Ebook Financial accounting (4E): Part 2

www.downloadslide.com Chapter 12 Accounting and taxation Contents 12.1 Introduction 236 12.1.1 Rationale for this chapter 236 12.1.2 Separate taxation for companies 236 12.1.3 International differences in taxes 237 12.2 International differences in the determination of taxable income 238 12.2.1 Introduction 238 12.2.2 Depreciation 239 12.2.3 Capital gains 239 12.2.4 Dividends received 239 12.2.5 Interest 239 12.2.6 Other taxes 240 12.3 Tax rates and tax expense 240 12.4 Deferred tax 241 Summary 247 References and research 247 Exercises 248 Objectives After studying this chapter carefully, you should be able to: n outline some of the main ways in which corporate taxation can differ internationally; n explain the distinction between accounting profit and taxable income; n discuss some major international differences in the tax base and give simple examples; n outline the rationale for the recognition of deferred tax assets and liabilities in financial statements; n calculate amounts of deferred tax for some basic examples. 235 www.downloadslide.com Chapter 12 · Accounting and taxation 12.1 Introduction 12.1.1 Rationale for this chapter There are several related purposes of studying taxation. First, corporate taxation clearly has some significant effects on net profit figures and on other financial reporting matters. In particular, it has been shown earlier (e.g. in Chapter 5) that in some continental European countries the rules relating to the taxation of corporate income have a dominant effect on financial accounting measurement and valuation rules in an individual company. For example, there is a strong influence of tax rules on depreciation charges on individual company financial statements in Germany; and if asset values are changed on a balance sheet, this generally affects tax liabilities for individual companies in France. By contrast, neither of these two points is true for the United Kingdom. A second major topic is how to account for the effects of the differences between the tax rules and the financial reporting rules. This is a major point under the national accounting rules in those countries where the tax and accounting practices are separated on a number of issues. Further, in any country, for those groups using IFRSs for the preparation of consolidated financial statements, there are likely to be substantial differences between tax and financial reporting. This leads to the topic of deferred tax, which is examined in the fourth section of this chapter. Thirdly, an understanding of corporate taxation in different countries is a neces-sary introduction to a study of business finance and management accounting. However, it is often omitted from books on these subjects. Hence there is an introduction here. 12.1.2 Separate taxation for companies In most countries, it has only been within the last hundred years that com-panies have begun to be treated differently from individuals for the purposes of taxation. However, the question of whether a business is a separate entity from its owner(s) has a long history in disciplines such as accounting, company law and economics. Italian accountants had decided by the thirteenth century that they wished to separate the business from its owners, so that the owners could see more clearly how the business was doing. Consequently, as examined in Chapter 2, balance sheets of businesses show amounts called ‘capital’ that represent amounts contributed by the owners. During the nineteenth century, various laws were enacted in European countries to the effect that companies have a legal existence independently from their owners, that these companies may sue and be sued in their own names, and that the owners are not liable for the debts of a company beyond their capital contributions. Economists have (in micro-economic theory) extended the separation of the owner from the business. When calculating the profit of the business to a sole trader, for example, economists would include as costs of the business the opportunity costs of the amounts that the owner could have earned with the invested time, the invested property and money if they had been invested outside the business instead. 236 www.downloadslide.com 12.1 Introduction As mentioned, it was not until the twentieth century that revenue law (i.e. taxation law) caught up with this separation and that companies began to be taxed in a different way from individuals. As is frequently the case with taxation, changes were associated with the need to finance warfare. In particular, the rearmament of nations before the two World Wars imposed a heavy burden on government finances, which was partly supported by the revenue from taxes on companies. Another vital point – certainly in EU countries – is that tax is calculated on the basis of individual legal entities; it is not calculated on the basis of groups of companies, although in particular circumstances groups are allowed to pass losses or dividends around. This means that consolidated financial statements (as introduced in Chapter 4 and taken further in Chapter 14) are not generally relevant for the purposes of taxation. This chapter is concerned with the taxation of corporate income, which is the major corporate tax in most countries. However, there are other taxes on corpora-tions in Europe: on property, on share capital, on payroll numbers, and so on. 12.1.3 International differences in taxes Three major types of difference between corporate income taxes concern tax bases, tax systems and tax rates. The international differences in corporate income tax bases (or definitions of taxable income) are very great. Although in all countries there is some rela-tionship between accounting income and taxable income, in several continental European countries (but not Denmark, the Netherlands or Norway, for example) the relationship is much closer than it is in the United Kingdom, the United States or Australia (see Chapter 5). Further, it has been pointed out throughout this book that the underlying measurement of accounting income itself varies substantially by country. These two points, which are of course linked, mean that companies with similar profits in different countries may have vastly different taxable incomes. The second basic type of difference lies in tax systems. Once taxable income has been determined, its interaction with a tax system can vary, in particular with respect to the treatment of dividends. Corporations may have both retained and distributed income for tax purposes. If business income is taxed only at the corporate level and only when it is earned, then different shareholders will not pay different rates of personal income tax. If income is taxed only on dis-tribution, taxation may be postponed indefinitely. On the other hand, if income is taxed both when it is earned and when it is distributed, this creates economic double taxation, which could be said to be inequitable and inefficient. The third major international difference is in tax rates. There is a brief section on this later in the chapter. These differences in tax bases, tax systems and tax rates could lead to several important economic effects: for example, on dividend policies, investment plans and capital-raising methods. Such matters are not dealt with here; and neither are the important issues of transfer pricing within groups and international double taxation that, in practice, help to determine taxable profits and tax liabilities. 