Chapter
International &
deferred taxation
20
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20.1 Definition of UK residence
Incorporated in the UK?
NO
YES
Controlled and managed in the UK
UK Resident
(Where do the board of directors meet?)
YES NO
UK Resident Non-UK Resident
IMPLICATIONS
� UK Resident companies assessed for tax on all their worldwide income (UK profits, foreign
branch profits or foreign dividends remitted to the UK parent)
� Non-UK Resident companies assessed for tax only on UK income earned unless they have
income earned in the UK by trading through a UK branch or agency.
20.2 Overseas operations abroad if you are UK resident
FOREIGN BRANCH
1. Just an extension of your UK operations.
2. Any profit the foreign branch earns forms part of the UK company s profits.
3. Any assets the foreign branch buys will allow the UK company to claim capital allowances
in the UK.
4. Any losses the foreign branch incurs is the UK company s own losses.
5. A foreign branch is not an associated company.
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SETTING UP A FOREIGN SUBSIDIARY
1. A separate company incorporated abroad.
2. Foreign subsidiary s profits are not chargeable to UK corporation tax, unless a controlled
foreign company (CFC).
3. UK capital allowances cannot be claimed.
4. Losses cannot be group relieved.
5. An associated company if the UK parent has control.
6. UK parent company will be taxed on any foreign income the foreign subsidiary remits back
to the UK.
Foreign companies
Companies may set up foreign companies abroad in order to pay a lower amount of taxation than
they would in the UK or if they control the amount of profit it remits back to the UK again they
will pay less tax.
A controlled foreign company (CFC) is
1. Resident outside the UK and
2. At least 40% controlled by UK persons and
3. Subject to a  lower level of taxation in the country in which it is resident.
A lower level of taxation would be if the company pays less than � of the amount it would have
been paying if it was resident in the UK
IMPLICATIONS
� Profit earned by the CFC must be apportioned to the parent on a fair and reasonable
basis if the parent owns at least 25% or more of the CFC (regardless of whether the
profits have been remitted to the UK or not).
� Under self-assessment the company must decide this itself
� The apportioned profit will be taxed at full rate (30%) irrespective of whether the
shareholding company is a large company or not for corporation tax purposes.
EXCEPTIONS
1. The CFC distributes at least 90% of its profits or
2. CFCs profits for the year are less than Ł50,000 or
3. It has an exempt activity (maintains a large presence in its territory of residence) or
4. Motive for setting up the company was not to avoid tax or
5. Its shares are listed on a registered stock exchange and at least 35% of its ordinary share
capital is held by the public.
Transfer pricing rules
Transfer pricing rules prevent a UK company from reducing their profits by selling goods to an
overseas subsidiary at below market value, as well as purchasing goods from an overseas
subsidiary at above market value.
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The effect if this is happening
� UK company is avoiding corporation tax.
� A market price must be substituted for the transfer price and any financial effect on profit of
the UK company must be accounted for.
� The market price will be an  arms length price, as if the two companies were independent
from one another.
� The UK company under self assessment is responsible for declaring these adjustments
themselves within the tax return.
EXAM POINT  Please note that these rules are UK tax rules and are mentioned here for
illustration purposes only. For the exam you must of an awareness of these areas and do not need
knowledge of specific tax rules for any particular country.
Lecture Example 20.1  (Past CIMA question)
The following details are relevant:
� HC carries out its main business activities in Country A;
� HC is incorporated in Country B;
� HC s senior management exercise control from Country C, but there are no sales or
purchases made in Country C;
� HC raises its finance and is quoted on the stock exchange in Country D.
Assume Countries A, B, C and D have all signed double taxation treaties with each other, based
on the OECD model tax convention. Which country will HC be deemed to be resident in for tax
purposes?
A Country A
B Country B
C Country C
D Country D
20.3 Withholding tax (WHT) and double taxation relief (DTR)
If a company remits income abroad to another country then there maybe some tax that has to be
paid before it leaves the country. This is known as withholding tax (WHT) and is designed to stop
companies not paying any tax in the country of residence by sending all income abroad and then
ceasing trade. WHT varies and can range up to 40%.
