Which tax rate to use for current tax
Which tax rates and laws measure a client's current tax under IAS 12 when rates or rules change around year end, and how to book and disclose it.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Tax rates rarely change at a convenient moment. A finance minister announces a new company rate in a budget a few weeks after a client's year end. A tax bill passes parliament but waits for assent. A new levy arrives halfway through the client's financial year. The preparer, drafting the tax note, has to decide which rate belongs in this year's current tax figure.
IAS 12 settles it with one phrase: enacted or substantively enacted by the end of the reporting period.
What counts as an income tax
Under IAS 12, income taxes include all domestic and foreign taxes that are based on taxable profits. That is the scope test. The tax a South African, Nigerian or Kenyan company pays on its taxable profit is clearly inside it. Taxes calculated on something other than profit, such as a levy on turnover, property rates or customs duty, generally fall outside it and belong elsewhere in the statements.
Where a levy is worked out on profit, or on a measure close to profit, look closely at how it is calculated before deciding. The test is the base of the tax, not its name. The country-specific tax notes are covered separately: the South African tax note, the Nigerian tax note and the Kenyan tax note with instalments.
Enacted or substantively enacted by year end
Under IAS 12, current tax liabilities and assets are measured at the amount expected to be paid to, or recovered from, the taxation authorities, using the tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period.
Two consequences follow:
- The reporting date is the cut-off. A rate announced after year end does not change this year's current tax measurement, however certain it seems, unless it had already been substantively enacted at year end.
- "Substantively enacted" is a judgement about the law-making process. It turns on how far a proposal had travelled by the reporting date, and each country's process is different. The firm should form a view for each country it works in, apply it consistently, and keep the evidence, such as the gazette, the status of the bill or the date of assent, on file.
At the time of writing, rates and rules in all three countries continue to change. Check the current position with SARS, the NRS or KRA rather than relying on last year's computation.
Unpaid tax as a liability, overpaid tax as an asset
Under IAS 12, current tax for current and prior periods is recognised as a liability to the extent that it is unpaid. IAS 12 also states that an overpayment of current tax is recognised as an asset.
For most clients the year-end position is the tax charged for the year, less provisional payments or instalments made, adjusted for any balance brought forward from earlier assessments. That net amount is the current tax liability or asset. Prior years belong in it too: an additional assessment for an earlier year that is still unpaid is a current tax liability today, and a refund the authority has confirmed but not yet paid is a current tax asset.
Rate changes announced after year end
When a rate change is announced after the reporting date but before the statements are authorised:
- Measure current tax at the rate enacted or substantively enacted at year end.
- Consider whether the change is significant enough to explain in the notes as an event after the reporting period.
- Note the change in the working for next year, so the roll-forward picks up the right rate.
The opposite case also arises: a change substantively enacted before year end but effective only from a later date. For current tax, what matters is the rate that applies to this year's taxable profit under the law as it stood at the reporting date.
Booking the adjustment and completing the tax note
Many small clients post a provisional estimate during the year and never true it up. The year-end task is to compute the current tax charge properly and adjust the ledger to it. The computation itself is the firm's working, kept with the file.
In Achekam's Financials Studio, staff can post a year-end adjusting entry for the difference between the tax in the trial balance and the computed amount. If the entry later proves wrong, it is reversed with a record of who did so and why, and the original stays visible.
The Studio's standard policy wording is based on IFRS for SMEs and labelled for review before issue, and staff can write their own policies. Notes take their figures from the mapped trial balance, and facts the trial balance does not hold are left as "[to be completed]". The preparer completes from the computation whatever the ledger cannot supply, such as the rate applied and any explanation of a change in rate.
Before the tax note is signed off, check that:
- the computation uses the rates and rules enacted or substantively enacted at year end, with the evidence on file;
- provisional payments and instalments for the year agree to the authority's statement of account;
- prior-year assessments and refunds are reflected;
- the ledger has been adjusted to the computed liability or asset;
- any rate change announced after year end has been considered for disclosure.
The IFRS Foundation's summary of IAS 12 explains the accounting treatment for income taxes, including current and deferred tax.
A budget speech makes headlines; enactment rarely does. Keep a short register for each country of what was announced, when it became law and the evidence, and the year-end rate question will answer itself.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
