Def. tax for exempt income

[sohail kashif]

Dear Members and partner,

Kindly, can any one or you kamran sb guides me what we will do with broughtfroward tax losses if a company earned taxable profit for the year but its income is declared as exempt from tax for a period of next three years. And what will be its effect on deferred tax as this loss is used for the calculation of deferred taxtion

Regards,

[kamranACA]

The query is not fairly explained, therefore, the reply may not be too precised.

In my view the tax losses arising and accumulating during the period in which the company remains tax exempted, cannot be carried forward and adjusted against the profits of the year when the company will be taxable.

As explained above, the tax losses of exempted period cannot be adjusted while determining the deferred tax.

As far as deferred tax is concerned, you can refer to the recognition principles of "provision" enumerated in IAS-37 as well as deferred tax's recognition as per IAS-12.

The answer to the query that whether or not deferred tax liabilities (or asset) should be estimated and provided during the exempted period, depends upon detailed assessment and working because the tax exemption is not available in perpetuity. The company has to be taxable in fourth year. Therefore, if the wroking calls for providing the deferred tax liability, it should be provided without adjusting the exempted period's tax losses.

Regards,

[sohail kashif]

Sir, actually query is that for example we have a company how have adjustable brought forward taxable losses and in the current year company has earned taxable income but the income of this year and that of next two years has been declared as exempt from tax by the federal Govt. Could the income of the current year be adjusted with the said losses or not cause this is exempt from tax.

Second whether we freeze those losses and use the same figure for calculation of deductible temporary differences under the calculation of deferred taxation. Further this period in which the income of the company has been declared as exempt will be counted for period for which business losses could be carried forward or not? i.e 6 years.

[Ali Akbar]

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by sohail kashif</i>
<br />Sir, actually query is that for example we have a company how have adjustable brought forward taxable losses and in the current year company has earned taxable income but the income of this year and that of next two years has been declared as exempt from tax by the federal Govt. Could the income of the current year be adjusted with the said losses or not cause this is exempt from tax.

Second whether we freeze those losses and use the same figure for calculation of deductible temporary differences under the calculation of deferred taxation. Further this period in which the income of the company has been declared as exempt will be counted for period for which business losses could be carried forward or not? i.e 6 years.
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

As fully explained by Kamran, the deferred tax asset should not be recognized based on tax free period profits (In your case 3 years profit). If your projections for year 4-6 shows profit (which is taxable and against which your current year loss can be set off as per law) and which are sufficient enough to utilize loss then you can recognize deferred tax asset on loss of current year.

Regarding your second question, it is worth mentioning here that recognition of deferred tax should not be isolated from what tax law says. Deferred tax calculations are done considering tax laws as to how deductions (for asset) and taxability (for liability) would take effect in future period as per law effective as of calculation/reporting date. Having said that, the law should be clear enough on validitity period of losses and how it is effected if tax free period comes during that period.