Examples of types of payments affected by this are dividends, interest payments, royalties and
capital gains accruing to non-residents (e.g. a gain made by a non-resident company on the sale of
some land may have to pay WHT even though the gain itself has not been remitted back to the
resident company). However the foreign income received by the non-resident company would have
to be subject to tax both in the non-resident and resident country. Double taxation relief (DTR) is
used to mitigate taxing overseas income twice. There is normally a bilateral agreement between
countries to address this.
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20.4 Double taxation treaties based on the OECD Model Convention
The OECD Model Convention is an illustration of how to deal with double taxation and countries
are encouraged to base their bilateral agreements on this. The main points are as follows:
� Specify which taxes should be included.
� Residency of company should be established in one of the two countries which should be
based on where effective management decisions are made. Resident of a Contracting
State means that the entity or person is liable for tax in that State in respect of income,
profits or capital gains earned in that State.
� Permanent establishment   fixed place of business through which the business of an
enterprise is wholly or partly carried on .
Inclusions
Place of management
Branch
Office
Factory
Workshop
Any place for extracting natural resources (e.g. a mine, oil well or quarry).
A building site or construction site, but only if it lasts more than 12 months.
Exclusions
Storage, display or delivery facilities.
A fixed place of business which is used for buying goods or collecting
information only.
A fixed place of business which is used in a preparatory or auxiliary capacity
only.
Use of a broker or agent carrying on in its own course of business.
A stock of inventory for storage, display or delivery of goods only.
A stock of inventory in the other State for the sole purpose of processing by
another enterprise.
The mere fact that a subsidiary company has its parent company in a particular country
does not automatically make the subsidiary resident in the same country as the parent
company.
� Income from immovable property  this type of income can be taxed in the non-resident
country. Immovable property is agriculture (includes livestock and equipment), forestry and
letting property such as land.
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� Business profits  these shall be taxable in a State only if there is a permanent
establishment their which it carries on business through. If this is the case then only that
portion of the profits should be considered for tax which is pertaining to the permanent
establishment.
� Dividends  the company in the State paying dividends should not pay tax of more than
5% of the gross dividend if the shareholder has more than 25% of the share capital, or it
should not exceed 15% of the gross dividends in all other cases.
� Interest  interest payments between contracting States should not have a withholding tax
of more than 10% of the gross interest.
� Royalties  the beneficiary of the royalty is only taxed unless they have a permanent
establishment in the other country.
� Capital gains  Any disposal made by a non-resident maybe taxed on that gain in that
country.
Lecture Example 20.2  (Past CIMA question)
The OECD model tax convention defines a permanent establishment to include a number of
different types of establishments:
(i) A place of management
(ii) A warehouse
(iii) A workshop
(iv) A quarry
(v) A building site that was used for 9 months
Which of the above are included in the OECD s list of permanent establishments?
A (i), (ii) and (iii) only
B (i), (iii) and (iv) only
C (ii), (iii) and (iv) only
D (iii), (iv) and (v) only
Lecture Example 20.3  (Past CIMA question)
The OECD Model tax convention defines a permanent establishment. Which ONE of the
following is not specifically listed as a  permanent establishment by the OECD Model tax
convention?
A An office.
B A factory.
C An oil well.
D A site of an 11 month construction project.
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20.5 Methods of double taxation relief
Credit method
If a non-resident company pays dividends they are taxed in that country and the dividend is also
taxable when received in the company s resident country. However the amount of foreign tax paid
on the dividend is credited against the tax payable in the resident country. This method is used in
the UK.
Exemption method
If a non-resident company pays dividends they are taxed in that country but it would be exempt
from tax when received in the company s resident country. The main point of this method is that
foreign tax has already been paid, and so the income should not be taxed again. This is simpler than
the credit method and is used in most EU countries and the USA.
Deduction method
Dividends paid by non-resident companies are taxed in that country, but in the resident country the
foreign tax already paid will be used to reduce the amount of dividend received and then it will
form part of taxable income. The foreign tax paid is essentially a cost of obtaining those profits.
Lecture Example 20.4
D Plc is a UK resident company. It has interests in a non-UK resident company.
Rate of WHT
A Inc 15%
The only income received by D Plc during the accounting period was a dividend from the above
company. The figure (net of WHT) was:
A Inc Ł170,000
Compute the tax payable by D plc if the UK tax rate was 20% and then 10% under the credit
method.
