What is Deferred Tax?
Deferred tax is the tax effect of temporary differences between the carrying amount of an asset or liability in the financial statements and its tax base. It is recognized as a deferred tax asset (future deduction) or deferred tax liability (future taxable amount).
How It Works
- Identify temporary differences (e.g., accelerated tax depreciation vs. book depreciation).
- Multiply by the enacted tax rate to compute deferred tax.
- Review at each reporting date for changes in rates and recoverability.
Saudi Context
Saudi corporate income tax (20% on foreign-owned shares of mixed companies) and Zakat (2.5% on Saudi/GCC shares) create distinct temporary differences. SOCPA-licensed audit firms test deferred tax on every IFRS audit.
Example
A company depreciates equipment over 5 years for books and 4 years for tax. The early-year tax deduction creates a deferred tax liability that reverses over time.