PAS 12 Income Taxes

Accounting Income
-net income for the period before deducting income tax expense.
Income computed in accordance with accounting standards.
Net income in the income statement
Taxable Income
-income computed in accordance with tax law and regulation. Income
appearing on the income tax return.
Net income in the ITR.
Differences
Permanent differences Temporary differences
-Nontaxable revenue -Differences between the carrying amount of an asset or
liability and the tax base.
-Nondeductible expenses
They have future tax consequences.
They have no future tax consequences.
•Taxable temporary difference
•Interest income on deposits
-future taxable amount
•Dividends received
-deferred tax liability
(Nontaxable permanent differences)
•Life insurance premium where the entity is a beneficiary on
an officer or employee. •Deductible temporary difference
•Tax penalties, surcharges and fines. -future deductible amount
(Nondeductible permanent differences) -deferred tax asset
Carrying amount VS. Tax base
Carrying Amount VS. Tax Base
Carrying Amount
-the amount an asset or liability in reported in
accordance with the accounting standards.
Tax Base
-the amount attributable to an asset or liability for tax purposes.
•Tax base of an asset
e.g capitalized cost that are
-“capitalized” as asset
-deducted one-time in the return.
•Tax base of a liability
e.g warranty liability
-liability in the balance sheet
-deductible only in the tax return when actually paid.
CA asset > tax base → deferred tax liability
CA liability < tax base → deferred tax liability
CA asset < tax base → deferred tax asset
CA liability > tax base → deferred tax asset
 Accounting Income xxx
± Permanent differences xxx
Income subject to tax xxx
± Temporary differences xxx
Taxable income xxx
 Taxable income
X Tax Rate
Current income tax expense

Temporary differences (+/-)

X Tax Rate
Deferred income tax expense
 Current Income Tax Expense
+ Deferred Income Tax Expense

Total Income Tax Expense

Problem
ABC Company began operations at the beginning of the current year. At the end of the first year of operations, the entity reported
₱6,000,000 income before income tax in the income statement but only ₱5,100,000 taxable income in the tax return.
Analysis of the ₱900,000 difference revealed that ₱500,000 was a permanent difference and ₱400,000 was a temporary tax liability
difference related to a current asset.
The enacted tax rate for the current year and future year is 30%.
1.What is the current tax expense?
a.1,800,000
b.1,530,000
c.1,380,000
d.1,680,000
2.What is the total income tax expense to be reported in the income statement for the current year?
a.1,800,000
b.1,530,000
c.1,650,000
d.1,950,000
SOLUTION
Taxable income 5,100,000
X Tax Rate 30%
1,530,000 (B)

Temporary tax liability 400,000

X Tax Rate 30%
Deferred tax expense 120,000
+ Current tax Expense 1,530,000
Total Tax expense 1,650,000 (C)