Underlying tax (ULT)
Underlying tax is calculated on company profits used to pay a dividend. This calculation is used to
work out foreign tax paid on foreign dividends received by a non-resident, which can then be used
to give DTR in addition to the WHT if tax laws allow, e.g. the non-resident will receive a tax credit
in their own country, due to the fact that they are assessed and liable to pay tax twice on the same
income received.
ULT = (Dividend actually received + WHT) x tax paid on profits
Financial profit after tax of the foreign company by foreign company
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Lecture Example 20.5
Transformers Plc is a UK resident company. It has interests in a non-UK resident company.
Rate of WHT
Pokemon Inc 20%
The only income received by Transformers Plc during the accounting period was a dividend
from the above company. The figure (net of WHT) was:
Pokemon Inc Ł300,000
Pokemon Inc s profit before tax was Ł900,000 and corporate income tax paid was Ł50,000.
Compute the amount of underlying tax that relates to Transformers plc and also tax payable in
the UK if the tax rate was 40%.
20.6 Tax avoidance and tax evasion
Tax avoidance is the arranging of tax affairs to deliberately take full advantage of tax relief s and
incentives or it maybe the exploitation of any loopholes in the tax rules. It is a legal activity and not
breaking the law as it aims to minimise the tax liability whilst complying fully with all tax rules.
Tax advisors will provide expert help in constructing legal schemes in avoiding tax.
Any weaknesses in the current tax rules will normally be closed up with legislation passed by the
government but it takes time to do this and the loophole is open for exploitation until this
legislation comes into effect. It is very rare for governments to retrospectively legislate against
loopholes.
Tax evasion is minimising or not paying any tax at all to the authorities by deliberately breaking
the tax rules which is an illegal activity, for example the non-declaration of cash sales to the tax
authorities.
Most tax jurisdictions have a mixture of specific and general anti-avoidance provisions. Specific
provisions tend to be challenges in court by the government on certain tax avoidance schemes
which are alleged to be illegal. This normally results in court rulings or legislation brought in by
the government to counter tax avoidance.
The main problem with this approach is that it may take a long time for a court case to conclude
which means in the meantime the practice is still continuing, and doubt and uncertainty as to
whether this is legal. Anti avoidance provisions are not usually retrospective and so tax avoidance
has then been successful up until introduction of legislation.
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General anti-avoidance rules (GAAR) are rules that can be applied to specific situations and
make it difficult to avoid tax through schemes. Some examples of statutory GAAR are as follows:
� Legitimate tax planning should be allowed but those tax planning schemes which conflict
or defeat the purpose of tax rules should be disallowed.
� Tax schemes should be looked at from a holistic perspective rather than on a micro level.
The rule is that steps in a scheme which are purely there for the avoidance of tax and have
no commercial basis should be disallowed.
� Courts should have regard for the main point of the piece of tax legislation and should be
interpreted with only this in mind when deciding on the legality of a scheme.
� Schemes should be submitted to the tax authorities for approval and opinion before using it.
20.7 IAS 12 Current tax and deferred tax
(Tutor note: Deferred taxation is not examinable in this paper, but it s useful to read this
section for overall understanding)
Current tax
Current tax deals with the actual tax payable to the authorities on taxable profits for companies. It
normally gets paid later after calculating it and therefore an expense is recognised in the income
statement and liability is recognised in the balance sheet. The double entry to record the tax charge
is:
Dr Tax charge in the income statement X
Cr Tax creditor in the balance sheet X
When the tax charge is calculated and recorded in the financial statements it is normally an
estimate, and then once it is finalised with the tax authorities it may transpire that we have over or
under provided for this charge in the accounts. Should this be the case the tax charge for the
following period will be adjusted accordingly.
For example if we had over-provided we will have an additional credit balance in the income
statement under tax charge and an associated debit in the balance sheet under tax liability.
If we had an under-provided we will have an additional debit balance in the income statement
under tax charge and an associated credit in the balance sheet under tax liability.
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Worked example  Cleopatra coming at ya Ltd
Cleopatra coming at ya Ltd had a brought forward credit balance of Ł5,000 on current tax. In the
year it had paid Ł27,000 in tax and it has a put in a provision of Ł53,000 for this year s current
tax. It has also increased the deferred tax provision by Ł14,000. Work out the total tax charge to
the income statement.
