Disclosure Corporate Income Tax

Disclosure Corporate Income Tax

– provides guidance on the disclosure requirements under IFRS for IAS 12 income tax and provides a comprehensive example of a potential disclosures for these income taxes/corporate income tax.

Disclosure corporate income tax – Guidance

Relationship between tax expense and accounting profit

Entities can explain the relationship between tax expense (income) and accounting profit by disclosing reconciliations between: [IAS 12.81(c), IAS 12.85]

1. tax expense and the product of accounting profit multiplied by the applicable tax rate, or
2. the average effective tax rate and the applicable tax rate.

The applicable tax rate can either be the domestic rate of tax in the country in which the entity is domiciled, or it can be determined by aggregating separate reconciliations prepared using the domestic rate in each individual jurisdiction. Entities should choose the method that provides the most meaningful information to users.

Where an entity uses option (a) above and reconciles tax expense to the tax that is calculated by multiplying accounting profit with the applicable tax rate, the standard does not specify whether the reconciliation should be done for total tax expense, or only for tax expense attributable to continuing operations. While RePorting Co. Plc is reconciling total tax expense, it is equally acceptable to use profit from continuing operations as a starting point.

Initial recognition exemption – subsequent amortisation

The amount shown in the reconciliation of prima facie income tax payable to income tax expense as ‘amortisation of intangibles’ represents the amortisation of a temporary difference that arose on the initial recognition of the asset and for which no deferred tax liability has been recognised in accordance with IAS 12.15(b). The initial recognition exemption only applies to transactions that are not a business combination and do not affect either accounting profit or taxable profit.

Taxation of share-based payments

For the purpose of these illustrative financial statements, it is assumed that deductions are available for the payments made by RePorting Co. Plc into the employee share trust for the acquisition of the deferred shares (see note 21). In our example, the payments are made and shares acquired upfront which gives rise to deferred tax liabilities. It is also assumed that no tax deductions can be claimed in relation to the employee option plan.

However, this will not apply in all circumstances to all entities. The taxation of share-based payments and the accounting thereof is a complex area and specific advice should be obtained for each individual circumstance. IAS 12 provides further guidance on the extent to which deferred tax is recognised in profit or loss and in equity. [IAS 12.68A-68C]

Income tax recognised outside profit or loss

Under certain circumstances, current and deferred tax is recognised outside profit or loss either in other comprehensive income or directly in equity, depending on the item that the tax relates to. Entities must disclose separately: [IAS 1.90, IAS 12.81(a),(ab), IAS 12.62A]

1. the amount of income tax relating to each component of other comprehensive income, including reclassification adjustments (either in the statement of comprehensive income or in the notes), and
2. the aggregate current and deferred tax relating to items that are charged directly to equity (without being recognised in other comprehensive income).

Examples of items that are charged directly to equity are: [IAS 12.62A]

1. the equity component on compound financial instruments
2. share issue costs
3. adjustments to retained earnings, eg as a result of a change in accounting policy.

Unrecognised temporary differences

The disclosure of unrecognised temporary differences in relation to the overseas subsidiary has been made for illustrative purposes only. The taxation of overseas subsidiaries will vary from case to case, and tax advice should be obtained to assess whether there are any potential tax consequences and temporary differences that should be disclosed.

Other potential disclosures

The following requirements are not illustrated in this publication

Issue not disclosed	Relevant disclosures or references
Changes in the applicable tax rate [IAS 12.81(d)]	Explain the changes (see illustrative disclosure below).
Deductible temporary differences and unused tax credits for which no deferred tax asset is recognised [IAS 12.81(e)]	Disclose amount and expiry date. Disclosure Corporate Income Tax Disclosure Corporate Income Tax
The payment of dividends will affect the entity’s income tax expense (eg a lower tax rate applies to distributed profits) [IAS 12.82A, IAS 12.87A-87C]	Explain the nature of the income tax consequences and disclose the amounts, if they are practicably determinable
Dividends were proposed or declared but not recognised as liability in the financial statements [IAS 12.81(i)]	Disclose the income tax consequences, if any.
Tax-related contingent liabilities or contingent assets, and changes in tax rates or tax laws enacted after the reporting period [IAS 12.88]	Provide disclosures required under IAS 37 – Disclosures and IAS 10 – Disclosures.
Business combination: changes in the deferred tax assets of the acquirer recognised as a result of the combination [IAS 12.81(j)]	Disclose the amount of the change Disclosure Corporate Income Tax Disclosure Corporate Income Tax
Deferred tax benefits acquired in a business combination but only recognised in a subsequent period [IAS 12.81(k)]	Describe the event or change in circumstances that caused the deferred tax asset to be recognised.

