Dividends and withholding taxes

Learning objectives

• Determine the measurement rate when income tax depends on whether profits are distributed.L2
• Recognise the tax consequences of a dividend when the liability to pay the dividend is recognised, according to where the distributed profits originated.L2, L3
• Distinguish a withholding tax paid on behalf of shareholders (equity) from additional tax borne by the entity.L3

Normative references

• IAS 12 §52AIn some jurisdictions, income taxes are payable at a higher or lower rate, or are refundable or payable, if part or all of the net profit or retained earnings is paid out as a dividend; current and deferred tax are then measured at the tax rate applicable to undistributed profits.
• IAS 12 §57AThe entity recognises the income tax consequences of dividends, as defined in IFRS 9, when it recognises a liability to pay a dividend; because those consequences are linked more directly to past transactions or events that generated distributable profits than to distributions to owners, they are recognised in profit or loss, other comprehensive income or equity according to where those past transactions or events were recognised.
• IAS 12 §65AWhen an entity pays dividends, it may be required to pay a portion of them to the taxation authorities on behalf of shareholders (withholding tax); this amount paid or payable is charged to equity as part of the dividends.
• IAS 12 §82AIn the circumstances described in para. 52A, the entity discloses the nature of the potential income tax consequences that would result from the payment of dividends to its shareholders; it also discloses the amounts of those consequences that are practicably determinable and whether there are any potential consequences that are not practicably determinable.
• IAS 12 §87ATo comply with para. 82A, the entity describes the important features of the income tax systems and the factors that will affect the amount of the potential income tax consequences of dividends.
• IAS 12 §87BIt is sometimes impracticable to compute the total amount of the potential income tax consequences of a dividend distribution, for example where the entity has a large number of foreign subsidiaries; some portions of that amount may nevertheless be easily determinable (for example, tax refundable on future distributions in a group that has paid tax at a higher rate on its undistributed profits) and are then disclosed.
• IAS 12 §87CAn entity required to provide the disclosures in para. 82A may also be required to provide disclosures on temporary differences associated with investments in subsidiaries, branches and associates or interests in joint arrangements; it considers this in determining the information to be disclosed under para. 82A. Thus, when it discloses the aggregate amount of temporary differences associated with subsidiaries for which no deferred tax liabilities have been recognised and it is impracticable to compute those liabilities, potential income tax consequences of dividends relating to those subsidiaries may not be practicably determinable.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

18 questions

• The tax consequences of a dividend for the entity paying it are recognised when it recognises the liability to pay the dividend.L2
• The withholding tax that the entity pays to the tax authorities on behalf of its shareholders, when it pays a dividend, is recognised as the entity's tax expense.L2
• An entity whose tax depends on the distribution of its profits, and for which it is impracticable to compute the total amount of the potential tax consequences of a dividend, has nothing to disclose on the matter in its notes.L2
• In Ulmerac's jurisdiction, distributed profits are taxed at a lower rate than retained profits. The board proposes a dividend in February 20X6, after the reporting date of 31 December 20X5; no dividend liability exists at the reporting date. Which rate does Ulmerac use at 31 December 20X5?L2
• Valquerne declares a dividend, recognised as a liability; the legislation in the case imposes on it additional tax on distributed profits. Those profits come from its ordinary sales and production. Where does it recognise this additional tax?L2
• Wiltrane is subject to a regime in which tax depends on the distribution of profits. What information does it provide about the potential tax consequences of paying dividends?L2
• Xaviole proposes a dividend after the reporting date, before the financial statements are authorised for issue; it is not recognised as a liability. Under the legislation in the case, the dividend will give rise to additional tax. What does Xaviole do?L2
• When paying a dividend, Yvrelac bears two levies set by the legislation in the case: (a) a 15% withholding deducted from the dividend and paid over on behalf of the shareholders; (b) additional tax of 4% owed by Yvrelac itself, the distributed profits arising from its ordinary activity. Which statements are correct?L3
• Which statements about levies relating to dividends are correct?L3
• Zelmonde has been taxed at the higher rate for undistributed profits. Under the legislation in the case, a distribution entitles it to a refund equal to {refund_rate}% of the dividend. It declares a dividend of {dividend}, recognised as a liability; the distributed profits arise from its ordinary activity. Compute the tax income to be recognised.L2
• Amorvelle declares a dividend of {dividend}, recognised as a liability. Under the legislation in the case, the distribution triggers additional tax of {extra_rate}% of the dividend, borne by Amorvelle. According to the analysis in the case, {pl_origin_share}% of the distributed profits were generated by transactions recognised in profit or loss and the rest by gains recognised in OCI. Compute the additional tax and its allocation.L3
• Brontelle declares a gross dividend of {dividend}. Under the legislation in the case, it must withhold {withholding_rate}% of the dividend and pay it to the authorities on behalf of the shareholders. Compute the withholding, the net amount due to shareholders and the effect on Brontelle's tax expense.L3
• Cardelle recognises a dividend of {dividend} as a liability. Under the legislation in the case, the distribution requires it to pay additional tax of {extra_rate}% of the dividend; the distributed profits come from its operations. Record the entry for the additional tax.L3
• Dalvanne declares a gross dividend of {dividend}. Under the legislation in the case, it withholds {withholding_rate}% on behalf of the shareholders and will pay it to the authorities. Record the entry for the declaration of the dividend.L2
• Estravane declares a dividend of 300,000. Under the legislation in the case, it must itself pay a 7% distribution tax (21,000); its profits come from its operations. The accountant charged the 21,000 to equity with the dividend. Where is the error?L3
• Fervalde declares a gross dividend of 800,000 and withholds 10% (80,000) on behalf of its shareholders, as required by the legislation in the case. The accountant recognised the 80,000 as current tax expense and charged only 720,000 to equity. Where is the error?L3
• In Gorvanne's jurisdiction, distributed profits are taxed at 20% and retained profits at 30% (case data). At 31 December 20X5, the shareholders have not yet decided on any distribution; a dividend will be declared in April 20X6. How does Gorvanne measure its current and deferred tax at 31 December 20X5?L3
• In Lumbrac's country, tax on distributed profits is higher than on retained profits (case data); Lumbrac therefore measures its tax at the rate for undistributed profits. What does it disclose about future dividends?L3