Determine Tax base
The tax base of an asset or a liability is the amount attributed to that asset or liability for tax purposes. The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to the entity when it recovers the carrying amount of the asset. The tax base of a liability is its carrying amount, less any
amount that will be deductible for tax purposes in future periods. Some items have a tax base even though they are not recognised as assets or liabilities (see below). [IAS 12.5 (see tab IFRS Definitions), IAS 12.7–9]
In determining the tax base of an asset or a liability, an entity should not carry out an assessment of how probable it is that the respective amounts will ultimately be deducted or taxed. Instead, the probability assessment is part of the analysis required for the recognition of deferred tax assets. [IAS 12.5 (see tab IFRS Definitions), IAS 12.7–8, IAS 12.24]
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Case – The tax base of an asset |
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Company A purchased an item of property, plant and equipment for CU10,000. Over the life of the asset, deductions of CU10,000 will be available in calculating taxable profit through capital allowances. All deductions will be available against trading income and no deductions will be available on sale. Management intends to use the asset. As deductions of CU10,000 will be available over the life of the asset, the tax base of that asset is CU10,000. |
Tax base of a revalued asset that is not depreciated
When an asset is revalued under IAS 16 ‘Property, Plant and Equipment’ and that asset is non-depreciable, the carrying amount of that asset will not be recovered through use. Therefore the tax base and tax rate will be those applicable to the sale of that asset. IAS 12 was amended in December 2010 to incorporate this principle which was previously contained in SIC-21 ‘Income Taxes-Recovery of Revalued Non-Depreciable Assets’. SIC-21 has been withdrawn as a result of these amendments.
The same presumption, of recovery through sale rather than use, applies to an investment property that is measured at fair value in accordance with IAS 40 ‘Investment Property’. However, in the case of a building the presumption may be rebutted if the building is held in a business model whose objective is to consume substantially all of the economic benefits embodied in the building over time, rather than through sale. For land that meets the definition of investment property, the presumption of recovery through sale may not be rebutted, as land is a non-depreciable asset.
Items with a tax base but no accounting base
Some items have a tax base but no accounting base, for example carried-forward tax losses and some employee share options. Deferred tax on such items is calculated in the same way as items with an accounting base.
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Case – An item with a tax base but no accounting base |
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Company A issues 100,000 share options to its employees. The options vest immediately. A charge is recognised in profit or loss of CU100,000. In the country where Company A is domiciled, a tax deduction will be available when the options are exercised, based on the intrinsic value of the share options at the date of exercise. As a tax deduction will be available in the future when the options are exercised, a tax base exists, even though no asset is recognised in the statement of financial position for the options issued. |
Method of recovery of an asset
Many assets are recovered partly through use and partly by sale. For example, it is common for an investor to hold an investment property to earn rentals for a period and then sell it. Other assets, such as property, plant and equipment 
and intangible assets are also frequently used in a business for part of their economic life and then sold. When such assets are depreciated, the residual value ascribed to them indicates an estimate of the amount expected to be recovered through sale.
Under IAS 12, the measurement of deferred taxes related to an asset should reflect the tax consequences of the manner in which an entity expects to recover the carrying amount of the asset (IAS 12.51-51A).
When the tax rate and the tax base are the same for both use and sale of the asset, the deferred tax does not depend on the manner of recovery and hence no complications arise. In some jurisdictions the tax rate applicable to benefits generated from using a specific asset, the ‘use rate’, differs from the rate applicable to benefits from selling the asset, the ‘sale rate’. Further in certain jurisdictions, tax bases may vary depending on how an entity benefits from a specific asset. In these circumstances, the measurement of deferred taxes should be consistent with the expected manner of recovery of the asset. This principle requires measurement of deferred taxes by reference to:
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the use tax rate and the tax base applicable for the use of the asset to the extent that the entity expects to recover the carrying amount of the asset through use and
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the sale tax rate and the tax base applicable for the sale of the asset to the extent that the entity expects to recover the carrying amount through sale.
Taxation and Management’s intention
In some jurisdictions, different tax deductions are available for an asset depending on how its carrying amount is recovered. In such cases, the tax base of an asset is generally determined based on management’s intent. However, there is specific guidance for non-depreciable assets measured using the revaluation model and there is a rebuttable presumption that the carrying amount of investment property measured at fair value will be recovered through sale. [IAS 12.51–51C]
In some jurisdictions, no deduction is allowed when an asset is depreciated, but a deduction is allowed when the asset is disposed of, abandoned or scrapped. Sometimes an asset may be recovered through use and then scrapped at the end of its useful life. In this case, the general opinion is that the tax base should be determined assuming that the carrying amount is recovered through use and scrapping together. Therefore, the tax base should include the tax deduction that will be received when the asset is scrapped.
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Case – Determine tax base – Tangible asset becomes tax-deductible when sold or scrapped |
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An item of property, plant and equipment is purchased for 100. The asset will be depreciated for accounting purposes over its 10-year useful life to a residual value of zero. No tax deductions will be received while the asset is being used. However, when the asset is sold or scrapped, a tax deduction is received for the initial cost of the asset of 100. The tax base of the asset is 100. |
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Case – Determine tax base – Intangible asset becomes tax-deductible on expiry |
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Company X paid 100 to acquire the right to mine a specific area for 40 years, which is recognised as an intangible asset. The asset is not depreciable for tax purposes, but is amortised for accounting purposes. If the right is used until expiry, then on expiry X will receive a tax deduction for the initial cost of 100. However, no deduction is available if the right is disposed of or the mine is abandoned in the future. If management’s intention is to use the right until it expires, then the tax base is 100. However, if management’s intention is to sell the right after 10 years, then the tax base of the intangible asset is zero. |
Management normally needs to demonstrate its intent clearly in order for it to be reflected in the determination of the tax base. However, in our view it is not always required that the entity perform a formal act demonstrating this intention. Instead, depending on the facts and circumstances, we believe that it may be sufficient to assume that management will act in the most economically advantageous way.
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Case – Determine tax base – Management’s intent |
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Company P acquires an item of property, plant and equipment for 100, the cost of which is only deductible for tax purposes on disposal. If P’s management estimates a positive residual value of the asset under IAS 16, then we believe that this demonstrates its intention to sell the asset at the end of its useful life. Accordingly, we believe that the tax base of the asset is 100. Even if P’s management estimates a residual value of zero, we believe that it should be assumed that management would sell the asset for an immaterial amount, rather than merely scrap the asset and therefore forfeit a tax benefit; this is because the only way to obtain a tax deduction is on disposal of the asset. Accordingly, we believe that the tax base of the asset is also 100 in this case. |
Management’s intention may also be relevant in determining which tax rates to apply in calculating deferred tax.
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