A credit balance brought forward on current tax means that we had an over provision in last
year s current tax calculation. The over provision of Ł5,000 is currently a liability on the
balance sheet which needs to be reversed out to the income statement. The double entry would
be:
Dr current tax creditor (balance sheet) Ł5,000
Cr current tax (income statement) Ł5,000
The answer will be as follows:
Total tax charge in the income statement
Over provision (Ł5,000)
Current tax for the year Ł53,000
Increase in deferred tax Ł14,000
Ł62,000
Lecture Example 20.6  (Past CIMA question)
On 31 March 20X6, CH had a credit balance brought forward on its deferred tax account of
$642,000. There was also a credit balance on its corporate income tax account of $31,000,
representing an over-estimate of the tax charge for the year ended 31 March 20X5.
CH s taxable profit for the year ended 31 March 20X6 was $946,000. CH s directors estimated
the deferred tax provision required at 31 March 20X6 to be $759,000 and the applicable income
tax rate for the year to 31 March 20X6 as 22%.
Calculate the income tax expense that CH will charge in its income statement for the year ended
31 March 20X6, as required by IAS 12 Income Taxes.
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Lecture Example 20.7  (Past CIMA question)
DZ recognised a tax liability of $290,000 in its financial statements for the year ended 30
September 20X5. This was subsequently agreed with and paid to the tax authorities as $280,000
on 1 March 20X6. The directors of DZ estimate that the tax due on the profits for the year to 30
September 20X6 will be $320,000. DZ has no deferred tax liability.
What is DZ s income statement tax charge for the year ended 30 September 20X6?
A $310,000
B $320,000
C $330,000
D $600,000
Deferred tax
(Tutor note: not examinable in this paper)
The amount of tax payable to the tax authorities by a company is usually very different to the tax
payable on the reported profit in the published accounts. These differences are due to either
permanent differences or timing differences.
IAS 12 deals with the differences between accounting profits and taxable profits, so that tax
inequalities arising from timing differences are ironed out over time.
Permanent differences
Items which are taken into the financial statements but which are disallowed for tax purposes, for
example entertainment expenses will be shown as an expense in the income statement but is
disallowable for tax.
Deferred taxation is not concerned with permanent differences.
Timing differences
Items that are recognised in different periods for financial and taxable purposes. For example
interest payable is recognised in the financial statement even though it is not paid (accruals) in
that period, but it will not be allowed for taxation purposes, as it is not actually paid.
Deferred tax is concerned with timing differences.
Accounting profits
The figure reported in published accounts, drawn up under the accrual or allocation based
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accounting rules i.e. interest payable.
Taxable profits
The figure that tax authorities base their corporation tax calculations, and is arrived at using cash,
based accounting i.e. interest paid as opposed to interest payable.
Timing differences - Main categories
� Tax depreciation or accelerated capital allowances (ACA).
� Interest charges and development costs.
� Inter-group profits in stock that are unrealised for consolidation purposes, yet
taxable in the computation of the group company that made the unrealised profit.
� Pension liabilities that are accrued in the financial statements but are allowed for tax
only when the contributions are made to the pension fund at a later date.
� Revaluations of fixed assets.
� Unrelieved tax losses - A loss for tax purposes which is available to relieve future
profits.
� Un-remitted earnings of subsidiaries.
Basis of deferred tax
Deferred tax is the tax attributable to timing differences, not permanent differences. The most
common timing differences is tax depreciation or accelerated capital allowances (ACAs)
If tax depreciation is faster than accounting depreciation this equals a deferred tax liability.
If tax depreciation is slower than accounting depreciation this equals deferred tax asset.
There are 3 bases for charging deferred tax
1 Flow-through - no provision, tax accounted for as assessed, so therefore there is no
defer tax.
2 Full provision - provided in full for deferred tax on all timing differences.
3 Partial provision  Deferred tax is provided for only if reversal is probable
IAS 12 requires full provision.
The partial provision method was rejected by IAS 12 because it was too subjective as it relied on
directors estimations of the future.
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Worked example  Beckham Ltd
Beckham Ltd makes a profit before tax of Ł100,000 for years 20X1 and 20X2. Beckham Ltd
buys an asset in 20X1 for Ł40,000, which is depreciated over 5 years on a straight-line basis.
Capital allowances (tax depreciation) are at 25% on a reducing balance basis each year. The tax
rate is 30%.
