What are deferred tax liabilities – News

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Deferred tax liabilities correspond to amounts of corporation tax payable in future periods



The tax administration may allow companies to pay taxes on income that is lower than the income recognized in the statement of comprehensive income, which leads to lower taxable profits.

By Mahar Afzal/ Compliance Corner

Published: Sun 13 March 2022, 15:21

In our previous article entitled “difference between accounting and taxable profits”, we established that the difference between accounting and taxable profits can be permanent and temporary in nature.

Additionally, we have discussed that temporary differences, which create lower taxable profits in the current period, arise due to taxable temporary differences and ultimately create deferred tax liabilities.

Deferred tax liabilities are the amounts of corporation tax payable in future periods, and this results from the following factors:

• Taxable income is lower than accounting income due to taxable temporary differences.

• Taxable expenses are higher than accounting charges due to taxable temporary differences.

The tax administration may allow companies to pay taxes on income that is lower than the income recognized in the statement of comprehensive income, which leads to lower taxable profits. Such as interest of Dh50,000 on term deposits accrued by A Ltd which will be received at the end of the five-year deposit term. Tax authorities will not consider such accrued interest as income when calculating current period taxable profits, and the taxable temporary difference will result from such interest income.

In cases where the taxable expenses are greater than the accounting expenses, typical examples are advance payments, such as three years’ rent of Dh 120,000 paid in advance. In the books of accounts, it will be amortized over three years at the rate of Dhs 40,000 per annum, while the tax authorities in various jurisdictions may follow a cash basis of accounting and may require the registered business to process full payment of rent from 120,000 Dh as authorized. tax charge the first year. Thus, in the current period, the taxable expenses would be higher by 80,000 Dh due to the prepaid rent.

International Financial Reporting Standards [‘IFRS’) states that:

Temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.

Taxable temporary differences are: “temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled”.

Keeping in view the above definition of IFRS, in the aforesaid examples, the interest of Dh50,000, and rent of Dh80,000 are taxable temporary differences. The registered business will pay less tax in the current period due to these taxable temporary differences. These amounts will be considered in the future to ascertain the relevant period’s taxable profits.

With the few exceptions, IFRS states that deferred tax liability should be booked on taxable temporary differences.

“A deferred tax liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from:

(a) the initial recognition of goodwill; or

(b) the initial recognition of an asset or liability in a transaction which: (i) is not a business combination; and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss)”.

Since taxable temporary differences are Dh130,000 [50,000+80,000]so that the registered company will recognize a deferred tax liability of 11,700 Dh [130,000*9% (applicable corporate tax rate)].

The period in which the taxable temporary differences are greater than the deductible temporary differences, during this period the tax expense would be greater than the tax liability and the difference will be recognized as a deferred tax liability. The period in which the deductible temporary differences exceed the taxable temporary differences, in which the tax expense would be less than the tax liability, and the difference will be recognized as a deferred tax asset in the statement of financial position that we discussed in our previous article.

The above understanding is based on the global practices and requirements of IFRS 12. Once the UAE government introduces corporate law, it will establish a clear basis for the calculation of corporate income tax. companies.

Mahar Afzal is Managing Partner at Kress Cooper Management Consultants. The above is not an official but personal opinion of the author. For any questions/clarifications, please write to him at [email protected]

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