The components of the estimated rate

Learning objectives

• Analyse the components of the estimated annual effective rate: the progressive tax rate structure expected to apply to the full year's earnings, changes in rates enacted or substantively enacted, and separate rates for each tax jurisdiction where practicable.L3, L4

Normative references

• IAS 34 §B13Because income taxes are assessed annually, the estimated average annual effective rate reflects a blend of the progressive rate structure expected for the full year's earnings, including enacted or substantively enacted rate changes scheduled to take effect later in the year; it is re-estimated on a year-to-date basis (para. 28), and a significant change in estimate is disclosed (para. 16A).
• IAS 34 §B14To the extent practicable, a separate estimated average annual effective rate is determined for each tax jurisdiction, and for each category of income subject to its own rate, and applied to the corresponding interim pre-tax income; otherwise, a weighted average of rates across jurisdictions or categories is used if it is a reasonable approximation of the effect of using more specific rates.

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

1 question

• Brasel SA operates in two tax jurisdictions. Case data: in A, estimated annual profit before tax of EUR 3,000,000 and estimated average annual effective rate of 20%; in B, EUR 1,000,000 and 35%. In the half-year, profit before tax is EUR 1,200,000 in A and EUR 300,000 in B. Management proposes to apply 35% to all the half-year profit (EUR 1,500,000) "for prudence". Write a short note on the income tax expense of the half-year, distinguishing rule, case facts and professional judgement.L3