IASB issued new standard IFRS 18
On 9 April 2024, the International Accounting Standards Board (IASB) published its new standard IFRS 18 Presentation and Disclosures in Financial Statements that will replace IAS 1 Presentation of Financial Sta…
Which entities are required to account for deferred tax? And how is this tax properly calculated? In the following article, we have outlined what to pay special attention to when calculating deferred tax in the financial statements for 2023.
While the amount of income tax payable for a given reporting and taxation period is derived from the Income Taxes Act and represents the actual tax liability to the tax administrator, the deferred tax liability is a purely accounting category based on differences resulting from the different treatment and valuation of certain items in accounting and income taxes. The accrual principle – the principle of the material and temporal relationship of the relevant expense or income to the accounting period – is applied through deferred tax. In some cases, the accrual principle is adjusted using the prudence principle if there is any doubt about the recoverability of any of the items resulting in a partial deferred tax asset or about the recoverability of the entire deferred tax asset.
In accordance with Section 59 of Decree No. 500/2002 Coll., entities that form a consolidation unit and entities that prepare full financial statements (these are compulsorily prepared by those that are subject to the statutory obligation to have their financial statements audited pursuant to Section 20 of the Accounting Act) are required to account for deferred tax. Other entities may account for deferred tax on a voluntary basis.
The method of accounting for deferred tax is specified in detail in the Czech Accounting Standard for Entrepreneurs (CAS) No. 003 – Deferred Tax. The issue of deferred tax is also addressed in three interpretations of the National Accounting Board, namely:
Deferred tax is determined from all temporary differences that arise between the carrying amount of an asset or liability on the balance sheet and its tax base (i.e. the amount that will be available for future tax purposes), for example:
Temporary differences may be the following:
1. taxable (to be included in the taxable amount), which result in taxable amounts when determining the tax base of future periods and therefore give rise to a deferred liability; and
2. deductible, resulting in amounts that are deductible when determining the tax base of future periods, i.e. giving rise to a deferred asset.
The deferred tax asset or liability is determined as the product of the resulting difference and the income tax rate applicable to the future period in which the income or expense will be taken into account when determining the tax base.
It should be noted that, while a deferred tax liability is always accounted for, a deferred tax asset is (in accordance with the prudence principle) accounted for only to the extent to which it is probable that future taxable profit will allow for the utilisation (application) of deductible items.
In general, deferred tax assets and liabilities are recognised after mutual offsetting in account group 48 (account 481).
The government’s consolidation package includes a change to corporate income tax. It will increase from the current 19% to 21%. The increase in the tax rate will apply to all taxation periods after 1 January 2024.
If the income tax rate changes, the balance of the deferred tax account must be recalculated according to CAS No. 003 and the difference recognised through the relevant account in account group 59 – Income Taxes, Transfer Accounts and Income Tax Reserve.
The Act on Top-Up Taxes for large multinational groups and large-scale domestic groups (“the Act”) is currently going through the legislative process and is expected to come into effect from 31 December 2023.
The aim of the Act is to ensure that large multinational or domestic groups pay a minimum tax in the Czech Republic with an effective tax rate of 15%. The Act is applicable to groups of companies whose annual revenue exceeded EUR 750 million (in two of the four preceding taxation periods).
The Act introduces two completely new taxes with specific rules, which are different from the personal and corporate income tax rules defined by the Income Taxes Act and are quite complex. For more information, see Pillar II News: global minimum tax from the perspective of Czech transposition (and more).
According to the draft amendment to Decree No. 500/2002 Coll., which should be effective from 1 January 2024, the top-up tax is not considered when calculating deferred tax. However, an entity that will be subject to the top-up tax will have to comment on the expected impact of this tax in its notes to the financial statements for 2024.
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