Question

In 2017, Kerry Corp’s financial statement showed accrued losses on disposal of unused plant facilities of $3,600,000. The facilities were sold in December 2018 and a $3,600,000 loss was recognized for tax purposes then. Also in 2018, Kerry Corp’s paid $150,000 for a two-year life insurance policy for their CEO Kerry, and the company was the beneficiary. Assuming that the enacted tax rate is 35% in both 2017 and 2018, and that Kerry paid $1,170,000 in income taxes in 2017.

Trump enacted the tax cut and job act in 2018 and effectively changed the corporate tax rate to 21%. For Kerry’s quarterly financial statement on March 2018, how would this change in tax rate impact Kerry’s net deferred income taxes? Show me your calculation. Is this change counter-intuitive for you? Why and why not?

Answer 1

Solution:

For calculation of deferred income taxes we always use the rate of taxes, expected to apply upon realization of benefit / settlement of liabilities. Theses rates should be based on enacted / substantively enacted laws including applicable circulars etc. on reporting date.

In the given case tax rates has been changed from 35% to 21%, as per IAS 12, tax rate that needs to be considered for deferred income tax would be 21% instead of 35%.

($ 3600000 + $ 150000 ) * 21% = $ 787500

Tax paid of $ 1,170,000 would not have any impact.

This change is not counter intuitive as the decrease in Tax rate would lead to less payment of tax in the future years