Key takeaways
- TAS 12 makes the tax expense in the financial statements reflect accounting profit, not just the tax payable for the year.
- Temporary differences give rise to deferred tax; permanent differences do not.
- The method is to compare the carrying amount with the tax base, then multiply by the tax rate expected to apply when the difference reverses.
- A DTA can be recognised only when it is probable that sufficient taxable profit will be available to use it.
What problem TAS 12 solves
Thai Accounting Standard 12, Income Taxes, is aligned with IAS 12. The core issue is that accounting profit and taxable profit are often different, so deferred tax must be recorded to make the tax expense consistent with the profit in the financial statements. The financial statements of larger entities therefore often contain a deferred tax asset (DTA) and a deferred tax liability (DTL).
| Item | Accounting (TFRS) | Tax (Revenue Code) |
|---|---|---|
| Revenue recognition | TFRS 15, when control transfers | Accrual basis under the Revenue Code; may differ for some items |
| Depreciation | Over the useful life, e.g. 30 years | Capped at the statutory rate, e.g. buildings 5% a year |
| Provisions | Recognised when the criteria are met | Generally deductible when the expense is actually incurred |
| Non-deductible expenses | May be an expense in the financial statements | Added back |
| Doubtful debts | Recognised on an estimated basis | Deductible when the bad-debt criteria are met |
| Leases (TFRS 16) | Depreciation and interest | Rent on an accrual basis |
| Tax losses brought forward | No accounting expiry | Usable for no more than 5 accounting periods |
Types of differences
Permanent differences
These are items recognised in the accounts that are permanently disallowed for tax, or exempt without reversing, so no deferred tax arises. Examples include:
- Penalties and surcharges on tax
- Donations above the limit
- Entertainment expenses above the limit, including gifts above the per-person, per-occasion limit
- Dividends exempt from tax subject to conditions
- Profits exempt from tax that do not give rise to tax on reversal, e.g. BOI businesses meeting the conditions
Temporary differences
These are items whose carrying amount differs from the tax base and will reverse in the future. Examples include:
| Item | Account | Tax | Result |
|---|---|---|---|
| Tax depreciation faster than accounting depreciation | 30 years | 20 years | DTL in the early years |
| Tax losses brought forward | — | Deductible for no more than 5 periods | DTA |
| Allowance for doubtful debts | Recorded | Not yet deductible | DTA |
| Warranty allowance | Recorded | Deductible when the expense is actually incurred | DTA |
| Leases under TFRS 16 | ROU asset and lease liability | Rent | DTA and DTL depend on the item |
| Interest capitalised into assets | Released gradually as depreciation or COGS | Depends on the tax treatment adopted | DTL if the tax deduction is faster than the accounting treatment |
Exchange rates must be checked case by case: Section 65 bis (5) of the Revenue Code requires foreign-currency assets and liabilities to be translated into baht at the end of the accounting period, so you should not conclude that unrealised differences are excluded from the tax computation. Check the rate used and the nature of the item before recognising deferred tax.
The thinking: balance sheet approach
- Determine the carrying amount of the asset or liability
- Determine the tax base of the same item
- Calculate the temporary difference
- Multiply by the tax rate expected to apply when the difference reverses
| Situation | Result |
|---|---|
| Asset: carrying amount above tax base | DTL |
| Asset: carrying amount below tax base | DTA |
| Liability: carrying amount above tax base | DTA |
| Liability: carrying amount below tax base | DTL |
A DTL means more tax will be payable in the future when the item reverses. A DTA means less tax will be payable in the future.
