Deferred Tax

Deferred Tax | Bestar

Deferred Tax in Singapore

Deferred tax is a concept in accounting that addresses the timing difference between when an expense or revenue is recognized for financial reporting purposes and when it is recognized for tax purposes. In Singapore, deferred tax is governed by the Singapore Financial Reporting Standards (SFRS) 12, which is based on the International Accounting Standard (IAS) 12.   

Key Concepts:

• Temporary Differences: These arise when the carrying amount of an asset or liability in the financial statements differs from its tax base.

  • Taxable Temporary Difference: An asset or liability with a higher carrying amount in the financial statements than its tax base. This will result in a higher taxable income in the future, leading to a deferred tax liability.   

  • Deductible Temporary Difference: An asset or liability with a lower carrying amount in the financial statements than its tax base. This will result in a lower taxable income in the future, leading to a deferred tax asset.

• Deferred Tax Liability: The amount of income tax payable in future periods in respect of taxable temporary differences.   

• Deferred Tax Asset: The amount of income tax recoverable in future periods in respect of deductible temporary differences.   

Recognition of Deferred Tax:

Deferred tax is recognized for all temporary differences, except for:

• Goodwill

• The initial recognition of an asset or liability that is neither deductible nor taxable

• Differences arising from the initial recognition of an asset or liability when the transaction affects neither accounting profit nor taxable profit or loss

Measurement of Deferred Tax:

Deferred tax is measured at the enacted tax rate that is expected to apply to the temporary difference when it reverses.   

Presentation of Deferred Tax:

Deferred tax assets and liabilities are presented separately on the balance sheet. Deferred tax assets are typically offset against deferred tax liabilities only when there is a legally enforceable right to offset current tax assets against current tax liabilities and it is probable that the entity will be able to utilize the deferred tax asset.   

Disclosure of Deferred Tax:

Entities are required to disclose information about deferred tax assets and liabilities, including:

• The nature and amount of significant temporary differences

• The amount of deferred tax assets and liabilities, and the movement in these amounts during the period

• Reconciliation of the income tax expense with the amount computed by applying the statutory tax rate to accounting profit

• Information about unrecognized deferred tax assets

Impact of COVID-19:

The COVID-19 pandemic has had a significant impact on businesses worldwide, including those in Singapore. The pandemic has led to economic uncertainty and financial distress for many businesses, which may affect their ability to utilize deferred tax assets. In response to the pandemic, the Singapore government has introduced various measures to support businesses, including tax relief measures. These measures may have an impact on the recognition and measurement of deferred tax for businesses in Singapore.   

Conclusion:

Deferred tax is an important concept for businesses in Singapore. It is crucial for businesses to understand the principles of deferred tax accounting and to ensure that their deferred tax liabilities and assets are correctly recognized and measured in their financial statements. By doing so, businesses can ensure that their financial statements provide a true and fair view of their financial position and performance.

Example of Deferred Tax in Singapore

Scenario:

A Singaporean company purchases a machine for $100,000. For accounting purposes, the company depreciates the machine over 5 years using the straight-line method, resulting in an annual depreciation expense of $20,000. However, for tax purposes, the company is allowed to deduct a higher depreciation expense in the first year, say $40,000.   

Analysis:

• Temporary Difference: In the first year, the accounting depreciation expense is $20,000, while the tax depreciation expense is $40,000. This creates a taxable temporary difference of $20,000.

• Deferred Tax Liability: Since the tax expense is higher in the first year for tax purposes, the company will have to pay less tax in future years when the accounting depreciation expense exceeds the tax depreciation expense. This future tax obligation is recognized as a deferred tax liability.

• Calculation: Assuming a corporate tax rate of 17% in Singapore, the deferred tax liability in the first year would be $20,000 * 17% = $3,400.

Journal Entry:

Dr. Depreciation Expense $20,000
Cr. Accumulated Depreciation $20,000

Dr. Income Tax Expense $3,400
Cr. Deferred Tax Liability $3,400

Subsequent Years:

In subsequent years, as the accounting depreciation continues to exceed the tax depreciation, the deferred tax liability will increase. When the machine is fully depreciated for tax purposes but still has a carrying value on the accounting books, the entire deferred tax liability will be recognized as income tax expense.

Key Points:

• Deferred tax arises due to timing differences between accounting and tax recognition of expenses or revenues.

• Taxable temporary differences result in deferred tax liabilities.

• Deductible temporary differences result in deferred tax assets.

• Deferred tax is measured at the enacted tax rate expected to apply when the temporary difference reverses.

This is a simplified example. In practice, deferred tax calculations can be more complex, especially for companies with multiple jurisdictions and complex tax structures.

How Bestar can Help deferred tax

Bestar, through our Tax Services, can provide significant assistance with deferred tax:

• Identification and Calculation: Bestar's tax professionals can help identify and calculate deferred tax liabilities and assets arising from temporary differences between accounting and tax bases.

• Compliance with Accounting Standards: We ensure that deferred tax is recognized and measured in accordance with Singapore Financial Reporting Standards (SFRS) 12.

• Tax Planning and Optimization: Bestar can advise on strategies to minimize deferred tax liabilities and maximize the utilization of deferred tax assets. This may involve restructuring transactions or exploring tax incentives to minimize the impact of temporary differences.

• Tax Return Preparation: Bestar can prepare tax returns accurately, ensuring that deferred tax liabilities and assets are correctly reflected in the tax computations.   

• Staying Updated: We stay abreast of changes in tax laws and regulations, ensuring that your deferred tax accounting and planning strategies remain compliant and effective.   

By leveraging Bestar's expertise in tax, you can ensure accurate deferred tax accounting, minimize tax liabilities, and optimize your tax position.   

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