accounting profit, an entity should use an applicable tax rate that provides the most
meaningful information to the users of its financial statements.
Often, the most meaningful rate is the domestic rate of tax in the country in which the
entity is domiciled. In this case, the tax rate applied for national taxes should be
aggregated with the rates applied for any local taxes which are computed on a
substantially similar level of taxable profit (tax loss). However, for an entity operating
in several jurisdictions, it may be more meaningful to aggregate separate
reconciliations prepared using the domestic rate in each individual jurisdiction.
[IAS 12.85]. Where this latter approach is adopted, the entity may need to discuss the
effect of significant changes in either tax rates, or the mix of profits earned in different
jurisdictions, in order to satisfy the requirement of IAS 12 to give an explanation of
changes in the applicable tax rate(s) compared to the previous accounting period –
see item (d) at 14.2 above.
Example 29.56 illustrates how the selection of the applicable tax rate affects the
presentation of the numerical reconciliation.
Example 29.56: Alternative presentations of tax reconciliation
In 2019 an entity has accounting profit of €3,000m (2018: €2,500m) comprising €1,500m (2018: €2,000m)
in its own jurisdiction (country A) and €1,500m (2018: €500m) in country B. The tax rate is 30% in country
A and 20% in country B. In country B, expenses of €200m (2018: €100m) are not deductible for tax purposes.
There are no other differences between accounting profit and profit that is subject to current tax, or on which
deferred tax has been provided for under IAS 12.
Thus the accounting tax charge in the financial statements for each period will be as follows:
2019
2018
€m
€m
Country A
€1,500m/€2,000m @ 30%
450
600
Country B
€[1,500 + 200]m/€[500 + 100]m @ 20%
340
120
Total tax charge
790
720
Reconciliation based on A’s domestic tax rate
If the entity presents a tax reconciliation based on its own (i.e. country A’s) domestic tax rate, the following
presentation would be adopted.
2019
2018
€m
€m
Accounting
profit 3,000
2,500
Tax at domestic rate of 30%
900
750
Effect
of:
Expenses not deductible for tax purposes1
60
30
Overseas tax rates2 (170)
(60)
Tax
expense
790
720
1
€200m/€100m @ 30%
2
B’s taxable profit €1,700m/€600m @ (20% – 30%)
2492 Chapter 29
Reconciliation based on each jurisdiction’s tax rate
If the entity presents a tax reconciliation based on each jurisdiction’s domestic tax rate, the following
presentation would be adopted.
2019
2018
€m
€m
Accounting
profit 3,000
2,500
Tax at domestic rates applicable to individual
group entities1 750
700
Effect
of:
Expenses not deductible for tax purposes2
40
20
Tax
expense
790
720
1
2019: A = €450m [€1,500m @ 30%], B = €300m [€1,500m @ 20%], total €750m
2018: A = €600m [€2,000m @ 30%], B = €100m [€500m @ 20%], total €700m
2
€200m/€100m @ 20%
14.2.2
Temporary differences relating to subsidiaries, associates, branches
and joint arrangements
IAS 12 requires an entity to disclose the gross temporary differences associated with
subsidiaries, associates, branches and joint arrangements for which a deferred tax
liability is not recognised, as opposed to the unrecognised deferred tax on those
temporary differences – see (f) under 14.2 above.
IAS 12 clarifies that this approach is adopted because it would often be impracticable
to compute the amount of unrecognised deferred tax. Nevertheless, where practicable,
entities are encouraged to disclose the amounts of the unrecognised deferred tax
liabilities because financial statement users may find such information useful. [IAS 12.87].
14.3 Reason for recognition of particular tax assets
Separate disclosure is required of the amount of any deferred tax asset that is
recognised, and the nature of the evidence supporting its recognition, when:
(a) utilisation of the deferred tax asset is dependent on future profits in excess of those
arising from the reversal of deferred tax liabilities; and
(b) the entity has suffered a loss in the current or preceding period in the tax
jurisdiction to which the asset relates. [IAS 12.82].
