Scope: income taxes, withholding taxes, grants and tax credits

Learning objectives

• Identify whether a levy is an income tax within the meaning of IAS 12 (a tax based on taxable profits, withholding taxes on distributions by a subsidiary, associate or joint arrangement).L1, L2
• Distinguish the treatment of a government grant or an investment tax credit (outside IAS 12) from the temporary differences they give rise to (within IAS 12).L2
• Determine, in a case, whether a tax falls within IAS 12 and whether the Pillar Two exception applies, separating the tax data given in the case from judgement.L2

Normative references

• IAS 12 §1The standard is applied in accounting for income taxes; the notion of income taxes is specified in para. 2.
• IAS 12 §2Income taxes include all domestic and foreign taxes that are based on taxable profits, as well as taxes, such as withholding taxes, payable by a subsidiary, associate or joint arrangement on distributions to the reporting entity.
• IAS 12The standard does not deal with the methods of accounting for government grants (IAS 20) or investment tax credits; it does, however, deal with the temporary differences that may arise from such grants or credits.
• IAS 12 §4AThe standard applies to income taxes arising from tax law enacted or substantively enacted to implement the Pillar Two model rules published by the OECD, including qualified domestic minimum top-up taxes. As an exception, the entity neither recognises nor discloses information about deferred tax assets and liabilities related to Pillar Two income taxes.

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

20 questions

• What does IAS 12 apply to?L1
• A foreign tax computed on the taxable profit of a branch located outside the entity's country is an income tax under IAS 12, just like the domestic tax on profits.L1
• A levy equal to a percentage of revenue, with no reference to profit, becomes an income tax under IAS 12 as soon as it is paid to the tax authorities.L1
• The withholding tax that a subsidiary must pay on the dividends it distributes to its parent is, for the parent as the reporting entity, an income tax under IAS 12.L1
• IAS 12 sets the method of accounting for government grants received by the entity, since such grants generally change its tax.L2
• Taxes arising from legislation enacted to implement the OECD Pillar Two rules are excluded from the scope of IAS 12, since they are computed under international rules.L2
• Quilmorel bears the following levies. Which one is an income tax under IAS 12?L1
• What primarily characterises an income tax under IAS 12?L1
• Ternavel obtains an investment tax credit linked to the purchase of a production line. Which statement about the role of IAS 12 is correct?L2
• The Haldermont group is subject to Pillar Two legislation enacted in several countries where it operates. What treatment does IAS 12 require for deferred tax related to those taxes?L2
• A joint arrangement in which Moranvel holds rights distributes part of its profits to Moranvel. The law of the joint arrangement's country requires it to pay a withholding tax on that distribution. For Moranvel, how should this withholding tax be classified?L1
• Of the levies borne by the Sarbelin group, which are income taxes under IAS 12?L1
• Which statements about government grants and investment tax credits are correct under IAS 12?L2
• Which statements about Pillar Two taxes are correct under IAS 12?L2
• Based on the analysis of the legislation provided by Ombrelys's tax specialists (case data), which levies fall under IAS 12?L2
• Velquerin, established in a fictitious country, pays a 'contribution to the regional development fund'. Under the law (case data), this contribution is a percentage of the taxable profit determined for the tax on profits, after the same add-backs and deductions. The accounting department classifies it as an operating expense because it 'is not corporation tax'. Which analysis should be adopted?L2
• The distributor Corbanis owes a 'territorial equity levy' equal to 0.5% of its gross revenue, payable whether the year is profitable or loss-making (case data). The financial controller proposes including it in income tax expense and computing deferred tax on it. Which analysis should be adopted?L2
• Lindomère receives a government grant to finance a press. Under its accounting policy (case data), it deducts the grant from the carrying amount of the press; tax law, however, uses the full cost of the press as its tax base. Which allocation of roles between the standards is correct?L2
• A subsidiary of the Astrenor group is subject, in its country, to a qualified domestic minimum top-up tax arising from enacted Pillar Two legislation. The group's tax specialists have computed the top-up tax due for the year (amount given in the case, not yet paid). How should it be treated in the subsidiary's financial statements?L2
• Which statements about levies relating to dividends are correct?L3