ARTICLE 07: CORPORATION TAX

This is one of the key topics and a favourite of examiners.

Computation of corporate tax liability involves reconciling net profit to arrive at a figure of
taxable income. In many cases the figure for net profit is not the same as that of taxable
income, this is because the Accountant & Taxman differs in their approach and treatment of
some items. So let’s look at how the two differs.

Accountant & Taxman

An accountant uses accounting principles and the taxman applies tax provisions, the
provisions and accounting principles differs at times. There are two types of differences
which are;

a) Permanent differences- These differences arise as a result of one (an accountant

or taxman) including an item and the other not including the item at all. Examples
include:
 Exempt income like dividends from a local company, which is however
included as income by an accountant.
 Prohibited or disallowed expenditure like fines and penalties which are
however treated as expenses by an accountant.
b) Temporal differences- Temporal differences are caused by items which are taken
into account by both accountant and taxman but in different periods. They are
sometimes referred to as timing differences. Timing differences are also caused by
the fact that the taxman applies both receipt and accruals basis of accounting,
whichever comes first, yet an accountant uses an accruals basis as a result amounts
recognised by both of them differs Examples of timing differences include:
 Interest collected in advance may be taxable in the period which it is received
but for accounting purposes credit may be taken only in latter days when it is
earned.
 Expenses or losses included in the income statement but not deductible from
income for tax purposes until a later date, e.g. provision for doubtful debts

Receipt or accrual
The taxman applies receipt or accrual basis of accounting yet an accountant applies an
accruals basis. Receipt and accruals basis means that the taxman accounts for a
transaction on receipt or accrual, whichever comes first. An example is when an expense
has been paid with a shortfall, the taxman account for the actual amount paid yet the
accountant accounts for the whole amount accrued. This difference in principle is the major
reason for temporal differences. Look out for these items and reconcile them
appropriately.

Questions on corporates covers a lot of sections of the Income Tax Act, and
requires a wide understanding and application of varied tax principles. In this
article I am going to explain some general tips on this topic overall.
Framework for the determination of tax liability for corporates

Net profit as per accounts xxx

Add: Income according to taxman xxx

Disallowable deductions xxx
Other income (investment income, e.g. Interest) xxx xxx
xxx

Less: Exempt income xxx

Income according to accountant xxx
Allowable deductions xxx (xxx)
Taxable income xxx
Tax @ 25% xxx
Add: 3% Aids Levy xxx
Tax liability xxx
Less: QPD’s paid (xxx)
Tax payable / refund xxx/(xxx)

Net profits as per accounts- always start with this figure and then reconcile the figure to
taxable income. For you to reconcile you need to have an understanding of what has been
done already to arrive at the figure of net profit. Starting with net profit figure is starting from
where the accountant has ended, the accountant would have treated some items correctly,
and some in a way not in line with tax principles. Most students get confused, repeating
the same items which have been correctly treated in arriving at the figure for net
profit, avoid such mistakes.

ADDITIONS
Income according to taxman- this income replaces certain income according to accounting
principles e.g. recoupment which replaces profit on disposal.

Disallowable deductions- these are expenses which do not qualify as deduction according
to tax principles. Adding them back will be disregarding them. Examples are depreciation
(which is replaced with capital allowances); expenses not yet incurred.

Other income
Some income may have been left out when calculating net profit. Examples are stocks
disposed other than by way of sale, concessions from creditors, dividends and interests.
These incomes should be added to give a correct figure for taxable income.

SUBTRACTIONS
Exempt income- some income included in accounts are exempt, common examples are
dividends paid to a local company, interest paid by certain financial institutions like POSB
etc. These incomes should be deducted.
Income according to accountant – this refers to certain income which have corresponding
tax income, examples include, profit on disposal. These should be deducted as the correct
income according to taxman would have been added already i.e. recoupment.

Allowable deductions
Most of these amounts should be calculated first. An example is capital allowances.

This framework I have suggested will allow you to have a well written answer which is easier
to mark. However you can choose to answer otherwise. When you are running out of time
you can attack item by item whether it is an addition or subtraction, it’s still acceptable.

In conclusion, corporate tax questions covers a lot of tax principles, you have to be
knowledgeable.

The following items are most examined; Sections quoted are from the Income Tax Act.
 Sect 8 in general
 Sect 15 in general
 Prohibited deductions- Sect 16
 Capital allowances – Sect 15(2)(c) arw 4th Schedule.
 Donations- Sect 15(2)(q)
 Preproduction expenditure: Sect 15(2)(t)
 Assessed losses: Sect 15(3)
 Bad debts: Sect15(2)(g)
 Leasing- Sect 8(1)(d-e); sect 15(2)(d-e)
 Capital expenditure like, paving, business licences which would have been
expensed.
 Rent or cost of repairs for unoccupied property- sect 16(1)(i)
 Taxes paid for other tax heads, e.g. VAT, PAYE which would have been expensed-
sect 16(1)(d)
 Restraint of trade payments – sect 16(1)(j)
 Entertainment expenses- sect 16(1)(m)

Till next time!!!!

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PARTSON NYATANGA, BSc, CIS, ACCA
AUTHOR & SENIOR TUTOR: HAVENHILL BUSINESS ACADEMY
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