equity, where appropriate, for the purpose of preparing the entity’s financial statements in accordance with this Act. The entity’s accounting system shall also be required to monitor the tax base of the items of income, expense, assets, liabilities and equity, as appropriate, in order to comply with tax legislation and to file tax returns. ”
According to the definitions given in Annex A of Law 4308/2014 a tax basis is the value recognized for an asset or liability for income tax purposes.
This tax value, Law 4308/2014, wants to be monitored separately from the respective accounting.
Therefore, the entity’s accounting system is required to monitor both the carrying amount and the tax base, if different, of the items of income, expenses, assets, liabilities and equity where appropriate. This obligation is a self-evident condition for fulfilling the entity’s tax liabilities. Monitoring can be done in any convenient and secure way, so that the necessary information can be extracted for the preparation of financial statements, the preparation of tax returns, and the assurance of controls (Ministry of Finance POL 1003/2015).
It is obvious that the entity should be able to document in detail, from its books and related documents, the amounts of tax differences from the accounting basis as shown in the table, and to make this documentation available. of the audit (Ministry of Finance POL 1003/2015).
The obligation to monitor the tax base relates not only to income and expenses but also to balance sheet items. In fact, changes in the balance sheet items may affect the calculation of income tax, whether or not these changes are related to income / expense (eg settlement of the relevant balance sheet item such as payment of staff allowance from a provision). It is also important for the entity to monitor the tax base of its equity, and in particular “retained earnings”, to know the amounts for which there is a liability to pay income tax in the event of distribution. (Ministry of Finance POL 1003/2015).
In the above instructions Finance does not propose any particular system to monitor this. The companies can find a monitoring system that can meet the needs of the law.
Purpose of Deferred Tax Accounting (4)
Deferred tax accounting seeks to capture a more accurate accounting result and assets / liabilities by avoiding the time-consuming delays that may arise from the diversification of tax laws. Thus, the recognition for accounting purposes of an income or expense (asset / liability) respectively that will be taxed / deducted for tax purposes at a later date implies the simultaneous recognition of the proportionate deferred income tax on the basis of all accruals accrued. of financial statements when they arise and not when they are settled in cash.
As deferred tax accounting is a complex accounting object introduced for the first time by Law 4308/2014, entities may seek guidance in IAS. 12 “Income Taxes”.
In international practice, the resulting amounts in the balance sheet and in the income statement from deferred tax accounting relate purely to financial reporting. Deferred taxation adjusts the income tax deferral resulting from differences in accounting and tax bases, and therefore deferred tax amounts are the same as current income tax. Under Directive 34/2013 / EU and L. 4308/2014 the recognition, where appropriate, of deferred tax is optional, while in the context of IFRSs. is mandatory (5) .
The layout of Greek Accounting Standards
In article 23 of the Greek Accounting Standards (Law 4308/2014) and in paragraphs 3 to 5 the following are deferred tax (6) :
‘(…) 3. Deferred tax. Entities may recognize deferred income tax in their financial statements. Entities that recognize deferred tax must recognize all deferred tax liabilities. On the contrary, deferred tax assets are recognized to the extent that it is highly probable and documented that there will be taxable profits against which deductible temporary differences can be utilized. Debt and credit balances of deferred taxes are subject to offsetting and the corresponding net amounts are presented in the balance sheet and the income statement.
- Deferred tax, whether an asset or a liability, is initially recognized and subsequently measured at the amount that results from applying the applicable tax rate to any temporary differences.
- Changes in the amount of the deferred tax asset or balance sheet liability that arise from period to period are recognized in a decrease or increase in the income statement in the income statement. By ” exception , the differences which result from underlying data or obligations of which the changes are recognized in net position , recognized also in ‘ straight in the net position , to decrease or increase depending on the relative envelope u. (…)”
It follows from the above:
(a) Entities that recognize deferred tax must recognize all deferred tax liabilities.
Deferred tax liabilities are recognized for all taxable temporary differences unless the liability arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a non-business combination transaction and at the time of the transaction neither the accounting nor the tax result is affected. (7) .
(b) Deferred tax assets are recognized to the extent that it is highly probable and documented that there will be taxable profits against which deductible temporary differences can be utilized.
Deferred tax assets are recognized for all deductible temporary differences, to the extent that it is probable that there will be a taxable profit against which the deductible temporary differences will be utilized .
An exception is the case where the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that does not relate to consolidation and at the time of the transaction neither the accounting nor the tax result is affected (8) (9).
(c) Deferred tax, whether on an asset or a liability, is initially recognized and subsequently measured at the amount that results from applying the applicable tax rate to any temporary differences.
Deferred tax accounting is introduced by N. 4308/2014 on Greek Accounting Standards on a purely voluntary basis (10) . However, deferred tax accounting cannot be applied selectively. That is, an entity may not elect to report deferred tax accounting those items that defer deferred income tax and corresponding deferred tax assets, and ignore items that defer deferred tax expense and deferred tax liability. Therefore, when an entity applies deferred tax accounting, it applies it to the total of positive and negative amounts of deferred tax.
