The tax rate reconciliation

Users want to know why a company's tax charge differs from what its profit "should" produce. IAS 12.81(c) requires an explanation of the relationship between tax expense and accounting profit, in either or both of two forms:

1. a numerical reconciliation between tax expense and accounting profit × the applicable tax rate; or
2. a numerical reconciliation between the average effective tax rate and the applicable rate,

together with the basis on which the applicable rate is computed. The effective tax rate (ETR) is tax expense ÷ accounting profit.

What appears in the reconciliation? Items that make tax expense differ from profit × rate: - Non-deductible expenses (fines, some entertainment) — increase tax. - Exempt income (some dividends, exempt gains) — decrease tax. - Different rates in other jurisdictions — a subsidiary taxed at 10% when the parent's rate is 20% reduces group tax. - Unrecognised deferred tax assets — losses for which no DTA is recognised give no tax relief in expense. - Prior-year adjustments — under- or over-provisions of earlier years, at their actual amount. - Rate changes applied to opening deferred tax balances.

What does not appear? Ordinary temporary differences. Because deferred tax is recognised on them, current tax plus deferred tax already equals profit × rate for those items. That is the point of deferred tax accounting.

Each item's tax effect is the item × the applicable rate (except prior-year adjustments and rate-difference amounts, which are stated directly). Signs matter: present increases as positive and decreases in brackets.

IFRS 18, effective for annual periods beginning on or after 1 January 2027, changes the structure of the statement of profit or loss but not the IAS 12 reconciliation requirement.