Change in the corporate income tax rate

For years of assessment ending on / after 31 March 2023 the corporate income tax rate will reduce from 28% to 27%. How will this impact the annual financial statements?

IN SIMPLE TERMS

Essentially, for any company with a financial year commencing on / after 1 April 2022, the tax liability (if any) should be computed by applying a corporate income tax rate of 27% to the determined taxable income.

CURRENT INCOME TAX

IAS 12 – Income Taxes (“IAS 12”) requires current tax liabilities or assets to be measured at the amount expected to be paid to or recovered from SARS, using the tax rates that have been enacted or substantially enacted by the end of the reporting period.

In other words, the corporate income tax rate of 28% should continue to be applied to determine the current income tax liability or asset up until the company becomes entitled to apply the reduced corporate income tax rate of 27%.

Historic current income tax liabilities or assets should not be remeasured once the company becomes entitled to apply the reduced corporate income tax rate of 27%. The balance (if any) will remain unchanged as at the end of the reporting period prior to the financial year in which the company starts applying 27% to determine its current income tax liability (if any).

Example Company A has a June financial year-end. Company A determined that its taxable income for the period: ·             1 July 2021 – 30 June 2022 (2022 financial year) is R8 392 857. ·             1 July 2022 – 30 June 2023 (2023 financial year) is R10 296 297. Company A should apply the reduced corporate income tax rate of 27% from 1 July 2022. Ignoring any provisional tax payments made by Company A, the current income tax liability will be as follows: 2022 financial year: R2 350 000 (R8 392 857 x 28%) 2023 financial year: R2 780 000 (R10 296 297 x 27%) In terms of IAS 12, the current income tax liability for the 2022 financial year should not be adjusted to account for the reduced corporate income tax rate of 27%

IMPACT ON DEFERRED TAX

IAS 12 requires deferred tax assets and liabilities to be measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates that have been enacted by the end of the reporting period.

Deferred tax assets and liabilities essentially represent timing / temporary differences between when transactions are accounted for in terms of relevant financial reporting standards, and when transactions should be accounted for in determining the taxable income / assessed loss of a company in terms of the Income Tax Act. The tax rate applicable at the time that these temporary differences will be extinguished should be applied.

When there is a change in the prevailing corporate income tax rate, the carrying amount of deferred tax assets and liabilities will change. Said change, however, is not as a result of a change in the quantum of the temporary differences. In order to ensure that the quantum of the temporary differences is correct, a deferred tax opening balance adjustment will be required.

Example Company A has a June financial year-end and should, therefore, apply the reduced corporate income tax rate of 27% from 1 July 2022. Company A determined that its net deferred tax liability for the: ·             2021 financial year is R3 320 180: Determined at the corporate income tax rate of 28%. ·             2022 financial year is R4 813 400: Determined at the corporate income tax rate of 28%. ·             2023 financial year is R3 651 230: Determined at the corporate income tax rate of 27%. The movement in the deferred tax liability for the 2023 financial year is a decrease of R1 162 170 (R4 813 400 – R3 651 230). However, a portion of this movement (i.e. between the opening and closing balance of the net deferred tax liability) resulted from the fact that the net deferred tax liability for the 2022 financial year was determined by applying the corporate income tax rate of 28%. Therefore, the opening balance of R4 813 400 should be reduced by R171 907 (R4 813 400 x [1% / 28%]) to ensure that the quantum of the temporary difference pertaining to the 2023 financial year is corrected. The correct temporary difference for the 2023 financial year is, therefore, R990 263 (R1 162 170 – R171 907).

IMPACT ON DISCLOSURES IN THE ANNUAL FINANCIAL STATEMENTS

IAS 12 requires the following to be disclosed where there was a change in the corporate income tax rate:

• Any deferred tax temporary differences attributable to a change in the corporate income tax rate should be separately disclosed in the current income tax note.
• The tax rate reconciliation disclosure note should separately disclose the reconciling difference attributable to a change in the corporate income tax rate.
• A note providing more details regarding the change in the corporate income tax rate and the date on which the change became effective.

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