Changes in tax rate

Where the applicable tax rate changed during the year, the adjustments to the deferred tax balances appear as another reconciling item in the reconciliation of prima facie income tax payable to income tax expense. The associated explanations could be along the following lines: [IAS 12.81(d)]

The reduction of the Neverland corporation tax rate from 30% to 28% was substantively enacted on 26 June 2020 and will be effective from 1 April 2021. As a result, the relevant deferred tax balances have been remeasured. Deferred tax expected to reverse in the year to 31 December 2021 has been measured using the effective rate that will apply in Neverland for the period (28.5%). For years ending after 31 December 2021, the group has used the new tax rate of 28%.

Further reductions to the Neverland tax rate have been announced which will reduce the rate by 1% per annum to 24% by 1 April 2025. However, these changes are expected to be enacted separately each year. As a consequence, they had not been substantively enacted at the balance sheet date and, therefore, are not recognised in these financial statements.

The impact of the change in tax rate has been recognised in tax expense in profit or loss, except to the extent that it relates to items previously recognised outside profit or loss. For the group, such items include in particular remeasurements of post-employment benefit liabilities and the expected tax deduction in excess of the recognised expense for equity-settled share-based payments.

Disclosure corporate income tax example

6 Income tax expense

This note provides an analysis of the group’s income tax expense, and shows what amounts are recognised directly in equity and how the tax expense is affected by non-assessable and non-deductible items. It also explains significant estimates made in relation to the group’s tax position.

6(a) Income tax expense

Relevant items – IAS 12.79, IAS 12.81(g)(ii)

Table – IAS 12.80(a)(b)(c)

Amounts in CU’000	2020	2019
Current tax	Disclosure Corporate Income Tax	Disclosure Corporate Income Tax
Current tax on profits for the year	17,116	11,899
Adjustments for current tax of prior periods	-369	135
Total current tax expense	16,747	12,034
Disclosure Corporate Income Tax Disclosure Corporate Income Tax Disclosure Corporate Income Tax	Disclosure Corporate Income Tax	Disclosure Corporate Income Tax
Deferred income tax	Disclosure Corporate Income Tax	Disclosure Corporate Income Tax
Decrease/(increase) in deferred tax assets (note 8(e))	-4	-1,687
(Decrease)/increase in deferred tax liabilities (note 8(e))	-177	1,399
Total deferred tax expense/(benefit)	-181	-288
Income tax expense	16,566	11,746
Disclosure Corporate Income Tax Disclosure Corporate Income Tax Disclosure Corporate Income Tax	Disclosure Corporate Income Tax	Disclosure Corporate Income Tax
Income tax expense is attributable to:	Disclosure Corporate Income Tax	Disclosure Corporate Income Tax
Profit from continuing operations	18,182	11,575
Profit from discontinued operation	384	171
	16,566	11,746

6(b) Significant estimates – uncertain tax position and tax-related contingency

The tax legislation in relation to expenditures incurred in association with the establishment of the retail division is unclear. The group considers it probable that a tax deduction of CU1,933,000 will be available and has calculated the current tax expense on this basis. [IAS 1.122, IAS 1.125, IFRIC 23.A5]

However, the group has applied for a private ruling to confirm its interpretation. If the ruling is not favourable, this would increase the group’s current tax payable and current tax expense by CU580,000 respectively. The group expects to get a response, and therefore certainty about the tax position, before the next interim reporting date. [IAS 37.86, IAS 37.88] Disclosure Corporate Income Tax Disclosure Corporate Income Tax

