The key difference between IAS 12 and VAS 17 on Corporate Income Tax is that tax losses can be carried back to prior tax periods. The tax loss carryback rules allow entities to choose to offset all or part of a tax loss against current or prior year tax liabilities. In general, companies can carry tax losses back to prior years instead of carrying them forward to future years.
IAS 12 note: An entity should recognize tax liabilities arising from transactions and events in the same way it recognizes those transactions or events.
1. Key Considerations During Transition
When the parent company controls the dividend policy of its subsidiaries, the parent can control the timing of reversal of temporary differences related to the investment (including temporary differences arising from undistributed profits and foreign exchange differences). Furthermore, determining the value of income tax liabilities to be recognized depends on whether the temporary differences are likely to reverse.
Therefore, when the parent determines that the subsidiary’s profits are unlikely to be distributed in the foreseeable future, the parent does not recognize a deferred income tax liability. The company should also consider similar assessments for investments in branches.
| Content | IFRS | VAS |
| IAS 12 and VAS 17 – Corporate Income Tax | ||
| Objective | Specifies and guides the principles and methods for accounting for corporate income taxes. The main issue in tax accounting is how to account for the current and future tax effects of: (a) The recovery or settlement in the future of the carrying amounts of assets or liabilities recognized in the entity’s balance sheet; (b) Transactions and other events of the current period recognized in the income statement. | |
| Carrying Tax Losses Back to Prior Years | When a tax loss is used to offset current taxes of a prior period, the entity recognizes the benefit as an asset in the period in which it becomes probable that the benefit will be realized, and the benefit can be measured reliably. | Not addressed because tax losses cannot be carried back to prior tax periods. |
| Recognition of Deferred Income Tax Liabilities | Deferred income tax liabilities must be recognized for all taxable temporary differences, except for deferred tax liabilities arising from: (a) The initial recognition of goodwill; or (b) The initial recognition of an asset or liability in a transaction that: (i) Is not a business combination; and (ii) At the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). | The standard specifies only one exception for not recognizing taxable temporary differences: when the deferred tax arises from the initial recognition of an asset or liability in a transaction that, at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). |
| Recognition of Deferred Income Tax Assets | Deferred income tax assets must be recognized for all deductible temporary differences when it is probable that future taxable profit will be available against which the deductible temporary differences can be utilized, except for deferred tax assets arising from the initial recognition of an asset or liability in a transaction: (a) That is not a business combination; and (b) That, at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). | Deferred income tax assets need to be recognized for all deductible temporary differences when it is certain that future taxable profit will be available against which the deductible temporary differences can be utilized, except for deferred tax assets arising from the initial recognition of an asset or liability from a transaction where the transaction does not affect accounting profit or taxable profit (tax loss) at the time of the transaction. |
| Valuation | When different tax rates apply to various levels of taxable profit, deferred tax assets and liabilities are measured using the average expected tax rate applicable to the taxable profits (tax losses) of the periods in which the temporary differences are expected to reverse. | Not addressed. |
| Recognition of Tax Expense and Income | Current tax and deferred tax must be recognized as income or expense in the statement of profit or loss, except for tax amounts arising from:
| Not addressed. |
| Income Tax from Dividend Distributions | When the parent company controls the dividend distribution policy of its subsidiaries, it can control the timing of reversing temporary differences related to that investment (including temporary differences arising from undistributed profits and foreign exchange differences). Furthermore, determining the value of the income tax liability for temporary differences is often difficult. Therefore, when the parent determines that the subsidiary’s profits are unlikely to be distributed in the foreseeable future, the parent does not recognize a deferred income tax liability. The parent should also assess similarly for investments in branches. | Not addressed. |
2. Tasks to Be Performed?
- Identify temporary differences recognized during the year.
- Determine the applicable tax rate for recognizing deferred tax.
