A86045 Accoun,ng and Financial Repor,ng (2017/2018) Session 7 Taxa,on: Direct & Indirect Paul G. Smith B.A., F.C.A.
SESSION 17 OVERVIEW AND OBJECTIVES A 86045 Accoun,ng and Financial 2 Repor,ng
Course Overview 1. Financial repor,ng under IFRS 14. Construc,on contracts 2. Financial analysis: Ra,o analysis 15. Other Non-financial liabili,es 3. Financial analysis: Segments and EPS 16. Review session PGS 4. Review session 17. Mid term test 5. Revenues 18. Financial Instruments 1 6. Costs and expenses 19. Financial Instruments 2 PGS 7. Taxa,on - Direct and Indirect 20. Review session 8. Non-current assets - Intangible assets 21. Cash Flow Statement 9. Non-current assets - Tangible assets 22. Group accounts/Business comb PT 10. Financial leases 23. Review session 11. Impairment of assets 24. Review session 12. Review session 25. Final test PGS PT 13. Inventories A 86045 Accoun,ng and Financial 3 Repor,ng
Objec,ves of Session 17 At the end of this session students will: a) understand the difference between direct and indirect taxa7on and how to account for these taxes under IFRS 12 b) be able to perform a simple current income tax and deferred tax computa7on, and c) Will be able to complete a simple reconcilia/on of tax charge . A 86045 Accoun,ng and Financial 4 Repor,ng
Overview of Session 7 Types of taxa,on • Direct • Indirect • Witholding taxes Value added taxes Current income taxes • Taxable income/expense • Non-taxable income expenses Deferred income taxes • Temporary differences • Permanent differences Reconcilia,on of tax charge – Effec,ve tax rate Uncertain tax posi,ons A 86045 Accoun,ng and Financial 5 Repor,ng
Session 7 Overview Mins Session overview and objec,ves of Session 7 5 Review of pre-work and session 6 recap 5 Types of taxa,on 5 Value added tax 15 Research assignment RA 5 Income Taxes 25 Current income taxes 20 Deferred income taxes 35 Reconcilia,on of tax charge 10 Uncertain tax posi,ons 5 Overview of session 8, required reading and assignment 5 for next session Summary and valida,on 5 135 A 86045 Accoun,ng and Financial 6 Repor,ng
Session 7 Pre-work • Reading – Melville Interna,onal Financial Repor,ng – A Prac,cal Guide : • Chapter 14 – Employee benefits – IASB Statements • IAS 19 Employee benefits • IFRS 2 Share-based payments • Exercises – Melville 14.1 – 14.6 – Melville on-line mul,ple choice ques,ons for chapter 14 – Ex 6 Costs and expenses - Exercises • Research assignment – RA 5 Income taxes accoun,ng policies and effec,ve tax rates A 86045 Accoun,ng and Financial 7 Repor,ng
RA 5 Income taxes Company__________ Accoun,ng Policy for income taxes A 86045 Accoun,ng and Financial 8 Repor,ng
RA 5 Income taxes Company_________ Effec,ve tax rate Reasons why this is different from the statutory tax rate A 86045 Accoun,ng and Financial 9 Repor,ng
SESSION 6 RECAP AND PRE-WORK SESSION 7 A 86045 Accoun,ng and Financial 10 Repor,ng
Session 6 Summary • Classifica,on of costs/expenses by nature or by des,na,on • Cost of goods sold • Other costs/expenses – accruals/deferrals • Employee expenses – Short-term benefits – Wages and salaries – Post employment benefits - Pensions – Share-based payments - Stock op,ons A 86045 Accoun,ng and Financial 11 Repor,ng
TYPES OF TAXATION A 86045 Accoun,ng and Financial 12 Repor,ng
Taxa,on "'In this world nothing can be said to be certain, except death and taxes." Benjamin Franklin (1706-90), in a leLer to Jean-Bap7ste Leroy, 1789, which was re-printed in The Works of Benjamin Franklin, 1817 A 86045 Accoun,ng and Financial 13 Repor,ng
Types of Taxa,on Corporate Income taxes, Taxes on Profits (Can also be Direct withholding taxes, capital imputed) gains taxes Sales taxes, value added Company acts as a collec,on Indirect agent for the tax authori,es taxes Stamp duty, registra,on Taxes on specific transac,ons e.g. Other purchase of a company, land etc. taxes A 86045 Accoun,ng and Financial 14 Repor,ng
VALUE ADDED TAX A 86045 Accoun,ng and Financial 15 Repor,ng
Value-added tax (VAT) Company A Selling price + VAT Company B VAT on sales, less VAT on purchase to Tax Selling price + VAT AuthoriLes Final Company C consumer Selling price + VAT A 86045 Accoun,ng and Financial 16 Repor,ng