6(c) Reconciliation of expected income tax to estimated income tax expense

Relevant items – IAS 12.81(c)(i), IAS 12.84, IAS 12.85

Table – IAS 12.81(d), IAS 12.85, IAS 12.80(b), IAS 12.80(f), IAS 12.80(e)

Amounts in CU’000	2020	2019
Profit from continuing operations before income tax expense	51,086	39,617
Profit from discontinued operation before income tax expense	1,111	570
Total profit before tax in financial statements	52,197	40,187
Disclosure Corporate Income Tax Disclosure Corporate Income Tax Disclosure Corporate Income Tax	Disclosure Corporate Income Tax	Disclosure Corporate Income Tax
Tax rate at the Neverland tax rate	30%	30%
Expected income tax expense	15,659	12,056
Disclosure Corporate Income Tax Disclosure Corporate Income Tax
Reconciliation to estimated income tax expense:	Disclosure Corporate Income Tax	Disclosure Corporate Income Tax
Tax effect (i.e. at 30% tax) of reported amounts which are not deductible (taxable) in calculating taxable income	Disclosure Corporate Income Tax	Disclosure Corporate Income Tax
Goodwill impairment	723	–
Amortisation of intangibles	92	158
Entertainment	82	79
Employee option plan	277	99
Dividends paid to preference shareholders	378	378
Recycling of foreign currency translation reserve on sale of subsidiary, see note 15	-51	–
Sundry items Disclosure Corporate Income Tax Disclosure Corporate Income Tax	189	14
Difference in overseas tax rates (lower) higher than 30%	-248	-127
Adjustments for current tax of prior periods	-369	135
Research and development tax credit	-121	-101
Previously unrecognised tax losses used to reduce deferred tax expense (refer to note 4(e))	–	-945
Previously unrecognised tax losses now recouped to reduce current tax expense Disclosure Corporate Income Tax	-45	–
Estimated income tax expense in profit or loss	16,566	11,746

6(d) Amounts recognised directly in equity

Table – IAS 12.81(a), IAS 12.62A

Amounts in CU’000	Notes	2020	2019
Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss or other comprehensive income but directly debited or credited to equity:
Current tax: share buy-back transaction costs	9(a)	-15	–
Deferred tax: Convertible note and share issue costs	8(e)	990	–
		975	–

6(e) Tax losses

Table – IAS 12.81(e) Disclosure Corporate Income Tax Disclosure Corporate Income Tax

Amounts in CU’000	2020	2019
Unused tax losses for which no deferred tax asset has been recognised	1,740	2,796
Potential tax benefit at 30%	522	839

The unused tax losses were incurred by a dormant subsidiary that is not likely to generate taxable income in the foreseeable future. They can be carried forward indefinitely. See note 8(e) for information about recognised tax losses and significant judgements made in relation to them. Disclosure Corporate Income Tax

6(f) Unrecognised temporary differences

Table – IAS 12.81(f), IAS 12.87

Amounts in CU’000	2020	2019
Unused tax losses for which no deferred tax asset has been recognised
– Foreign currency translation	2,190	1,980
Undistributed earnings	1,350	–
	3,540	1,980
Disclosure Corporate Income Tax Disclosure Corporate Income Tax Disclosure Corporate Income Tax
Unrecognised deferred tax liabilities relating to the above temporary differences	1,062	594

Temporary differences of CU2,190,000 (2019 – CU1,980,000) have arisen as a result of the translation of the financial statements of the group’s subsidiary in China. However, a deferred tax liability has not been recognised as the liability will only crystallise in the event of disposal of the subsidiary, and no such disposal is expected in the foreseeable future.

RePorting Co. Retail Limited has undistributed earnings of CU1,350,000 (2019 – nil) which, if paid out as dividends, would be subject to tax in the hands of the recipient. An assessable temporary difference exists, but no deferred tax liability has been recognised as RePorting Co. Plc is able to control the timing of distributions from this subsidiary and is not expected to distribute these profits in the foreseeable future