Pursuant to both the Danish Financial Statements Act and IFRS, when measuring deferred tax, the corporate tax rate that is expected to be applicable to temporary differences in the financial years in which the differences are expected to be eliminated should be applied based on applicable tax rules and tax rates adopted or in reality adopted before the end of the financial year.
L 218 on change of the Danish corporation tax rate will entail a gradual reduction of the Danish corporation tax rate over the income years 2014-2016.
Deferred tax liabilities and tax assets included in financial statements or interim financial statements for periods ending after 27 June 2013 are thus affected by the reduced corporation tax rates.
L 218 will entail the following corporation tax rates for the income years 2014-16:
| 2016 and subsequent
In the years up to 2016, the computation of deferred tax will be affected by the date when the company's temporary differences are expected to be realised.
Example of computation of deferred tax at 31 December 2013:
| Property, plant and equipment
| Tax losses
| Total temporary
| Tax rate
The accounting effect of the reduction of the corporation tax rate on deferred tax at 31 December 2013 will thus be DKK 23.9 thousand calculated as the difference between 25% of DKK 950 thousand = DKK 237.5 thousand and the deferred tax of DKK 213.6 thousand calculated at 31 December 2013. In general, the change is recognised in the income statement unless the tax reduction can be attributed to transactions recognised directly in equity.
As it appears from the above example, the computation of deferred tax is complicated by the gradual reduction of the corporation tax rate. In practice, it may often be difficult to predict in which income year a temporary difference is expected to be realised. On determining the specific method of accounting, the materiality of deferred tax should be taken into account.
The measurement of current income tax is based on the corporation tax rate applicable to the income year and the taxable income for the income year.
In financial statements and interim financial statements for periods ending before the adoption of L 218, deferred tax must still be determined based on the previous corporation tax rate (25%).
If the tax rate reduction is expected to materially affect future financial statements and interim reports, this should be disclosed in the section Events after the balance sheet date in the Management's review and in the notes, if relevant.
In general, companies must apply the same accounting policies in the interim financial statements as in the financial statements; see IAS 34.28. According to this provision, changes in the corporation tax rate must be recognised immediately.
Pursuant to IAS 34 IE B12, taxes recognised in interim reports may, however, be based on the best estimate of the company's expected effective corporation tax rate for the entire income year multiplied by the profit/loss before tax for the interim period. Under this provision, the accounting effect of the tax rate reduction will be evened out over the remaining reporting periods in the financial year.
The accounting effect of a reduction of the corporation tax rate adopted before the interim period end must be recognised immediately (i.e. Q2 2013).
An acceptable alternative method for recognition in interim reports is to even out the accounting effect of the change in corporation tax rate over the remaining annual reporting periods (i.e. Q1-Q4 in 2013) by adjusting the expected annual effective tax rate; see IAS 34 IE B12.