Taxes are one of the major sources for the income of every nation. The amounts collected by way of taxes are used by the Government authorities or organizations in the development of the economy of the nation. Acts along with the required amendments are passed in the governing parliaments of the countries to set up a proper structure for taxes. In a broader sense, 2 types of taxes may be levied and collected by the Government authorities or organizations. The first in the list is Direct tax that is levied or imposed on the taxpayer or assessee and the payment of such tax will be made only by them. The aforesaid taxpayer or assessee cannot shift the payment burden to some other person. The next is the list is Indirect tax that is levied or imposed on one taxpayer or assessee but the payment of such tax is made by some other person i.e. the ultimate consumer. Income tax is a type of direct tax that is levied or imposed on the income of taxpayers or assessee. This report will help to understand various important concepts that may impact or influence the accounting of taxes on the income of the taxpayers. Financial figures for two of the years have been taken into consideration by Orora Limited (ASX listed company) to provide more explanation and clarification of the treatment of taxes in the accounting function of the companies.
Understandings about the relevant concepts that may influence the accounting of income taxes are required for the professional who is responsible to execute accounting functions. Some of the significant concepts related to accounting of income taxes have been explained along with the relevant examples in the below-provided table:-
As discussed earlier, Deferred Tax Assets are those assets that are booked in the books of accounts to take tax benefits in later or next period. These Deferred Tax (DT) Assets are created or recognized the books of accounts of taxpayers when certain deductible temporary differences are present the financial reports of the taxpayers that are causing lower accounting profit for the year as compared to the taxable profits. Higher taxable profits for the year are going to increase the tax liability of the current year but it will also reduce the liability of the future or next year(s) as the taxpayer will pay the higher amount of taxes in current Year (Carlon, Tran, & Tran-Nam, B. (2013)).
from the financial reports have been shown below to show the break-up of the income of Orora Limited including disclosure of tax expenses for two of the financial years: As discussed in the earlier part of the text, Deferred Tax Liabilities are those liabilities or obligations that are booked in the books of accounts to represent the liabilities of the taxpayers towards taxes in later or next period. These Deferred Tax (DT) Liabilities are created or recognized the books of accounts of taxpayers when certain taxable temporary differences are present the financial reports of the taxpayers that are causing higher accounting profit for the year as compared to the taxable profits. Lower taxable profits for the year are going to decrease the tax liability of the current year but it will also increase the liability of the future or next year(s) as the taxpayer will pay the lower amount of taxes in current Year (Lucia, Lavinia, & Marcel (2014)).
Orora Limited has reported income tax expense as $55.4 million for the financial year 2019 and $74.0 million for the financial year 2018 in its financial reports. An abstract
The taxes on the incomes of both the years have been computed at a rate of 30%.
The total tax expenses for any financial are calculated and represented with the inclusion of different elements. Tax expenses include current tax expense, expenses for deferred taxes, adjustment of tax benefits that are related to past year(s) (WYATT (2007)).
Orara Limited’s expenses also include current tax expenses, expenses for deferred taxes, adjustment of tax benefits that are related to the past year(s). Below provided is a table showing the break-up of the income tax expenses for the financial year 2019 & 2018.
Some of the analysts may argue that when tax is levied on the income of the taxpayer then the amount of tax expense shown in the financial reports shall be computed by multiplying the rate of taxes to the accounting income. However, this is not the case. Income tax expenses in the income statement show the tax liability of current year computed as per tax regulation along with the deferred taxes and adjustments of taxes for the prior year(s) losses or benefits (Arnold, Ault, & Cooper, (Eds.). (2019)).
Orora Limitedin its Statement of Financial Position has reported deferred tax (DT) liabilities as $82.3 million for the financial year 2018 and $83.3 million for the financial year 2018.
Orora Limited has not reported any amount for Deferred Tax (DT) Assets in its Statement of Financial Statement for both the years as it is setting off the amount of deductible temporary difference with the amount of taxable temporary differences. The reason behind the creation of Deferred Tax (DT) Assets/Liabilities is the presence of temporary differences in its reported financial information. These temporary differences have been aroused due to the differences between the carrying balances of the assets as per accounting regulation and tax regulators.
Deferred Tax Assets are those assets that are booked in the books of accounts to take tax benefits in later or next period. These Deferred Tax (DT) Assets are created or recognized the books of accounts of taxpayers when certain deductible temporary differences are present the financial reports of the taxpayers that are causing lower accounting profit for the year as compared to the taxable profits. Deferred Tax (DT) Liabilities are created or recognized for the temporary differences that are going to result in a taxable amount in the future which is also known as Taxable Temporary Difference. In technical terms, deferred tax liabilities arise due to less payment of the taxes in the present or past year(s) due to differences in the timing of recognition of certain items in books as per accounting regulators and tax regulators.
Below provide table will show the details of Deferred Tax (DT) Assets or Liabilities for Orora Limited:
Orora Limited has reported Current Tax (CT) Liabilities as $10.6 million for the financial year 2019 and $8.7 million for the financial year 2018. However, the tax expenses for these two financial years are $55.4 million and $74.0 million respectively.
Some analysts may argue on this point that when tax expenses in the income statements for the year 2019 & 2018 are $55.4 million and $74.0 million respectively then why the company is showing its liability towards taxes as $10.6 million and $8.7 million for both the years? To get an answer over this question of argument, it must be understood by the analysts the tax expenses shown in the income statements are total of tax expense for the whole financial year that is computed as per the tax regulations along with the deferred taxes and adjustments for the prior year(s) losses or benefits. However, the liabilities shown for current taxes are the sum of amounts that are still pending at the date of reporting for the payment of current taxes.
