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A nightmare called Deferred tax

Helena Šulcová
19/06/2019
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Do you belong to people for whom the term Deferred Tax is becoming a nightmare? If so, let’s briefly summarize the basic facts. Maybe after reading our new article, the deferred tax will no longer take you the calm sleep.

Where did the deferred tax come from?

  • The deferred tax is strictly the accounting issue and does not have any impact on the income tax
  • The tax is used to achieve the accrual principle and thus to achieve a fair presentation of the accounts
  • It is due to differences that occur at the time of different accounting and tax views on the relevant items in the accounts

Do you have the obligation to charge a deferred tax?

  • Pursuant to Section 59 of Decree No. 500/2002 Coll. the obligation to charge and report the deferred tax have:
    • The accounting entities that form a consolidated group
    • The accounting entities that prepare financial statements in full (including statutory audit)
  • The other entities determine whether or not to account for deferred tax.

How is the deferred tax calculated?

  • Deferred tax calculation is relatively simple
  • It is calculated as the product of the resulting temporary difference and the income tax rate, which is determined by the Income tax act for the following period

What is the temporary difference?

  • Costs and revenues recognized by the Income Tax Act, but in another tax or accounting period, or the differences between the carrying amount of an asset or liability in the balance sheet and its tax base (i.e., the value that will be applicable in the future for tax purposes).

What are the classic examples of deferred tax titles?

  • Difference between the tax and accounting value of fixed assets
  • Tax loss
  • Adjustment to inventory
  • Accounting adjustments to receivables
  • Adjustments to fixed assets
  • Accounting reserves
  • Contractual penalties and default interest
  • Unpaid social security and health insurance premiums

Relating to these classic titles what to watch out for?

  • Accounting adjustments to receivables need to be assessed for their future tax deductibility
  • For adjustments to fixed assets, only depreciated fixed assets should be included. A non-depreciable asset with an unrecognizable loss on sale is a permanent difference.
  • Include accounting reserves only in case when the reserve is created for future tax deductible expenses
  • For the last two titles, do not forget their tax deductibility at the moment of payment.

What to do if you get a high deferred tax asset when calculating?

  • Remember that deferred tax receivables is an asset like any other. Just as receivables are reduced by a provision for doubtful and bad debts, the deferred tax asset should be recognized only to its recoverability. Ask yourself the question: will our company generate enough tax base in the next few years to enforce all tax claims? E.g. tax losses, which are a classic title for a deferred tax asset, can only be claimed for 5 years.
  • Charge a deferred tax asset only to its estimated recoverability.

Do you charge for deferred tax for the first time?

  • In the first year of deferred tax accounting, an entity becomes more difficult to account for deferred tax in the current year, but must also calculate deferred tax relating to prior periods.
  • The portion of the deferred tax relating to prior periods is recognized in the accounts of account group 42 and the portion relating to the current accounting period in the accounts of account group 59.

Author

Helena Sulcova
Helena Šulcová
Audit Manager
Crowe