Example
The annual depreciation (accounting and tax) of the first year of operation of the company in 2016, considering that: Whereas the property will use it productively for forty (40) years with an estimated residual value of the buildings at the end of the forty-fourth year zero being:
The accounting depreciation of the upper building is determined by the mathematical formula:
Acquisition Value – Residual Value
Life expectancy
The annual depreciation, according to the above formula, is: Building value 400,000 x 2.5% = Euro 10,000
The annual tax depreciation is in accordance with article 24 of Law 4172/2013: building value 400,000 x 4% = euro 16,000
Assuming that, for the first year of operation of the business of 2016, the profit and loss before depreciation was calculated at a profit of EUR 100,000 then the accounting result after recording the depreciation for 2016 is EUR 90,000 as follows:
First-year amortization result 2016
Revenue of 500,000
Minus: Expenses (excluding depreciation) (400,000)
Annual accounting depreciation 2016 (10,000)
Profit for the year with depreciation before tax of 90,000
Given that a) the above company is taxed at a rate of 29%, b) the year 2016, other than depreciation, there are no other accounting differences (or non – deductible tax expense ) nor tax exempt income, then its income tax on profits The financial year 2016 is estimated at EUR 24,360 as follows:
Profit for the year with depreciation before tax of 90,000
Plus: Cancellation of depreciation of 10,000
Minus: Tax Depreciation (16,000)
Profits for taxation 84,000
Income tax 84,000 x 29% = EUR 24,360
In the upper accounting profits of the company EUR 90,000 corresponds to income tax of EUR
(90.000 x 29% =) 26.100. ‘ O But the government will paid tax income as above EUR 24.360. Namely , public Generation of benefit difference (credit) Euro (= 26.100-24.360) 1.740 which is not recognized as income in the income statement but is recognized in liabilities as “deferred tax liability” with the following accounting entry:
———— 31.12.2016 ————
Reason Billing Credit
Income statement expense tax income 26,100
Deferred tax liability 1,740
Corporate Tax Liability 24,360
Assume that the above property is operated by the business for the next twenty-four (24) years and on 31.12.2040 the property has completed twenty-five (25) years of life in the business. Assuming the income and expense data for these twenty-four (24) years is the same as the first fiscal year 2016, then the Deferred Tax Liabilities account on 31.12.2040 will show a credit balance of Euro (1,740 x 25 years =) 43,500.
As at 31.12.2041, the enterprise still owns the above property and the income and expense data for the 26th fiscal year are assumed to be as the first year data:
Impairment charge for first year 2041
Revenue of 500,000
Minus: Expenses (excluding depreciation) (400,000)
Annual accounting depreciation 2016 (10,000)
Profit for the year with depreciation of 90,000
Assuming that the income tax rate is still 29% then the income tax on profits for the year 2041 is estimated at EUR 29,000 as follows:
Profit before tax 90,000
Plus: Cancellation of depreciation of 10,000
Minus: Tax Depreciation (0)
Profit for taxation 100,000
Income tax 100,000 x 29% = euro 29,000
In the upper accounting profits of the company EUR 90,000 corresponds to income tax of EUR (90.000 x 29% =) 26.100 . But the government will paid tax income as above EUR 29,000. Ie , generated difference loss ( debit ) euro (26,100-29,000 = 2,900 ) is that no records Tai as a loss in income, but recorded as liabilities in reduction of “Deferred tax liabilities” with the following accounting entry:
———— 31.12.2041 ————
Profit and loss account / Corporate Tax Expenditure 26,100
Deferred tax liability 2,900
Corporate Tax Liability 29,000
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(1) “End-of-year Accounting Tasks” G. Alifandis , Issue of Diplografia 14th edition, 2018, p. 205 et seq.
(2) “End-of-year Accounting Tasks” G. Alifandis , Issue of Diplografia 14th edition, 2018, p. 619.
(3) It is also clarified that business income does not include those arising from the measurement of the assets of legal entities and legal entities referred to in article 45 of Law 4172/2013 at fair value (Law 4308/2014), since at the above time no business transaction income is generated for the legal entity or legal entity, but any income that will be generated when the data are realized (Finance Ministry no.1059 / 2015, Art. 47 par. B 2 )
(4) ELTE Accounting Instruction of Law 4308/2014 p. 121.
(5) ELTE Accounting Instruction of Law 4308/2014 p. 122.
(6) In accordance with Article 30, para. 1 approx. Q of Law. 4308/2014 micro entities in paragraph 2 (c) of Article 1 that do, according to the law, using the option of paragraph 8 that is, they may alternatively compile only the Profit and Loss Statement of Model B.6 do not apply paragraphs 3 to 5 of Article 23 on the possibility of recognizing deferred tax
(7) ELTE Accounting Instruction of Law 4308/2014 p. 121.
(8) ELTE Accounting Instruction of Law 4308/2014 p. 121.
(9) BCC P. Vroustouris , Athens 2007, p. 169.
(10) ELTE Accounting Instruction of Law 4308/2014 p. 121.
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