Taxation Part 2 Notes

Taxation – Part 2

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Definition

Tax payable refers to the tax liability recorded on the balance sheet as a result of taxable income. Tax payable is the amount of taxes that has not been paid but will be in the near term.

Income tax paid is the actual taxes paid out of cash. This includes what was paid for this period and other periods during this accounting period.

In other words

Income tax is a compulsory contribution to state revenue, levied by the government business profits.

Tax payable includes total taxes to be paid within the accounting period. simply it is equal to the amount of income taxes paid or payable for the period.

It is calculated as:

Income tax payable = taxable income x tax rate

Why is it important?

Income tax is one of the most important source of government revenue, government collects income tax from the individuals and companies/ businesses for public expenditure to improve the standard of living of the public.

Lecture Notes

Adjustments for the change in tax rates

Deferred tax assets and liabilities needs to be adjust according to the change in tax rates

• If tax rate increases deferred taxes will increase

• If tax rate decreases deferred taxes will decrease

Increase in tax rates:

When there is an increase in tax rates it will be favourable for the business if there is a deferred tax asset as the business will be offsetting more from the tax authorities and it is adverse for those having a deferred tax liability because now business will have to pay more.

Decrease in tax rates:

When there is a decrease in tax rates it will be favourable for the business if there is a deferred tax liability as the business will be paying less to the tax authorities than before and it will be adverse if there is a deferred tax asset because it means reduction of value towards the offset of future payments to tax authorities

Difference between Effective Tax rate and Statutory Tax rates:

Statutory Tax rates are those imposed by the government/ jurisdiction of the country where company/ business operates

Effective tax rates is derived from the income statement as follows

Effective tax rate = income tax expense / income before tax (accounting profits)

Unused tax losses and Credits

IFRS treatment

A deferred tax...

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