In effect these disclosures are required when the entity has rebutted the presumption
inherent in the recognition rules of IAS 12 that tax assets should not normally be
recognised in these circumstances (see 7.4 above).
Income
taxes
2493
14.4 Dividends
As discussed at 8.5 above, where there are different tax consequences for an entity
depending on whether profits are retained or distributed, tax should be measured at the
rates applicable to retained profits except to the extent that there is a liability to pay
dividends at the end of the reporting period, where the rate applicable to distributed
profits should be used.
Where such differential tax rates apply, the entity should disclose the nature of the
potential income tax consequences that would arise from a payment of dividends to
shareholders. It should quantify the amount of potential income tax consequences
that is practicably determinable and disclose whether there are any potential income
tax consequences that are not practicably determinable. [IAS 12.82A]. This will include
disclosure of the important features of the income tax systems and the factors that
will affect the amount of the potential income tax consequences of dividends.
[IAS 12.87A].
The reason for this rather complicated requirement is that, as IAS 12 acknowledges, it
can often be very difficult to quantify the tax consequences of a full distribution of
profits (e.g. where there are a large number of overseas subsidiaries). Moreover, IAS 12
concedes that there is a tension between, on the one hand, the exemption from
disclosing the deferred tax associated with temporary differences associated with
subsidiaries and other investments (see 14.2.2 above) and, on the other hand, this
requirement to disclose the tax effect of distributing undistributed profits – in some
cases they could effectively be the same number.
However, to the extent that any liability can be quantified, it should be disclosed. This
may mean that consolidated financial statements will disclose the potential tax effect
of distributing the earnings of some, but not all, subsidiaries, associates, branches and
joint arrangements.
IAS 12 emphasises that, in an entity’s separate financial statements, this requirement
applies only to the undistributed earnings of the entity itself and not those of any of its
subsidiaries, associates, branches and joint arrangements. [IAS 12.87A-87C].
14.5 Examples
of
disclosures
In Extract 29.1 below, Royal Dutch Shell sets out the components of the tax expense
and provides a reconciliation of the tax charge in the income statement.
[IAS 12.79-80, 81(c)].
2494 Chapter 29
Extract 29.1: Royal Dutch Shell plc (2017)
Notes to the Consolidated Financial Statements [extract]
16. TAXATION [extract]
Taxation charge/(credit)
$ million
2017
2016
2015
Current tax
Charge in respect of current period
7,204
3,936
6,886
Adjustments in respect of prior periods
(613)
(1,205)
172
Total
6,591
2,731
7,058
Deferred tax
Relating to the origination and reversal of temporary
differences, tax losses and credits
(4,102)
(2,688)
(6,833)
Relating to changes in tax rates and legislation
2,004
(200)
(526)
Adjustments in respect of prior periods
202
986
148
Total (1,896)
(1,902)
(7,211)
Total taxation charge/(credit)
4,695
829
(153)
Adjustments in respect of prior periods relate to events in the current period and reflect the effects of changes in rules, facts or other factors compared with those used in establishing the current tax position or deferred tax balance in prior periods.
In 2017, deferred tax relating to changes in tax rates and legislation was mainly in respect of the US Tax Cuts and Jobs
Act (the Act).
Reconciliation of applicable tax charge/(credit) at statutory tax rates to taxation charge/(credit)
$ million
2017
2016
2015
Income before taxation
18,130
5,606
2,047
Less: share of profit of joint ventures and associates
(4,225)
(3,545)
(3,527)
Income/(loss) before taxation and share of profit of joint ventures
and associates
13,905
2,061
(1,480)
Applicable tax charge/(credit) at statutory tax rates
4,532
(344)
930
Adjustments in respect of prior periods
(411)
(219)
320
Tax effects of:
Expenses not deductible for tax purposes
2,423
2,066
1,452
Changes in tax rates and legislation (see above)
2,004
(200)
(526)
Income not subject to tax at statutory rates
(1,852)
(1,740)
(2,597)
(Recognition)/derecognition of deferred tax assets
(957)
1,575
108
Deductible items not expensed
(584)
(516)
(418)
Taxable income not recognised
251
509
384
Other
(711) (302) 194
Taxation charge/(credit)
4,695
829
(153)
The weighted average of statutory tax rates was 33% in 2017 (2016: (17)%; 2015: (63)%). The rate in 2017 reflects a
return to an overall tax charge on a pre-tax income. The negative rate in 2016 (tax credit on pre-tax income) was mainly
due to losses incurred in jurisdictions with a higher weighted average statutory rate than jurisdictions in which profits were made. The negative rate in 2015 (tax charge on a pre-tax loss) was mainly due to impairment charges, and other
charges related to ceasing activities in Alaska and the Carmon Creek project.