Accoun,ng for VAT Sales Purchases 100 1 2 50 1. Record sale of €100 plus 20% VAT 2. Record purchase of €50 plus 20% VAT 3. Record payment to VAT authoriLesn of net amount due Accounts receivable Accounts payable 1 120 60 2 VAT Return Output tax 20 VAT Payable 2 10 20 1 Input tax (10) Sales Invoice Purchase Invoice 3 10 Balance due 10 Goods €100 Goods €50 VAT @20% €20 VAT @20% €10 Total due €120 Total due €60 Cash 10 3 A 86045 Accoun,ng and Financial 17 Repor,ng
VAT – Some common issues VAT is never reported as part Export sales of Sales or Purchases • VAT exempt • Documenta,on • VAT credits • VAT warehouses • Habitual exporter status Imports Tax point • Goods – generally the date of delivery • Services – generally the date of invoicing VAT rates – These differ by country and by type of goods or services Financial impact of overdue accounts receivable A 86045 Accoun,ng and Financial 18 Repor,ng
VAT Rates Italy Rate Applicable to (examples) 4% Milk, vegetables, fruit, newspapers, houses, etc. 10% Meat, eggs, plants, grapes, rice, sugar, chocolate, vinegar, electricity, metano, 22% Furs, spumante, motorcycles, carpets, most goods and services A 86045 Accoun,ng and Financial 19 Repor,ng
CURRENT INCOME TAXES A 86045 Accoun,ng and Financial 20 Repor,ng
Current Tax IAS12 defines current tax as " the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period. ” The term "income taxes" refers to any tax which is payable on an en,ty's profits, regardless of the name given to that tax in the country concerned. A 86045 Accoun,ng and Financial 21 Repor,ng
Income taxes Income taxes are levied by governments on income earned by • individuals/enterprises. The percentage payable and the determina,on of taxable income • are governed by na,onal income tax legisla,on. Tax payable is normally determined annually with the filing of a Tax • Declara,on. IAS 12 (Income Taxes) is the accoun,ng standard that applies in • accoun,ng for income taxes, including all domes,c and foreign taxes based on taxable profits. It also applies to withholding taxes that are payable by a subsidiary, • associate or joint-venture on distribu,ons to a repor,ng enterprise. Taxable profit is usually different from accoun,ng profit. • A 86045 Accoun,ng and Financial 22 Repor,ng
Accoun,ng Income & Taxable Income • Accoun,ng profit is defined by IAS 12 as: “ profit or loss for a period before deducLng tax expenses ”, where: accoun,ng profit = revenues – expenses revenues and expenses are recognised according to accoun,ng standards. Taxable profit (or loss) is defined in the same standard as: • “ profit or loss for a period, determined in accordance with the rules established by the taxaLon authoriLes, upon which income taxes are payable (recoverable) ”, where: taxable profit = taxable income – deduc,ons allowable for tax against that income. A 86045 Accoun,ng and Financial 23 Repor,ng
Current income taxes Accoun,ng income (loss) XXX,XXX + Amounts to be added back XXX - Amounts to be deducted (XXX) Taxable income (loss) XXX,XXX X Tax rate % XX% Income taxes due XX,XXX Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period. A 86045 Accoun,ng and Financial 24 Repor,ng
Common add backs/ Deduc,ons Add backs DeducLons • Provisions e.g. warranty, • Actual warranty expenses inventory obsolescence, incurred con,ngencies, etc. • Actual interest income/ • Non deduc,ble expenses e.g. expense fines, penal,es, entertaining • Accelerated tax • Government grants deprecia,on • Deprecia,on and amor,za,on greater than allowed for tax • Bad debt write-offs purposes • Tax loss carry-forwards • Accrued financial income/ expense A 86045 Accoun,ng and Financial 25 Repor,ng
Compara,ve tax rates Country Corp Withholding Taxes Loss Loss Tax% % CFwds CBacks Dividends Interest Royal,es Italy 27.9 0/1,2/26 0/12,5/26 0/22,5/30 U/L - UK 20 - 20 20 U/L 1yr USA 15-39 30 30 30 20yrs 2yrs Brazil 15 - 15 15 U/L - Switzerland 12-24 35 0/35 - 7 - Libya 20 - - 5 - 65 (O&G) Japan 23,4 20 15/20 20 9 1 Sweden 22 30 - - U/L - Source: EY 2017 Worldwide Corporate Tax Guide A 86045 Accoun,ng and Financial 26 Repor,ng
Tax payments - Italy Year 20X0 Year 20X2 Year 20X1 Tax due €50,000 Tax due €100,000 Tax due €100,000 June 16 Nov 30 June 16 Nov 30 Balance Year 20XO 500 40% of 99% of Prior Year 19,800 100,000 60% of 99% of Prior Year 29,700 Balance Year 20X1 50,500 40% of 99% of Prior Year 39,600 60% of 99% of Prior Year 59,600 A 86045 Accoun,ng and Financial 27 Repor,ng
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