Calculate the balance on deferred tax at the end of each year using IAS 12 requirements.
20X1 20X2
Tax depreciation (W1) 10,000 7,500
Depreciation 8,000 8,000
Timing difference (TD) 2,000 500
Tax charge on TD at 30% 600 (150)
In 20X1 tax depreciation is being used at a faster rate than accounting depreciation and
therefore although we are paying less tax now because of the high amounts of tax deprecation
being used, in the future the tax depreciation will run out and higher amounts of tax will be
paid. Therefore the readers of the financial information need to be warned about this and
therefore a provision is put in as per the double entry below:
Dr Income statement tax charge Ł600
Cr SOFP defer tax Ł600 (DT liability)
In 20X2 tax depreciation is being used at a slower rate than accounting depreciation and
therefore we will continue to pay less tax in the future because of the high amounts of tax
deprecation that will be available. Therefore the readers of the financial information need to be
told about this and therefore the provision is reduced to reflect this as per the double entry
below:
Dr SOFP defer tax Ł150 (DT asset)
Cr Income statement tax charge Ł150
Worked example  Beckham Ltd
(W1) Tax depreciation
Tax base b/f Tax depreciation at 25% Tax base c/f
40,000 10,000 30,000
30,000 7,500 22,500
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Worked example  Saffy plc
Details of Saffy plc are as follows:
As at 31 March 20X4, the net book value of plant and machinery is Ł280,000 and the tax base is
Ł136,000.
Royalties received amounted to Ł60,000. The income statement showed royalties of Ł70,000 for
the year (Ł10,000 debtor). The tax authorities calculate tax on royalties on a received basis and
not on an accruals basis.
The tax rate is 30%.
Calculate the provision for deferred taxation at 31 March 20X4, using the full provision basis.
Capital allowances (tax depreciation) are higher than the financial accounting depreciation
charge; hence NBV is higher than the tax base. This means that tax depreciation is being used
at a faster rate than accounting depreciation and therefore more tax will be paid on company
profits in the future. The readers of the financial statements need to be warned about this and
therefore a provision is put through the financial statements.
At 31.3.X4 Ł 000
NBV 280
Tax base 136
Cumulative timing diff 144
Therefore full provision Ł144,000 x 30% = Ł43,200
Dr Income statement Ł43,200 Cr SOFP Ł43,200
Accrued income of Ł10,000 will produce deferred tax liability of (Ł10,000 x 30%) Ł3,000. The
tax man will establish the tax liability on royalty received and not accrued. So therefore a
provision needs to be put through the financial statements to show this extra tax to be paid.
Dr Income statement Ł3,000 Cr SOFP Ł3,000
Worked example  Saffy plc
Ł
Accelerated capital allowances 43,200
Short term timing difference royalty received 3,000
46,200 (liability in SOFP)
Note that the SOFP must show a DT liability of Ł46,200. If there was a balance b/f from
previous years, the difference needs to be put through only to bring the amount to Ł46,200
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Lecture Example 20.8  (Past CIMA question)
AB acquired non-current assets on 1 April 20X3 costing $250,000. The assets qualified for
accelerated first year tax allowance at the rate of 50% for the first year. The second and
subsequent years were at a tax depreciation rate of 25% per year on the reducing balance
method.
AB depreciates all non-current assets at 20% a year on the straight line basis. The rate of
corporate income tax applying to AB for 20X3/X4 and 20X4/X5 was 30%. Assume AB has no
other qualifying non-current assets.
Required:
Apply IAS 12 Income Taxes and calculate:
(i) the deferred tax balance required at 31 March 20X4;
(ii) the deferred tax balance required at 31 March 20X5;
(iii) the charge to the income statement for the year ended 31 March 20X5.
Lecture Example 20.9  (Past CIMA question)
DG purchased its only non-current tangible asset on 1 October 20X2. The asset cost $200,000,
all of which qualified for tax depreciation. DG s accounting depreciation policy is to depreciate
the asset over its useful economic life of five years, assuming no residual value, charging a full
year s depreciation in the year of acquisition and no depreciation in the year of disposal.
The asset qualified for tax depreciation at a rate of 30% per year on the reducing balance
method. DG sold the asset on 30 September 20X6 for $60,000. The rate of income tax to apply
to DG s profit is 20%. DG s accounting period is 1 October to 30 September.