Example: machinery
Machinery costing THB 10 million is bought at the start of year 1. For accounting, it is depreciated on a straight-line basis over 5 years. For tax, assume double-declining balance at 40%, with the remainder written off in the final year. Unit: THB million.
| Year | Accounting depreciation | Accounting NBV | Tax depreciation | Tax NBV | Temp Diff | DTL 20% |
|---|---|---|---|---|---|---|
| Y1 | 2.00 | 8.00 | 4.00 | 6.00 | 2.00 | 0.40 |
| Y2 | 2.00 | 6.00 | 2.40 | 3.60 | 2.40 | 0.48 |
| Y3 | 2.00 | 4.00 | 1.44 | 2.16 | 1.84 | 0.37 |
| Y4 | 2.00 | 2.00 | 0.86 | 1.30 | 0.70 | 0.14 |
| Y5 | 2.00 | 0.00 | 1.30 | 0.00 | 0.00 | 0.00 |
Year 1 entry: Dr. Income Tax Expense and Cr. Income Tax Payable at the current tax amount, together with Cr. Deferred Tax Liability of THB 0.40 million. The DTL begins to reverse from year 3, when tax depreciation falls below accounting depreciation.
5 common cases
Case 1: interest capitalised under TAS 23
Assume IDC of THB 50 million is capitalised into the cost of a hotel with a 30-year life, and assume it is deductible for tax in the year incurred; the actual tax treatment of the item must be confirmed first. In year 1, tax falls by 50 × 20% = THB 10 million, so a DTL of THB 10 million is recognised and reverses at about THB 0.33 million a year over 30 years. If the tax rules require the amount to be included in cost and deducted through depreciation, the difference is smaller or does not arise.
Case 2: accumulated tax losses
A hotel business has a tax loss of THB 30 million in year 1. If sufficient taxable profit is expected within the life of the loss, a DTA of 30 × 20% = THB 6 million is recognised. When THB 10 million of the loss is used in year 2, the DTA falls to THB 4 million. A business with a history of losses needs strong supporting evidence.
Case 3: leases under TFRS 16
An office is leased for 5 years at rent of THB 1.2 million a year, paid at the start of each year, at a rate of 6%. This uses the same figures as the TFRS 16 article in this category.
| Year | Accounting (depreciation + interest) | Tax (rent) | Difference |
|---|---|---|---|
| Y1 | 1.32 | 1.20 | (0.12) |
| Y2 | 1.26 | 1.20 | (0.06) |
| Y3 | 1.20 | 1.20 | (0.00) |
| Y4 | 1.14 | 1.20 | 0.06 |
| Y5 | 1.07 | 1.20 | 0.13 |
A net DTA arises in the early years and reverses in the later years. In an actual calculation, look at the ROU asset and the lease liability separately, because each has its own difference.
Case 4: allowance for doubtful debts
An allowance of THB 2 million is recognised under TFRS 9 but is not yet accepted for tax. The net carrying amount of the receivables is therefore lower than the tax base. A DTA of 2 × 20% = THB 400,000 is recognised.
Case 5: BOI privileges
Profit during the tax-exemption period gives rise to no current tax, but you must consider whether temporary differences will reverse during the exemption period or after the privileges expire, because the applicable tax rates differ. Assets used in both BOI and non-BOI activities need an allocation basis.
Measurement
Deferred tax = temporary difference × the tax rate expected to apply on reversal
That rate must be one that has been enacted, or is substantively certain to take effect, at the end of the reporting period. For example, if enacted law reduces the rate to 17% before the item reverses, use 17% for the portion that reverses in that period. The current standard CIT rate is 20%.
Presentation in the financial statements
- DTA and DTL are presented within non-current items
- They may be presented net when there is a legally enforceable right and they relate to the same taxation authority, subject to conditions
- Income Tax Expense = Current Tax + Deferred Tax
- ETR = Income Tax Expense ÷ Profit Before Tax
| Example P&L | Amount |
|---|---|
| Profit Before Tax | 100.0 |
| Current Tax | (18.0) |
| Deferred Tax | (3.0) |
| Total Income Tax Expense | (21.0) |
| Profit After Tax | 79.0 |
| Effective Tax Rate | 21% |
Full worked example: a hotel
Assume a hotel building of THB 500 million, excluding land. Accounting depreciation over 30 years = THB 16.67 million a year; tax depreciation at 5% a year = THB 25 million. Profit before depreciation and tax is THB 60 million a year, and CIT is 20%.
| Year 1 | Account | Tax |
|---|---|---|
| Profit before depreciation | 60.00 | 60.00 |
| Depreciation | (16.67) | (25.00) |
| Profit before tax / taxable profit | 43.33 | 35.00 |
| Current tax at 20% | — | (7.00) |
Year-end accounting NBV is THB 483.33 million and the tax base is THB 475.00 million, a difference of THB 8.33 million. DTL = THB 1.67 million.
