What is Deferred Income Tax?
According to the provisions of the Business Law, taxable income includes income from a business’s production, trading of goods, and provision of services, as well as other income. Other income here includes income from capital transfer, income from the transfer of investment projects, income from the use and ownership of assets, income from the transfer, lease, and liquidation of assets, and income from interest on deposits and capital loans, among others.
Currently, there is no specific concept for what a delayed corporate income tax is. However, it can be understood as the corporate income tax that a business will have to pay in the future, calculated based on temporary differences in corporate income tax payable in the current year.
Alternatively, it can be understood differently, where the delayed corporate income tax is the income tax that a business has to pay but is deferred to subsequent accounting periods.
Characteristics of Deferred Income Tax:
Standard accounting principles (GAAP) guide financial accounting practices, set conditions for calculating and handling specific economic events. The cost for income tax is a financial accounting item calculated based on income according to GAAP standards.
On the other hand, the Tax Department also provides specific rules for accounting for economic events. The difference between IRS and GAAP rules results in different outcomes for net income and income tax.
Deferred income tax is the result of the difference between the income tax expense reported on the income statement and the income tax actually paid.
Conflicts may arise when the income tax to be paid is higher than the income tax expense on the financial statements. If no other events occur, the deferred income tax account will be zero.
If a company does not have a deferred income tax liability, deferred income tax assets are created. This account represents the future economic benefit received from income tax exceeding income under GAAP.
Calculation of Deferred Income Tax:
According to the regulations of Circular 200/2014/TT-BTC, deferred income tax assets are calculated as follows:
Deferred income tax assets = temporary differences to be deducted + the value to be carried forward to the next year of deductible tax loss and unused tax incentives x the current corporate income tax rate.
In cases where at the time of recognizing deferred income tax assets, there is prior knowledge of changes in the corporate income tax rate in the future, if the recovery of deferred income tax assets falls within the effective period of the new tax rate, the tax rate to record the deferred assets will be calculated according to the new tax rate.
Temporary differences to be deducted are temporary differences that generate deductible amounts when determining taxable income in the future when the book value of assets is recovered or liabilities are settled.
Accounting for deferred income tax assets in a given year is carried out based on the offsetting principle between deferred income tax assets arising in the current year and deferred income tax assets recognized in previous years but reversed in the current year:
- If the deferred income tax assets arising in the current year are greater than the deferred income tax assets reversed in the current year, the difference is recognized as deferred income tax assets and reduces deferred income tax expense.
- If the deferred income tax assets arising in the current year are less than the deferred income tax assets reversed in the current year, the difference reduces deferred income tax assets and increases deferred income tax expense.
Example of Deferred Income Tax:
The most common example of a deferred income tax liability arises from differences in depreciation methods. GAAP allows companies to choose from various depreciation methods. However, the Tax Department may require the use of a depreciation method different from those in GAAP.
For this reason, the depreciation expense reported on the financial statements often differs from the depreciation expense on the company’s tax return. Over the life of the asset being depreciated, the depreciation expense under the two methods evens out, but there may be a deferred tax liability until then.
Accounting Principles for Deferred Income Tax:
– Account 243 is used to reflect the current value and changes in deferred income tax assets and liabilities.
Deferred income tax assets = Temporary differences to be deducted + The value to be carried forward to the next year of deductible tax loss and unused tax incentives x Current corporate income tax rate (%).
In cases where at the time of recognizing deferred income tax assets, there is prior knowledge of changes in the corporate income tax rate in the future, if the recovery of deferred income tax assets falls within the effective period of the new tax rate, the tax rate to record the deferred assets will be calculated according to the new tax rate.
– The basis for calculating the asset or liability tax and temporary differences:
- The basis for calculating the tax on the asset is the value to be deducted from the taxable income when the book value of the asset is recovered. If there is no taxable income, the tax base of the asset is equal to the book value of that asset.The tax base of the liability is its book value minus (-) the value to be deducted from taxable income when the liability is settled in future periods. For deferred revenue, the tax base is its book value minus the value of revenue that is not subject to tax in the future.
- Temporary differences are the differences between the book value of assets or liabilities in the Accounting Balance Sheet and the tax base of those assets or liabilities. Temporary differences include two types: temporary differences to be deducted and temporary differences to be taxed. Temporary differences to be deducted are temporary differences that generate deductible amounts when determining taxable income in the future when the book value of assets is recovered or liabilities are settled.
- Temporary differences regarding timing are just one of the temporary difference scenarios, for example, if accounting profit is recognized in this period but taxable income is calculated in another period.
- Temporary differences between the book value of assets or liabilities and the tax base of those assets or liabilities may not necessarily be temporary differences, for example: if accounting profit is recognized in this period, but taxable income is calculated in another period.
- Temporary differences between the book value of assets or liabilities and the tax base of those assets or liabilities may not be temporary differences regarding timing, for example, if the book value of an asset changes when reevaluating the asset but the tax base remains the same, then this temporary difference regarding timing is not a time difference.
- Accounting no longer uses the concept of “permanent differences” to distinguish from temporary differences when determining deferred income tax due to the time of recovery of assets or payment of liabilities, as well as the time for deducting assets and liabilities from taxable income, is finite.
– If the company is sure that it will have taxable income in the future to use temporary differences to be deducted, deductible tax losses, and unused tax incentives, deferred income tax assets are recognized for:
- All temporary differences to be deducted (excluding temporary differences arising from the initial recognition of assets or liabilities from a transaction that is not a business combination and has no impact on accounting profit and taxable income (or tax loss) at the time of the transaction).
- The remaining deductible amount of tax losses and unused tax incentives is carried forward to the next year.
– At the end of the year, the company must prepare a “Table of Determining Temporary Differences to Be Deducted,” a “Tracking Table for Unused Deductible Temporary Differences,” and the value to be carried forward to the next year for deductible tax losses and unused tax incentives as a basis for preparing the “Table of Determining Deferred Income Tax Assets” to determine the value of deferred income tax assets recognized or reversed in the year.
In conclusion, deferred income tax is quite important in the business and production activities of companies today. Based on the fundamental points mentioned above, it is hoped that readers will gain a general understanding of this type of tax to make appropriate production and business plans.