Required:
(i) Calculate DG s deferred tax balance at 30 September 20X5.
(ii) Calculate DG s tax balancing allowance/charge arising on the disposal of the asset.
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Lecture Example 20.10
Big Mountain Ltd has the following information relating to it s year end 31 December 20X2.
Ł
Revenue 720,000
Cost of sales 550,000
Distribution costs and admin expenses 65,000
Depreciation charge for year 15,000
Capital allowances for the year 25,000
Dividends paid 14,000
Dividends received 5,000
Additional information:
Current balance on corporation tax account is Ł4,000 credit.
Current year s tax provision is Ł31,000
The balance on deferred tax account as at 01 January 20X2 was Ł1,500 credit
Corporation tax rate is 30%.
Prepare Big Mountain Ltd s income statement account and balance sheet extracts for year ended
31 December 20X2.
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Summary of chapter  International & deferred taxation
Incorporated in the country?
NO
YES
Controlled and managed in the country
Resident
(Where do the board of directors meet?)
YES NO
Resident Non-Resident
A foreign branch is just an extension of your domestic operations.
A foreign company is a separate company incorporated abroad.
Withholding tax (WHT) and double taxation relief (DTR)
If a company remits income abroad to another country then there maybe some tax that has to be
paid before it leaves the country. This is known as withholding tax (WHT).
However the foreign income received from the overseas company would have to be subject to tax
again in this country. Double taxation relief (DTR) is used to mitigate taxing overseas income
twice. There is normally a bilateral agreement between countries to address this.
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Double taxation treaties based on the OECD Model Convention
The main points are as follows:
� Specify which taxes should be included.
� Residency
� Permanent
� Income from immovable property
� Business profits
� Dividends
� Interest
� Royalties
� Capital gains
Methods of double taxation relief
� Credit method
� Exemption method
� Deduction method
Underlying tax (ULT)
ULT = (Dividend actually received + WHT) x tax paid on profits
Financial profit after tax of the foreign company by foreign company
Tax avoidance is the legal arranging of tax affairs to deliberately take full advantage of tax
relief s.
Tax evasion is minimising or not paying any tax at all to the authorities by deliberately breaking
the tax rules.
General anti-avoidance rules (GAAR) are rules that can be applied to specific situations and
make it difficult to avoid tax through schemes.
IAS 12 Current tax
Current tax deals with the actual tax payable to the authorities on taxable profits for companies.
The double entry to record the tax charge is:
Dr Tax charge in the income statement X
Cr Tax creditor in the balance sheet X
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IAS 12 Deferred tax
The differences between accounting profits and taxable profits, so that tax inequalities arising
from timing differences are ironed out over time.
Permanent differences
Items which are taken into the financial statements but which are disallowed for tax purposes.
Timing differences
Items that are recognised in different periods for financial and taxable purposes.
Deferred taxation is not concerned with permanent differences, only timing differences.
Timing differences - Main categories
� Accelerated capital allowances (ACA)
� Interest charges and development costs
� Intra group profits in stock
� Accruals for pension costs that will be deductible for tax purposes only when paid.
� Revaluations of fixed assets.
� Unrelieved tax losses Un-remitted earnings of subsidiaries
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Solutions to Lecture Examples
Solution to Lecture Example 20.1
The answer is C.
Solution to Lecture Example 20.2
The answer is B.
Solution to Lecture Example 20.3
The answer is D.
Solution to Lecture Example 20.4
20% UK tax rate
Dividends received + WHT
A Inc 170,000 x 100/85 = 200,000 (Foreign tax being 15%)
D plc tax 200,000 x 20% = 40,000
Less WHT tax paid in A Inc = (30,000)
Therefore tax payable in UK = 10,000
10% UK tax rate
Dividends received + WHT
A Inc 170,000 x 100/85 = 200,000 (Foreign tax being 15%)
D plc tax 200,000 x 10% = 20,000
Less WHT tax paid in A Inc = (30,000)
Therefore tax payable in UK = NIL
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Solution to Lecture Example 20.5
Dividends received + WHT = Gross dividend
Pokemon Inc Ł300,000 x 100/80 = Ł375,000 (Foreign tax being 20%)
ULT = Ł375,000 x Ł50,000 = Ł22,059
(Ł900,000 - Ł50,000)
Transformers Plc tax Ł375,000 x 40% = Ł150,000
Less WHT tax paid in Pokemon Inc = (Ł75,000)
Ł75,000
Less ULT tax paid in Pokemon Inc = (Ł22,059)
Therefore tax payable in UK = Ł52,941
Solution to Lecture Example 20.6
$
Tax charge for the year  ($946,000 x 22%) 208,120
Less over provision from last year (31,000)
Increase in deferred tax provision (759,000  642,000) 117,000
Income tax expense 294,120
Solution to Lecture Example 20.7
The answer is A.