The entry is Dr. Income Tax Expense 8.67, Cr. Income Tax Payable 7.00 and Cr. Deferred Tax Liability 1.67, giving ETR = 8.67 ÷ 43.33 = 20%. The DTL grows until tax depreciation is exhausted in year 20, then reverses gradually until it is fully reversed in year 30.
ETR Reconciliation
| Item | Amount |
|---|---|
| Profit Before Tax | 100.0 |
| Tax at 20% | (20.0) |
| Permanent differences, e.g. donations and entertainment above the limit | (0.5) |
| Exempt BOI income | 1.5 |
| Other tax privileges | 0.3 |
| Effect of a change in tax rate | (0.2) |
| Prior-year adjustments | (0.1) |
| Actual Income Tax Expense | (19.0) |
| ETR | 19% |
Special issues
- Group: Thailand has no group tax consolidation system. Deferred tax is calculated company by company, and the consolidated financial statements are then prepared.
- Foreign subsidiaries: apply the tax rates and tax laws of that country.
- M&A: fair value adjustments in the purchase price allocation may give rise to deferred tax and affect goodwill.
- Revaluation of PP&E: the carrying amount increases; if the tax base does not change, a DTL arises and is recognised in OCI.
- Investments in subsidiaries: a DTL may arise, unless the investor controls the timing of the reversal and it is probable that the difference will not reverse in the foreseeable future.
- Uncertain tax treatment: under TFRIC 23, uncertainty in tax measurement must be reflected using either the most likely amount or the expected value.
Disclosure
- Components of income tax expense
- Reconciliation of the effective tax rate
- Deferred tax balances by type of temporary difference
- Unrecognised DTA
- Tax losses brought forward and expiry dates
- Effect of changes in tax rates
- Income tax relating to OCI
| Disclosure example | Y2 | Y1 |
|---|---|---|
| DTA: Bad debt provision | 1.5 | 1.2 |
| DTA: Loss carryforward | 6.0 | 8.5 |
| DTA: Lease liability | 2.3 | 2.0 |
| DTA: Employee benefit | 1.8 | 1.5 |
| Total DTA | 11.6 | 13.2 |
| DTL: PP&E | (8.5) | (7.2) |
| DTL: Capitalized borrowing cost | (3.0) | (3.2) |
| DTL: ROU Asset | (1.9) | (1.8) |
| Total DTL | (13.4) | (12.2) |
| Net Deferred Tax | (1.8) | 1.0 |
Common mistakes
- Entities required to apply TAS 12 do not recognise deferred tax
- Recognising a DTA without evidence of future profit
- Using the current rate instead of the rate in effect when the difference reverses
- Not separating permanent and temporary differences
- Not tracking the expiry of tax losses brought forward
- Forgetting differences arising from leases
- Running deferred tax on OCI items through P&L
The CFO's workflow
Quarterly
- Calculate current tax
- Adjust the tax base of assets and liabilities
- Calculate temporary differences and the movement in deferred tax
- Post the entries and update the ETR reconciliation
Annual
- Reconcile to the PND 50 return
- Review recognised and unrecognised DTA
- Update tax rate assumptions and complete the disclosures
Tax KPIs
| KPI | Formula | Meaning |
|---|---|---|
| Effective Tax Rate | Tax Expense ÷ PBT | Tax in the financial statements |
| Cash Tax Rate | Cash Tax ÷ PBT | Timing of cash payments |
| Deferred Tax ÷ Net Income | DT ÷ NI | Proportion of tax not yet affecting cash |
| Loss Carryforward ÷ Equity | LCF ÷ Equity | Tax risks and opportunities |
Conclusion
TAS 12 uses the balance sheet approach to compare the carrying amount with the tax base. Temporary differences require deferred tax at the rate expected to apply on reversal, and a DTA needs evidence that it can be used. The tax facts of each item should be confirmed with the auditor and tax adviser, because the tax base is the variable that determines the entire outcome.