Two Information

1) calculation for two company ; UWC and TNB

UWC :

2019

Accounting profit: RM 46,191,264

Taxable profit: RM 42,499,439 (estimate)

Tax return: RM 9,954,849

Effective Tax Rate = 22%

2020

Accounting profit: RM 72,629,059

Taxable profit: RM 61,954,580 (estimate)

Tax return: RM 14,864,870

Effective Tax rate = 20%

TNB :

2019

Accounting profit: RM 5,477.7 million

Taxable profit: RM 5,191 million (estimate)

Tax return: RM 1,032.7 million

Effective Tax Rate = 20%

2020

Accounting profit: RM 4,235.4 million

Taxable profit: RM 4,539 million (estimate)

Tax return: RM 619.0 million

Effective Tax rate = 14%

2) Tax planning position of the companies

UWC

2019

Accounting profit:RM 46,191,264

Tax rate 22%.RM 10,162,078.08

Taxable profit.RM 42,499,439

Tax rate.22%.RM 9,349,876.58

Actual paid.RM9,954,849

(i). Deferred tax liability :

RM10,162, 078.08 - RM9,954,849

=RM 207,229.08

(ii). Accounting deferred asset :

RM9,954,849 - RM9,349,876.58

=RM604,972.42

2020:

Accounting profit :RM72,629, 059

Tax rate 20%.RM14,525,211.8

Taxable profit :RM61,954,580

Tax rate 20%.RM12,390,916

Actual paid.RM14,864,870

(i). Deferred tax asset :

RM14,864,870 - RM14,525,211.8

=RM339,658.2

(ii). Accounting deferred asset:

RM14,864, 870 - RM12,390,916

=RM2,473,954

The company expected a reduction in tax rates in the year 2020. This explains why the company understated the taxable profits. This is shown with accounting profits being higher than the taxable profits in the year 2019.The actual deferred tax liability of RM207,229. 08 was reported in the year 2019 since the tax rates were high. In 2020 however, the company chose to take advantage of the reduced tax rates to pay more of the required accounting tax liability so that it could offset the deferred tax liability incurred in 2019.

The tax planning strategy of the company is to therefore tax more when the tax rates are low(have deferred tax assets) and to tax low when the tax rates are high (accumulate deferred tax liability) so that it can achieve an income smoothing advantage.

The difference between the tax liability on taxable profit and the actual returns (accounting tax asset is used for reporting purposes to instill confidence in potential investors.

It is important to note that accounting profits are the actual profits reported in financial statements for communications with shareholders while taxable profits are reported to the taxman/tax agency.

TNB:

2019

Accounting profit:RM5,477.70

Tax rate 20%.RM1,095.54

Taxable profit :RM5,191

Tax rate 20%.RM1,038.2

Actual returns.RM1,032.7

(i). Deferred tax liability :

RM1095.54 - RM1032.7

=RM62.84

(ii). Accounting deferred liability :

RM1038.2 -RM1032.7

=RM5.5

2020:

Accounting profit :RM4,235.40

Tax rate 14%.RM592.956

Taxable profit :RM4,539

Tax rate.RM635.46

Actual.RM619.0

(i) Deferred tax asset

RM619 -RM592.956

=RM26.044

(ii) Accounting deferred tax liability :

RM635.46 - RM619

=RM16.46

From the analysis, it is clear that the company prefers to report more tax returns when the taxes are low and reduced tax returns when the rates are high. The year 2019 had high tax rates thus the deferred tax liability while in 2020, the company chose to leverage on reduced tax rates to pay more than the required tax liability in the accounting profits of the year. This is an income smoothing strategy by the company.

Question : Based on (1) and (2) information, compare and contrast (between companies) the tax items that contributed to the tax expense paid by the companies.(15m)