Learning Objectives:
1. Explain why the profit presented in the financial statements may be different from the taxable profit
2. Determine the tax base of assets and liabilities
3. Compute for income tax expense and current tax expense
4. Compute for deferred tax assets and deferred tax liabili...
1. Explain why the profit presented in the financial statements may be different from the taxable profit
2. Determine the tax base of assets and liabilities
3. Compute for income tax expense and current tax expense
4. Compute for deferred tax assets and deferred tax liabilities
Income taxes refer to taxes that are based on taxable profits.
The income tax expense in the statement of comprehensive income is computed using PFRSs while the
current tax expense in the income tax return (ITR) is computed using Philippine tax laws.
Note: PFRSs and tax laws have different accounting treatments for some economic activities.
Accounting profit vs. Taxable profit
Accounting profit or loss Taxable profit (Tax loss)
Computed using PFRSs Computed using tax laws
Equal to the profit or loss for a period before Equal to taxable income less tax-deductible
deducting income tax expense expenses
Similar items: pretax income, financial income, Similar item: taxable income
and accounting income
The varying treatments of economic activities between the PFRSs and the tax laws result to the
following differences:
1. Permanent differences
2. Temporary differences
A. Permanent Differences
It arises when income and expenses enter in the computation of either accounting profit or taxable
profit but not both. If an item is included in the computation of one, it will never be included in the
other.
Permanent differences usually arise from non-taxable and non-deductible expenses and those that
have already been subjected to final taxes. In other words, these are items excluded from the income
, tax return. Permanent differences do not have future tax consequences and hence do not give rise to
deferred tax assets and liabilities.
Examples of permanent differences:
a. Interest income on government bonds and treasure bills
b. Interest income on bank deposits
c. Dividend income
d. Fines, surcharges, and penalties arising from violation of the law
e. Life insurance premium on employees where the entity is the irrevocable beneficiary.
B. Temporary Differences
Temporary differences include timing differences. Timing differences arise when income and expenses
are recognized for financial reporting purposes in one period but are recognized for taxation purposes in
another period (or vice versa).
Temporary differences have future tax consequences and hence give rise to either deferred tax assets or
deferred tax liabilities.
Temporary differences are either taxable temporary differences or deductible temporary differences.
Taxable vs. Deductible temporary difference
Taxable temporary Deductible temporary
difference difference
Arises when the financial Arises when financial
income is greater than the income is less than the
Taxable income (FI > TI) taxable income (FI < TI)
If multiplied by the tax If multiplied by the tax
rate, results to deferred rate, results to deferred
tax liability. tax asset.
Income tax expense vs current tax expense
Income tax expense Current tax expense
Income tax expense or tax expense (tax income) Current tax expense or current tax is “the amount
– is the total amount included in the of income taxes payable (recoverable) in respect
determination of profit or loss for the period. It of the taxable profit (tax loss) for a period.
“comprises current tax expense (current tax
income) and deferred tax expense (deferred tax
income).
Computed using PFRS Computed using tax laws
Reported in the Statement of comprehensive Reported in the Income Tax Return
income
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