Scope of IAS 12 Income Taxes

IAS 12 prescribes accounting for income taxes (current and deferred). Income taxes include all domestic and foreign taxes which are based on taxable profits (IAS 12.2).

Taxes other than income taxes are accounted for under other IFRS, e.g. IAS 37 or IAS 19 (payroll taxes).

As mentioned above, only those taxes that are based on taxable profits are in the scope of IAS 12. IFRIC update from March 2006 clarifies that the taxable profit may be calculated differently than accounting profit, but it still needs to be a profit. All taxes based on revenue or assets’ value are not income taxes under IFRS and are therefore recognised as revenue expense within operating profit.

Investment tax credits are excluded from the scopes of IAS 12 (IAS 12.4) and IAS 20 (IAS 20.20) and thus are effectively not covered by IFRS. Entities can therefore develop their own accounting policy as set out in IAS 8. It is most often the case that investment tax credits are accounted for as a reduction of income tax expense, but other approaches are also possible. The approach to be adopted depends on how strongly the realisation of investment tax credit is based on available taxable profits and whether such credits are treated as a taxable income themselves.

Some entities have to pay interest and penalties related to income taxes and it is not clear whether they should be presented as an income tax expense or as an expense in arriving at profit before tax. The IFRIC concluded that there is no policy choice between applying IAS 12 and IAS 37 to interest and penalties on income tax. Instead, entities should follow general IAS 12 requirements when deciding whether interest and penalties are a part of income tax expense or not. See September 2017 IFRIC update.

Key considerations in making scope and classification decision (i.e. IAS 12 vs IAS 37) are as follows:

  • If penalties are calculated on taxable profit, they are a part of income tax expense. If the amount of penalty is arbitrarily decided by the tax office, it is likely a revenue expense.
  • If interest, or penalties representing interest, largely reflect current market assessments of the time value of money, they most likely represent cost of financing shown as finance costs.

Disclosure requirements are set out in paragraphs IAS 12.79-88.

See other pages relating to IAS 12:

IAS 12 Income Taxes: Scope
IAS 12 Income Taxes: Deferred Tax
IAS 12 Income Taxes: Current Tax

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