International differences in tax treatment

The same sale or profit can be taxed in very different ways depending on the country. The accounting principle stays constant — who bears the tax decides where it goes — but the answer changes with the system.

Indirect taxes on consumption. - Multi-stage VAT / GST (used in many countries): every business in the chain charges output tax and recovers input tax, so only the final consumer bears the tax. For a registered business, VAT is normally a balance-sheet item only. - Single-stage retail sales tax (for example, the sales taxes of many US states): tax is charged only on the sale to the final user. Businesses buying for resale usually present an exemption certificate instead of paying tax. There is no input tax credit, so sales tax a business pays on its own supplies or equipment is simply part of the cost.

Direct taxes on the business. - Corporate income tax on taxable profit — within IAS 12, with current and deferred tax. - Other levies on the business — in some jurisdictions, for example a religious levy such as Zakat in Saudi Arabia — that aren't based on taxable profit in the IAS 12 sense; they are accounted for separately from income tax. - Turnover, payroll and property taxes — based on revenue, salaries or property values rather than profit, so outside IAS 12: they are operating costs. - IAS 12 also includes withholding taxes payable by a subsidiary, associate or joint arrangement on distributions to the reporting entity (IAS 12.2).

Withholding tax on dividends paid. When a company must pay part of its dividend to the tax authority on behalf of its shareholders, that amount is part of the dividend, charged to equity — not tax expense (IAS 12.65A).

Double taxation. Profits earned abroad may be taxed in both countries. Tax treaties and foreign tax credits reduce this; treaties often reduce withholding rates, typically where the recipient can show it is resident in the treaty country.

IFRS and US GAAP. Both use a balance-sheet approach to deferred tax and present deferred tax balances as non-current. Differences include uncertain tax positions: IFRIC 23 asks whether the authority will probably accept a treatment, assuming it examines the position with full knowledge. If not, the uncertainty is reflected using whichever method better predicts the outcome — the most likely amount (suits a yes/no outcome) or the expected value, the probability-weighted sum of possible outcomes (suits a range of outcomes). US GAAP (ASC 740) uses a two-step recognition and measurement approach. Questions in this course assume IFRS unless stated.

Global minimum tax. Many groups are now in scope of the OECD Pillar Two minimum-tax rules. IAS 12 (amended May 2023) requires a temporary exception: entities don't recognise or disclose deferred taxes arising from Pillar Two top-up taxes, but they disclose that they have used the exception and give information about their exposure.