There is an overprovision for 2005 tax of $10,000 (290,000  280,000). This will be used to
reduce the tax charged to the income statement for 2006.
The double entry would be:
Dr current tax creditor (balance sheet) $10,000
Cr current tax (income statement) $10,000
Total tax charge in the income statement
Over provision ($10,000)
Current tax for the year $320,000
$310,000
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Solution to Lecture Example 20.8
Depreciation $
01/04/X3 cost 250,000
Depreciation (250,000 x 20%) (50,000)
Net book value as at 31/03/X4 200,000
Depreciation (250,000 x 20%) (50,000)
Net book value as at 31/03/X5 150,000
Capital allowances $
01/04/X3 cost 250,000
1st yr CA (250,000 x 50%) (125,000)
TWDV as at 31/03/X4 125,000
2nd yr CA (125,000 x 25%) (31,250)
TWDV as at 31/03/X5 93,750
Deferred tax $ 31/03/X4 31/03/X5
Depreciation 50,000 50,000
Capital allowances (125,000) (31,250)
Timing difference (75,000) 18,750
Tax rate x 30% x 30%
Deferred tax 22,500 5,625
Journal entry Dr Income tax (IS) Cr Income tax (IS)
Cr Deferred tax Dr Deferred tax
(SOFP) (SOFP)
Deferred tax balance required at 31 March 20X4 $22,500
Deferred tax balance required at 31 March 20X5 (22,500  5,625) $16,875
Charge to the income statement for the year ended 31 March 20X5 $ 5,625
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Solution to Lecture Example 20.9
(i) Calculate DG s deferred tax balance at 30 September 20X5.
Depreciation $
01/10/X2 cost 200,000
Depreciation (200,000 / 5yrs x 3 yrs) (120,000)
Net book value as at 30/09/X5 80,000
Capital allowances $
01/10/X2 cost 200,000
1st yr CA s (200,000 x 30%) (60,000)
TWDV as at 30/09/X3 140,000
2nd yr CA (40,000 x 30%) (42,000)
TWDV as at 30/09/X4 98,000
3rd yr CA (98,000 x 30%) (29.400)
TWDV as at 30/09/X5 68,600
Deferred tax $ 30/09/X5
Depreciation 120,000
Capital allowances (60,000 + 42,000 + 29,400) (131,400)
Timing difference (11,400)
Tax rate x 20%
Deferred tax 2,280
Journal entry Dr Income tax (IS)
Cr Deferred tax (SOFP)
(ii) Calculate DG s tax balancing allowance/charge arising on the disposal of the asset.
Balancing charge /allowance = Sales proceeds less tax written down value
Sales proceeds $60,000
TWDV as at 30/09/X6 $68,600
Balancing allowance $ 8,600
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Solution to Lecture Example 20.10
Income statement for year ended 31 December 20X2 for Big Mountain Ltd
Ł Ł
Revenue 720,000
Cost of sales (550,000)
170,000
Distribution costs and admin expenses 65,000
Depreciation 15,000
(80,000)
90,000
Investment income 5,000
Profit before tax 95,000
Income tax expense (W1) (28,500)
Profits for the period 66,500
SOFP extract as at 31 December 20X2 for Big
Mountain Ltd
Tax payable (current liability) 31,000
Provision for deferred tax (W1) (non current liability) 3,000
(W1)
Income tax expense calculation Ł
Tax estimate for the year 31,000
Less prior years over provision (4,000)
Increase in deferred taxation (W2) 1,500
Income tax expense 28,500
(W2) Deferred tax  accelerated capital allowances
Ł
Capital allowances 25,000
Financial accounts depreciation charge 15,000
Timing difference 10,000
DT at 30% 3,000
Opening balance 1,500
Charge to income statement 1,500
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