Income
taxes
2495
In Extract 29.2 below, BP p.l.c. provides an analysis of deferred tax income or expense
recognised in profit or loss and the amount of the deferred tax assets and liabilities
recognised in the statement of financial position. [IAS 12.81(g)].
Extract 29.2: BP p.l.c. (2017)
Notes on financial statements [extract]
7. Taxation [extract]
Deferred tax [extract]
The following table provides an analysis of deferred tax in the income statement and the balance sheet by category of
temporary difference:
$ million
Income statementa Balance
sheeta
2017
2016
2015
2017
2016
Deferred tax liability
Depreciation
(3,971)
81
(102)
23,045
26,864
Pension plan surpluses
(12)
(12)
84
1,319
171
Derivative financial instruments
(27)
(230)
(326)
623
761
Other taxable temporary differences
(64)
(122)
59
1,317
1,254
(4,074)
(283) (285)
26,304
29,050
Deferred tax asset
Pension plan and other post-retirement
benefit plan deficits
340
98
12
(1,386)
(1,889)
Decommissioning, environmental and
other provisions
3,503
591
(2,513)
(8,618)
(12,108)
Derivative financial instruments
(50)
(6)
62
(672)
(734)
Tax
creditsb
1,476
(5,177) 256
(3,750)
(5,225)
Loss
carry
forward
(964)
249 (2,239)
(6,493)
(5,458)
Other deductible temporary differences
(785)
422 (45)
(1,872)
(1,139)
3,520
(3,823) (4,467)
(22,791)
(26,553)
Net deferred tax charge (credit) and net
deferred tax liability
(554)
(4,106) (4,752)
3,513
2,497
Of which
– deferred tax liabilities
7,982
7,238
– deferred tax assets
4,469
4,741
a The 2017 income statement and balance sheet are impacted by the reduction in US federal corporate income tax rate
from 35% to 21%, effective from
1 January 2018.
b The 2016 income statement reflected the impact of a loss carry-back claim in the US, displacing foreign tax credits
utilized in prior periods which are now carried forward.
The recognition of deferred tax assets of $3,503 million (2016 $3,839 million), in entities which have suffered a loss in either the current or preceding period, is supported by forecasts which indicate that sufficient future taxable profits will be available to utilize such assets. For 2017, $2,067 million relates to the US (2016 $2,974 million) and $1,336 million
relates to India (2016 $699 million).
In Extract 29.3 below, Hochschild Mining describes the general nature of its tax-related
contingent liabilities relating to fiscal periods that are still open to review by the tax
authorities and quantifies its estimate of the possible total exposure to tax assessments.
[IAS 12.88].
2496 Chapter 29
Extract 29.3: Hochschild Mining plc (2017)
Notes to the consolidated financial statements [extract]
34 Contingencies
[extract]
(a) Taxation
Fiscal periods remain open to review by the tax authorities for four years in Peru and five years in Argentina and Mexico, preceding the year of review. During this time the authorities have the right to raise additional tax assessments including penalties and interest. Under certain circumstances, reviews may cover longer periods.
Because a number of fiscal periods remain open to review by the tax authorities, coupled with the complexity of the
Group and the transactions undertaken by it, there remains a risk that significant additional tax liabilities may arise. As at 31 December 2017, the Group had exposures totalling US$46,664,000 (2016: US$43,931,000) which are assessed as
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 497