237 www.downloadslide.com Chapter 12 · Accounting and taxation Further international differences arise in the timing of the payment of taxes. For example, in some countries, corporate taxes are paid on a quarterly basis using estimates of taxable income for the year. In other countries, taxes are paid many months after the accounting year end – after the profit figures have been calculated and audited. In many continental countries taxes are not finally settled until a tax audit, which may be some years later. In some countries, e.g. Italy and Germany, there are regional as well as national corporate income taxes. Both these taxes generally use a similar tax base, but the composite tax rate is, of course, higher. The taxation of businesses is a very complex area, particularly when a business operates in more than one country. This chapter is only able to introduce some of the issues and therefore leaves out much of the complexity. One complication is that the legal types of businesses differ from country to country, as does the scope of particular business taxes. This chapter deals mainly with companies that can clearly be seen as separate from their owners for tax purposes. 12.2 International differences in the determination of taxable income 12.2.1 Introduction The obvious way to classify corporate income taxation bases is by degrees of difference between accounting income and taxable income. As should be clear from Chapter 5, the influence of taxation on accounting varies internationally from the small in the United Kingdom to the dominant in Germany. Such is the importance of this difference for accounting that a simple classification of tax bases would look much like a simple classification of accounting systems (see Chapter 5). For example, a two-group classification in either case might put Denmark, the Netherlands, the United Kingdom and the United States in one group, and France, Germany and Japan in the other. In the first of these groups, many adjustments to accounting profit are neces-sary in order to arrive at the tax base, namely taxable income. In the other group, the needs of taxation have been dominant in the evolution of accounting and auditing. Consequently, the tax base corresponds closely with accounting profit. As discussed in many places in this book, several of these continental European countries began in the late 1980s to de-couple accounting from tax rules. More recently, the impact of increasing globalization of the finance market and the rise in the influence of the IASB have accelerated this process, especially as regards consolidated financial statements. If a German company, for example, uses IFRSs for its consolidated financial reporting, this creates many significant differences between its financial reporting and the way that taxation works in Germany. However, even in Germany, tax and accounting began to move apart, particu-larly as a result of a law of 2008. Some of the differences in tax bases are discussed below; in a few cases this summarizes the coverage of topics elsewhere in the book. There is a concentration 238 www.downloadslide.com 12.2 International differences in the determination of taxable income here on four EU countries, but these should be taken as examples of how the cal-culation of taxable income can differ. 12.2.2 Depreciation Naturally, in all the countries studied in this book the tax authorities take an interest in the amount of depreciation charged in the calculation of taxable income. This concern varies from fairly precise specification of the rates and methods to be used (as in most countries), to an interference only where charges are unreason-able (as in the Netherlands). As has been pointed out in earlier chapters, the vital difference for financial reporting is that tax depreciation must usually be kept the same as accounting depreciation in Franco-German countries, but not under Anglo-Dutch accounting. For example, in the United Kingdom for large companies for 2009/10, machin-ery is depreciated at 25 per cent per annum on a reducing balance basis, and industrial buildings are depreciated at 4 per cent per annum on cost. There is a complete separation of this scheme of ‘capital allowances’ from the depreciation charged by companies against accounting profit. Unlike other countries, the United Kingdom does not give any depreciation tax allowance for most com-mercial buildings. By contrast, the quotation from the German company, BASF, in Chapter 9 illustrated some aspects of tax influence on depreciation. 12.2.3 Capital gains Capital gains are increases in the value of fixed assets above their cost. They are taxed at the point of sale. The taxation of capital gains varies substantially by country. In the United Kingdom, the Netherlands and Germany, capital gains are added to taxable income in full. In France, short-term capital gains (defined as for periods less than two years) are fully taxed, but some types of long-term capital gains are taxed at a reduced rate. The degree to which taxation on a gain can be postponed by buying a replacement asset (known as roll-over relief ) also varies internationally. 12.2.4 Dividends received The degree to which the dividends received by a company must be included has an important effect on its taxable income. In Germany and the United Kingdom, domestic dividends are generally not taxed in the hands of a recipient company. In France and the Netherlands, dividend income is fully taxed unless there is a holding of at least 5 per cent. 12.2.5 Interest Dividends paid are not tax-deductible in most systems, and of course nor are they considered to be expenses in the calculation of accounting profit. By contrast, interest payments are usually expenses for both accounting and tax purposes. Dividends are a share of post-tax profit paid to the owners of the company, 239 ... - tailieumienphi.vn