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There has been extensive study of book tax differences(BTDs). One of the literatures states that BTDs produce in formativeness of earnings. These are contemporary research paper that has evidence that book tax differences provide information in regards to growth and persistence of pre tax income. The work argues that when there is a great book tax difference it signals a poor quality in earnings and also this may indicate that there will be an unfavorable consequence of future performance. Another literature suggests that book tax differences can provide information in regards to the extent of the company’s manipulation of income tax. For example (DE BOER, 2016) state that book tax differences indicate the existence of a tax sheltering activity. Also (Engdahl, 2011) supports this by producing evidence that large book tax differences have a greater likelihood of the books of accounts being audited by authorities and also greater settlement payments.
In previous tribunals, we have commented on the treatment that we must give, both temporary and permanent differences, between the book tax differences Accounting Result and the Fiscal Result admitted by the Treasury. Our intention now is to make a brief guide of three tribunes ordered by accounts, to help us monitor those expenses and revenues that we must keep in mind.
Although the Corporation tax is going to be presented in July of the year following its accrual, it is at the end of the year when we must proceed to its calculation and accounting of the book tax difference and it is at that moment when doubts begin to arise so much for its estimate as well as the accounting notes it generates (Fishman, n.d.). We begin to question whether our accounting result will be accepted by the Treasury as tax base or if otherwise some of our expenses will not be deductible or our income is well calculated. We know that the vast majority of expenses in accounting income are also taxable, so we are going to stop in those that raise some confusion and can be used with some normality in the company.
In general, with the accounts of expenses, income and other related fiscal issues will also be affected by tax differentials.
In this first forum, we will analyze the expense accounts.
These accounts, as a rule, present balances corresponding to the year and therefore do not require adjustments. However, we must be careful about accounts that span more than one exercise. If accounting has been followed the accrual principle (something obligatory on the other hand), the accounting and tax expense will be the same. If it has not been followed, we should make a positive temporary difference adjustment the year that the expense is higher and negative when it reverses.
We will take special care with the following expenses that can “touch” more than one exercise.
It is a non-deductible expense, therefore it makes a difference.
The accounting of corporation tax will be made as an expense in subgroup 63 accounts. Obviously, neither the current tax nor the deferred tax will be deductible (Graetz and Schenk, n.d.).
If what we are going to calculate is the tax and we start from the Accounting Result Before Taxes, the accounts will not be counted, so they do not affect my calculation. What we should take into account is the possibility of having two other accounts such as in our accounting and these also cause differences. These two accounts can be opened for example if there has been a change in the corporate tax rate determined by the Government that causes us to adjust the accounts .
Financial Expenses
Realization of provisions of The Corporate Income Tax Law establishes that the provisions will be deductible less those derived from implicit or implicit obligations. Losses from intangible assets, material and real estate investments The loss will be deductible Expenses will be deductible Exceptional It is very common to use this account as a “wild card” for a series of facts that we have no right to deduct (Palda, 2001). In these cases we face a permanent positive difference. We can include in it: Fines, criminal and administrative penalties, surcharges of compulsion and late submission (Wilson, 2009) . Loss of play Expenses without documentary justification (if invoice) To amortizations With this account we must take special care. If we accept the criteria established in the Tax Law, , the accounting and tax expense will be the same and therefore will not need any adjustment.
In accounting we use a criterion other than the fiscal , There will be a temporary difference. In the years in which the accounting expense is greater than the fiscal, the difference will be positive and in which the fiscal expenditure is greater will be negative. The most common cases where we are going to find this situation will be, if fulfilling the requirements of the LIS We opted for free repayment or accelerated depreciation.
If the company chooses to account for impairment by an individualized system. Requirements for impairment correction This system is fiscally deductible (referred to the time of accrual of the tax). When one of these circumstances is present (Slavnic, n.d.).
If there is a judicial claim or judicial litigation or arbitration procedure on which its collection depends. If the entity is of small size and follow this system, the amounts mentioned above will be deductible in compliance with the above requirements, plus 1% of the remaining debit balances. ) If the company follows the global system (Graetz and Schenk, n.d.) . Allowance for provision for commercial transactions As mentioned above, in most of the provisions, nothing is established in the tax basis, which is why the accounting criterion is accepted, provided that they are not endowed with implied or implied future obligations.
However, In provisions for commercial transactions tax regulations establish limitations.- If it is to cover repairs and reviews, tax deductibility is the result of applying to the volume of sales with live guarantees at the end of the tax period, the percentage determined by cats Made to be guaranteed in the period and in the previous two, divided by the total sales with guarantees made in those periods – In the case of returns of sale, the endowment will not be deductible (Taxation, 2000). But it will be the possible expenses that give rise to the returns with the same limitation discussed above. Losses due to impairment of long-term debt securities and shares It will not be considered a deductible. Positive temporary difference Impairment losses on long-term credits Do not be considered a deductible. Do not be considered a deductible. It will not be considered a deductible.
