What is deferred corporate income tax? Regulations on accounting for deferred corporate income tax. Formula and calculation of deferred corporate income tax, with examples.
I. Learn about deferred corporate income tax
1. What is deferred corporate income tax?
Deferred corporate income tax (CIT) is tax that will be paid or refunded in the future. This amount will be calculated based on the temporary difference subject to corporate income tax in the current year.
2. Characteristics and causes of deferred corporate income tax
2.1. Characteristics of deferred corporate income tax
Deferred income tax arises from the difference between the recognized bases of items recorded in the company’s financial statements related to accounting and tax. Deferred income tax is reflected in the financial statements as a tax liability of accounting and tax. It is also considered a tool that will help balance accounting and tax obligations.
If the amount of deferred income tax payable in the future is greater or less than the amount actually payable, companies need to recognize a deferred income tax liability.
➨ Raising the tax rate to a different level than the actual will not cause a difference in the total amount of corporate income tax payable. Therefore, this process will not affect or violate the provisions of the current Law on Tax Administration. Deferred corporate income tax is the result of the difference between the income tax expense recorded on the income statement and the actual corporate income tax paid.
2.2. Causes of deferred corporate income tax
Deferred income tax arises when a company settles its liabilities or recovers the value of its assets. Therefore, deferred income tax payable or has not yet reached the level and has exceeded the amount of corporate income tax payable in the current year in the future.
In fact, these payments and recoveries do not have much impact on the total corporate income tax, however, the deferred corporate income tax must still be recorded by the company.
II. Regulations to note when accounting for deferred corporate income tax assets
- When preparing financial statements, accountants need to determine deferred corporate income tax expenses in accordance with the provisions of accounting standards on corporate income tax;
- Accounting shall not reflect in the deferred income tax asset account or deferred income tax liability arising from transactions that have been recorded directly in the company’s working capital;
- At the end of the accounting period, the difference between the debit and credit amounts of account 8212 of deferred corporate income tax expense will be transferred to account 911 to determine the results of business operations.
So the table of determining deferred corporate income tax assets is made at the end of the fiscal year, the accountant will record or reverse the deferred corporate income tax assets arising from transactions that have been recorded in deferred corporate income tax expenses.
➨ Record increase in deferred corporate income tax asset value
When the deferred corporate income tax asset arising in the fiscal year is greater than the deferred corporate income tax asset reversed in the year. The accounting method is as follows:
- Debit account 243 – Deferred corporate income tax assets (recorded as debit when the value of deferred corporate income tax assets increases compared to the year);
- Credit account 8212 – Deferred corporate income tax expense (recorded on the credit side when the value of deferred corporate income tax assets increases compared to the year).
➨ Write down deferred corporate income tax assets
When the deferred corporate income tax asset arising in the fiscal year is less than the deferred corporate income tax asset reversed in the year. The accounting method is as follows:
- Debit account 8212 – Deferred corporate income tax expense (recorded as debit when the value of deferred corporate income tax assets decreases compared to the year);
- Credit account 243 – Deferred corporate income tax assets (recorded on the credit side when the value of deferred corporate income tax assets decreases compared to the year).
III. Instructions on how to calculate deferred corporate income tax
1. How to determine deferred corporate income tax
Deferred corporate income tax is determined based on the reduction in corporate income tax expense arising from the following two factors:
- Record deferred income tax assets for the fiscal year;
- Reversal of deferred income tax liabilities recognized from previous years.
In the year-end financial statements, enterprises must determine and record deferred corporate income tax payable (if any), according to the provisions of Accounting Standard No. 17 – Corporate income tax. Thus, the formula for calculating deferred corporate income tax is as follows:
Thus, when recording deferred corporate income tax payable in the fiscal year, the enterprise will specifically offset the deferred corporate income tax payable arising in the year with the deferred corporate income tax payable recorded in previous years but will be reduced this year.
➨ Record additional deferred corporate income tax and increase deferred corporate income tax expense
When there is a difference between the deferred corporate income tax arising in the fiscal year and the deferred corporate income tax payable being reversed in the year.
➨ Record a reduction in deferred corporate income tax and record a reduction in deferred corporate income tax expense
When there is a difference between the deferred corporate income tax arising in the fiscal year and the deferred corporate income tax payable being reversed in the year.
2. Some temporary difference situations (with examples)
Temporary differences arise due to differences in the timing of when a company recognizes income or recognizes expenses and the timing prescribed by tax law for calculating taxable income or expenses that will be deducted from taxable income.
The temporary difference is the carrying amount of a liability or asset and the tax base of that asset or liability on the balance sheet.
There are two types of temporary differences: taxable temporary differences and deductible temporary differences, specifically:
➨ Taxable temporary difference
Temporary differences arise between the determination of future taxable income of an enterprise and the carrying amount of assets or liabilities when they are recovered and settled.
- The book value of the asset is higher than the tax base of the asset;
- The carrying amount of the liability is less than the tax base of the liability;
- Determination of the value of taxable temporary differences:
- For assets: A temporary taxable difference is the difference between the carrying amount of an asset being higher than its tax base;
- For liabilities: A taxable temporary difference is the difference between the carrying amount of a liability being less than its tax base.
➨ Deductible temporary differences
Temporary differences arise as deductible amounts when determining taxable income in the future when the carrying amount of assets or liabilities is recovered and settled.
- The book value of an asset is less than its tax base;
- The carrying amount of a liability is greater than its tax base;
- Determine the amount of temporary differences to be deducted:
- For assets: The temporary difference deductible is the difference between the carrying amount of an asset being lower than its tax base;
- For liabilities: The deductible temporary difference is the difference between the carrying amount of a liability and its tax base.
As for temporary differences in timing, it is simply one of the cases of temporary differences.
For example, if accounting profit is recognized in one tax period but taxable income is calculated in another tax period.
For temporary differences between a liability or the carrying amount of an asset that is the tax base of the liability or asset, the difference may not be temporary in time.
For example: When revaluing an asset, if the book value of that asset changes but the tax base does not change, a temporary difference will arise, but the time to recover the book value and the tax base do not change, so this temporary difference is not a temporary difference in time.
Note:
Accountants will not use the concept of “permanent difference” to distinguish it from “temporary difference” when determining deferred corporate income tax for the time of asset recovery and liability settlement, the time to deduct assets and liabilities from taxable income is finite.
IV. Frequently asked questions about deferred income tax
1. What is deferred corporate income tax (CIT)?
Deferred income tax is a tax that will be incurred but is postponed to future accounting periods.
2. Why does deferred corporate income tax arise?
Because there is a difference in the accounting recognition of items in the financial statements between tax and accounting, deferred income tax plays a role in balancing tax obligations under tax and tax under accounting.
>> See more: How to calculate deferred corporate income tax.