Current tax expense is the recognition of taxes payable to the taxation authorities in respect of a particular period. The current tax expense calculation engages identifying differences between Accounting Revenues and Taxable Income and between Accounting Expenses and Allowable Deductions for transactions taken place during the year and reversing Temporary Differences from previous years that happen in the current period. Accounting profit for the period is adjusted by these differences to calculate taxable profit- which is later multiplied by the current tax rate to determine current tax payable.
If a tax rate has changed or if a change has been announced in some jurisdictions, the rate applicable to the taxable profit for the period must be applied.
Identifying permanent and temporary differences in the current year profit is somewhat simple exercise. All revenues and expenses are reviewed for amounts that are not taxable or deductible. Identifying reversals of previous year temporary differences may require referring back to previous year worksheets, transactions posted to asset and liability accounts during the current year, or reconstructions of ledger accounts. Such reversals include, accrued expenses that have been paid and are now deductible, bad debts written-off and now deductible, accrued revenue that has been received and is now taxable, and prepaid expenses deducted in a previous period but now included in accounting profit.
When differences have been figured out, there are two ways in which the current tax expense could be determined:
- the net differences could be adjusted against accounting profit to derive taxable profit
- the gross amounts of items with differences could be added back or deducted against accounting profit.
A worksheet is used to perform this reconciliation between accounting profit and taxable profit using the following formula:
Accounting profit /loss
+ (−) accounting expenses not deductible for tax
+ (−) accounting expenses where the amount differs from deductible amounts
+ (−) taxable income where the amount differs from accounting revenue
− (+) accounting revenues not subject to taxation
− (+) accounting revenue where the amount differs from taxable income
− (+) deductible amounts where the amount differs from accounting expense
= taxable profit
The current tax rate is then applied to taxable profit to derive the current tax expense payable.