Journal 4; Book Tax Difference in Relation to Impairment of Losses
The first thing we should be clear about when calculating and accounting for corporation tax is that the accounting result and taxable income are two different concepts.
The accounting result is determined in accordance with the standards of the General Accounting Plan, the Commercial Code, the Capital Companies Act, the Accounting and Audit Institute resolutions, etc. Simply put, this is what we get as a result when we write the profit and loss account, the amount that appears in the account Profit for the year.
Tax shields are all those expenses that, recorded in the income statement of the company, determine, by reducing the taxable amount, a lower payment of income tax. Under that definition, then, ALL (so underlined and in bold) the annual expenses incurred by the firm (raw materials, salaries, rentals, etc.) are converted into EF (Nobes and Parker, 2012).
While this is correct in Finance and, above all, when evaluating projects, the EFs that interest us are those derived from three items of expenditure, namely: depreciation, financial expenses and derivatives Sales of fixed assets at the beginning or end of the investment (Melvin and Chan, 2010). The answer of why is simple and easy to understand: anything that reduces the cash outflow of the project – and the payment of income tax is one of them – will result in a greater availability of cash, which in turn will translate In a greater generation of value for the shareholder.
EFs that come from depreciation (EFD) and financial expenses (EFI) are easy to understand. The summary in the following tables, in which an income tax rate of 30% is assumed:
Step 1. Verify that there are profits in the project or company that year. If yes, then go to step Step 2. Multiply the income tax rate, in our case 30%, by the depreciation of the period in case you are looking for the EFD or by the financial expenses when you look for the EFI. The amount thus obtained will be the savings produced in the income tax.
Regarding the tax result, say that it is calculated according to the Corporate Tax Law. A few years ago, the law specifically set out the revenues and expenses that had to be taken into account in calculating the tax base, but nowadays the accounting result is based on a series of adjustments. These adjustments are the so-called “off-balance adjustments” and “corrections to the accounting result”.
Journal 5: Book Tax Difference in Relation to Deductibles
Thus, as each result is calculated according to different laws, discrepancies may occur between one and another, either because an income or expense is for accounting purposes but not for tax purposes, because there are different rates of imputation in results in the two Fields, etc (Nahuis and Tang, 2005).
Let us suppose that in our company all the expenses and revenues produced are recorded in the income statement (it is the most normal and we will surely find ourselves in the usual practice). Well, it is easy to discern that if all accounting expenses / income are also for tax purposes, the accounting result will coincide with the tax base (Melvin and Chan, 2010). However, this is very difficult to happen, since the expense or income by corporation tax, is an accounting expense / income that is not tax deductible
Conclusion
To a greater extent, the various streams of literature allude to the notion that when there is a large spread between taxable income and book income there is a possibility of manipulation of either taxable or book income. Presently, there is no existence of theoretical models which may be useful in providing insights on specifically the resourcefulness of book tax differences to participants of capital markets. Absence of such theory has only made us rely on prior research to inform both research design and hypothesis development.Therefore, it is true that the greater the BTDs the greater the tax payable by the company.
References
DE BOER, P. (2016). BASICS OF FINANCIAL MANAGEMENT. [Place of publication not identified]: TAYLOR & FRANCIS.
Engdahl, S. (2011). Taxation. Farmington Hills, MI: Greenhaven Press.
Fishman, S. (n.d.). The real estate agent’s tax deduction guide.
Graetz, M. and Schenk, D. (n.d.). Federal income taxation.
Green, R. (2005). The tax guide for traders. New York: McGraw-Hill.
Melvin, T. and Chan, E. (2010). How to legally reduce your tax. Pymble, N.S.W.: HarperCollins.
Murray, R. (2016). Tax avoidance. [Place of publication not identified]: Sweet & Maxwell.
Nahuis, R. and Tang, P. (2005). Environmental policy competition and differential tax treatment. The Hague, The Netherlands: CPB Netherlands Bureau for Economic Policy Analysis.
Nobes, C. and Parker, R. (2008). Comparative international accounting (10a. ed.). Harlow: Pearson Educacio?n.
Nobes, C. and Parker, R. (2012). Comparative international accounting. Harlow: Pearson Education.
Palda, P. (2001). Tax evasion and firm survival in competitive markets. Cheltenham,(UK),Northampton (USA): Edward Elgar.
Slavnic, N. (n.d.). European capital movements and corporate taxation.
Taxation. (2000). New York: United Nations.
Wilson, D. (2009). The paradoxes of transparency. Amsterdam: Amsterdam University Press.
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