What is Deferred Tax Accounting?
Deferred tax accounting is the recognition of the future income tax effects of temporary differences between the carrying amount of assets and liabilities in the financial statements and their tax bases. Under IAS 12, deferred tax assets and liabilities are measured at the tax rates expected to apply when the differences reverse.
How It Works
- Identify temporary differences: taxable (future tax payable) and deductible (future tax recoverable).
- Calculate deferred tax liabilities on taxable differences and deferred tax assets on deductible differences.
- Recognise deferred tax assets only when future taxable profits are probable.
- Update balances each period and recognise movements in profit or loss or in other comprehensive income, as appropriate.
Saudi Context
Saudi entities subject to corporate income tax (mainly foreign-owned or mixed-ownership) apply IAS 12. Pure Saudi-owned entities pay zakat instead of income tax, so deferred tax mainly relates to the foreign ownership portion. ZATCA accepts IAS 12 treatment for the corporate income tax portion.
Example
A foreign-owned Saudi subsidiary depreciates a SAR 10 million machine over 10 years for accounting and 5 years for tax. The temporary difference creates a deferred tax liability of SAR 1 million × 20% = SAR 200,000 at the end of year one.