3 Permanent Differences
Permanent differences between the
financial profit and taxable profit arise when income is not taxable or
expenses are not allowed for tax.
A government grant may be a gift
that is not taxed. Government bonds often provide tax-free interest income, or
may be taxed at a lower rate than the standard income tax rate for companies.
Fines paid by an undertaking may not be tax-deductible.
The tax computation for the period
will calculate the impact of these transactions.
No further accounting is needed and
no deferred asset or liability will be recorded.
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EXAMPLE-Permanent Differences
Your firm receives a tax- free $4million grant to
employ more staff.
It is later also fined $1m for environmental misuse,
after illegally discharging chemicals into a river. The fine cannot be deducted
for tax.
The financial statements will reflect these items,
but your tax computation will exclude them, or record that no tax is payable
nor receivable.
Your tax computation will reconcile these
adjustments to the accounting profit.
No deferred tax needs to be calculated for permanent
differences. This is because deferred tax is an accrual of tax, and there
will be no further tax to be accrued.
Assuming that both items are taken into profit in
full in the same period, the tax computation could reflect:
In the following examples, I/B
refer to Income Statement and Balance Sheet.
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$m
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Accounting Profit
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486
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Less grant
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-4
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Plus fine
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+1
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=Taxable
profit
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483
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Tax charge = 483 * 24% = 115,920
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I/B
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DR
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CR
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Tax expense
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I
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115,920
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Accrual for
income tax
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B
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115,920
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