- 7 Marks
Question
Mr. Ojoowuro, the director of a grocery store, has noticed that the tax charge for his company is N15million on profits before tax of N105million. This is an effective rate of 14.3%. Another company, Irin Plc, has an income tax charge of N30million on profit before tax of N90million. This is an effective rate of tax of 33.3%, yet both companies state that the rate of income tax applicable to them is 25%. Mr. Ojoowuro has also noticed that in the statements of cash flows, each company has paid the same amount of tax of N24million.
Required:
Advise Mr. Ojoowuro on the possible reasons why the income tax charge in the financial statements as a percentage of the profit before tax may not be the same as the applicable income tax rate and why the tax paid in the statement of cash flows may not be the same as the tax charge in the statement of profit or loss and other comprehensive income. (7 Marks)
Answer
Mr. Ojoowuro: Variance in Tax Charge and Payments
- Reasons for Effective Tax Rate Differing from Applicable Tax Rate:
- Taxable Profit Adjustments: Items like non-deductible expenses and tax exemptions.
- Deferred Tax: Temporary differences affect tax liabilities in the profit or loss.
- Under/Over-Provisions: Adjustments for past years affect current tax charges.
- Reasons for Variance Between Tax Charge and Tax Paid:
- Installments: Taxes paid in advance or arrears in cash flow statements.
- Withholding Tax Credits: Payments offset tax liabilities.
- Deferred Tax Effects: Non-cash adjustments impact the tax charge.
Conclusion: Effective tax rates and actual payments vary due to adjustments, provisions, and timing differences.
- Topic: Income Taxes (IAS 12)
- Series: NOV 2013
- Uploader: Dotse