Statement of Cash Flow is prepared to represent or disclose the actual inflow and outflow of cash or cash equivalents of the business entity. It is prepared with a concept to keep track of the flow of cash towards and outside the entity. Income Statement of the reporting entities is prepared to represent or disclose the financial transactions affecting the entity. It is prepared on the accrual basis as per the accounting regulations. Accrual basis states that the transactions are required to be recognized in the books at the time when they become due or when payment is made, whichever event happens earlier (Chowdhury & Shil(2020)). Some analysts may feel and doubt that the tax expenses paid in the statement of cash flow and income statements are not the same. This is because of the difference in the recognition concepts of these two different elements of the financial reports.
Also, the income tax paid in the statement of cash flow of Orora Limited is $51.5 million for the financial year 2019 and $41.6 million for the financial year 2018 and these are different from the amounts of the tax expenses in the income statement. The reason here is the same that the actual amount paid for taxes has been disclosed in the statement of cash flow and total liability towards taxes is shown in the income statement.
Temporary differences are the timing differences that have the capability of getting reversed in next year(s) are known as Temporary Differences. Temporary differences are the reason for the creation of DT (Deferred Tax) Assets or Liabilities. Any expense or income included in the financial reports of assessments or taxpayers that is not supposed to be recognized in the tax books but will get recognized in next year(s) is the temporary difference.
Permanent differences are the results of those items or elements in the reports of the entity that are not in common between tax regulations and accounting regulation and will not affect the computation of future or next year(s) tax liabilities in any way. In simple words, these are the result of such transactions recorded in the books that are not allowed to be recognized as per tax regulations and also cannot get reversed in any of the future years. No (Deferred Tax) Assets or Liabilities are recorded in the books on account of permanent differences. Any fine or penalty that has been levied by the tax regulators for making any kind of default will not be allowed to be deducted from the turnover of the entity in the computation of taxable profits. Hence, this item is considered a permanent difference because it is not going to get reversed in any of the next years.
Orora Limited has followed and complied with all the reporting requirements as per the accounting regulations along with taking care of the tax regulations. As per the accounting regulations, the company has booked all items of revenues and costs on the accrual basis. It was really interesting to see that company has not recorded any amount for DT (Deferred Tax) Assets in its reports but it has adjusted the amount for deductible temporary differences from the amounts of taxable temporary differences. However, the main interesting thing which I found in this was that company cannot record deferred tax assets and deferred tax liability at the same time in its recorded accounts. However, one needs to be adjusted first with other while recording then the remaining amount could be adjusted accordingly. The main interesting thing behind the creating DTL and DTA is that company could record the DTL when it is paying the less amount of tax to its government and in compliance with the taxation rules, the tax payment should have been higher. I have also found that The aforesaid taxpayer or assessee cannot shift the payment burden to some other person. The next is the list is Indirect tax that is levied or imposed on one taxpayer or assessee but the payment of such tax is made by some other person. The transfer of the tax liability to other person is limited to the uses
Taxes play a vital role in the development of the economy of every nation as it is the main source of income for the government. It is analysed that Deferred Tax Assets are those assets that are booked in the books of accounts to take tax benefits in later or next period at the same time if company is paying the less amount of tax as in compliance with the taxation rules then the remaining amount would be recorded as liability in its books of accounts. As there are differences in the approaches that are followed by the accounting regulations and tax regulations regarding recognition of the items in a particular year, so there is a need for the professional dealing in accounting functions to have well-versed knowledge of the tax treatments along with the impacts of the items that cause differences in taxable profit and accounting profits. The above-discussed concepts related to the accounting of taxes along with the examples and real-life scenarios will surely help to account professionals in their dealings and treatments for taxes.
Arnold, B. J., Ault, H. J., & Cooper, G. (Eds.). (2019). Comparative income taxation: a structural analysis. Kluwer Law International BV.
Carlon, S., Tran, A., & Tran-Nam, B. (2013). How Close Are Taxable Income and Accounting Profit-An Empirical Study of Large Australian Companies. Austl. Tax F., 28, 641.
Chowdhury, A., & Shil, N. C. (2020). Exploratory Evidence on Accounting System, Annual Report Review, and New Public Management. International Journal of Finance & Managerial Accounting, 4(16), 27-37.
Graham, J. R., Raedy, J. S., & Shackelford, D. A. (2012). Research in accounting for income taxes. Journal of Accounting and Economics, 53(1-2), 412-434.
Hofstrand, D. (2009). Understanding profitability. Ag Decisions Makers, 2, C3-24.
Lucia, P. P., Lavinia, C., & Marcel, P. (2014). Accounting–Taxation Report In Terms Of Deferred Taxes On Assets Revaluation. Annals-Economy Series, 6, 30-34.
Orora Limited, (2020), Orora Limited, (2020) a available at (https://www.ororagroup.com/system/downloads/files/000/000/334/original/19.09.13_Orora_2019_Annual_Report_to_shareholders_%28interactive%29.pdf?1568329656).
Richardson, G., & Lanis, R. (2007). Determinants of the variability in corporate effective tax rates and tax reform: Evidence from Australia. Journal of accounting and public policy, 26(6), 689-704.
van der Vossen, R. (2018). The relevance of deferred tax assets and the influence of the credit crunch.
WYATT, K. (2007). ACCOUNTING FOR INCOME TAXES: EARLY ADOPTION ISSUE.
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