Discussing the basis for calculating corporate income tax

Posted date 12/03/2018

5.508 view

Posted date 12/03/2018

5.508 view

Tax base is the basic element, showing the nature and content of the tax. It can be said that the tax base helps distinguish this tax from other taxes, and is often used to name the tax.

Dr. Le Thi Hong Phuong

Tax base is the basic factor, showing the nature and content of the tax. It can be said that the tax base helps distinguish this tax from other taxes, often used to name the tax. Normally, the tax payable for each tax is calculated according to the following formula:

Tax payable = Tax base x Tax rate (1)

In which, the tax rate can change depending on the taxable object, tax policy of each period, but the tax base in essence does not change, perhaps only the method of calculating the tax base changes. This article aims to clarify the basis for calculating corporate income tax (CIT) through 2 perspectives of calculating taxable income. According to the Law on CIT, the basis for calculating CIT is taxable income. From formula (1) applied to CIT, we have:

Corporate income tax payable = Taxable income x Corporate income tax rate (2)

In there,

Taxable income

Unused tax losses

Unused tax incentives

(3)

Taxable income in formula (3) is the business result of the period and is calculated according to the appropriate accounting principle:

Taxable income = Net revenue - Expenses corresponding to (creating) that revenue (4)

Accounting Standard No. 17 “Corporate Income Tax” does not specifically mention the concept of corporate income tax base, and does not link the tax base to taxable income. On the other hand, Article 03 of Standard 17 mentions the concepts of tax base of assets and tax base of liabilities, according to which the income tax base of an asset or liability is the value calculated for the asset or liability for the purpose of determining corporate income tax. Is there a conflict between the Corporate Income Tax Law and the Corporate Income Tax Accounting Standard regarding the tax base? In fact, this is just the difference between the two methods of calculating the corporate income tax base. This article will demonstrate the relationship between these two methods using mathematical equations. For simplicity in formula (3), because the previous year's losses carried forward and unused preferential taxes are available and do not need to be calculated, we will focus on the difference in calculating taxable income or business results. In addition to the calculation according to formula (4), business results can also be calculated by comparing the increase and decrease of equity at the end of the period with the beginning of the period. Indeed, because the owner bears the profit and loss, all business results after calculation will be entered into equity, from which we have:

Ending equity

Beginning equity

Equity added during the period

Equity withdrawn during the period

Business results for the period

(5)

Because the owner's equity added or withdrawn during the period does not participate in calculating corporate income tax, for simplicity, we assume that during the period the owner does not add or withdraw capital (or exclude the above factors). Then, if we change the equation (5), we will have:

Business results during the period = Ending equity - Beginning equity (6)

If we replace the financial equations:

Beginning equity = Beginning total assets - Beginning total liabilities (7)

Ending equity = Ending total assets - Ending total liabilities (8)

In equation (6), we then have the equation:

Business results for the period

Total assets at the end of the period

Total liabilities at the end of the period

Total assets at the beginning of the period

Total liabilities at the beginning of the period

(9)

Or:

Business results for the period

Total assets at the end of the period

Total assets at the beginning of the period

Total liabilities at the end of the period

Total liabilities at the beginning of the period

(10)

Through formula (10), it is easy to see that the business will make a profit if at the end of the period compared to the beginning of the period (after excluding the impact of the owner's capital addition or withdrawal):
a) Total assets increase while total liabilities decrease
b) Total assets increased more than total liabilities increased
c) Total liabilities decrease more than total assets decrease
Because all three cases a, b, c increase the owner's equity at the end of the period compared to the beginning of the period. The opposite cases all prove that the business is making a loss.
From this, we can clearly see how the value of assets and liabilities recorded at the beginning and end of the period affects taxable income. Therefore, each difference in the recognition of the value of assets or liabilities affects taxable income and consequently affects corporate income tax expense. However, this difference is only temporary and will end when the entire value of assets is recovered or liquidated (through allocation to expenses) and when all liabilities are paid. These temporary differences, after being multiplied by the corporate income tax rate, will give us Deferred corporate income tax assets (a) or Deferred corporate income tax liabilities (b). The algebraic sum of (a) and (b) creates Deferred corporate income tax expense. Deferred corporate income tax expense together with Current corporate income tax expense again creates Corporate income tax expense. The relationship between the above concepts is shown in the following diagram:

Conclude :
Because corporate income tax includes two independent parts, the basis for calculating corporate income tax is also divided separately for each part as follows:
· The tax base for calculating current corporate income tax is taxable income (including taxable income, unused tax losses and unused tax incentives)
· The tax base of deferred corporate income tax is temporary differences including deductible temporary differences and taxable temporary differences. These differences are calculated on the basis of comparing the tax base of assets or liabilities with their book value (accounting value).
The concepts of tax base of assets or liabilities themselves serve the purpose of calculating temporary differences or in other words, to calculate the deferred corporate income tax base.

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