FRS 112-Reconciliation Of Effective Tax Rate To Statutory Rate

In FRS112 on Income Taxes or IAS 12, there is a requirement for a reconciliation statement between the Effective tax rate (ETR) to the Statutory Rate in the notes to the financial statement wherein the following are normally taken up:

• Non allowable expenses
• Deferred tax assets not recognized
• Expenses not allowed for tax purposes
• Non taxable income
• Differential tax rate-SME’s ( small & medium enterprise), foreign subsidiaries
• Over/under provision for prior years
• Changes in tax rates of overseas subsidiaries
• Changes in deferred tax due to tax rate changes

The idea of this reconciliation is allow transparency for outsiders/shareholders to understand whats the company has done to manage its taxation namely how much the actual existing taxation rate compared to the norm statutory rate. An excessive variance between ETR versus statutory rate is alarming and should be critically look at. However, sad to say, many of us tend to ignore or take lightly of such review of the reconciliation.

My two cents is that whether you are an accountant, financial controller or CFO or top management, we should look at this reconciliation more carefully

Why is this so?

Effective tax rate (ETR) is very important. In my earlier article on Economic value added (EVA), it is mentioned that ETR is one way to improve EVA as ETR is an outright cash flow where, when we manage to plan it carefully, will increase shareholder value / EVA.

Deliberate investment in tax exempted industrial areas, looking ahead to plan for future material non-allowable expenses into allowable type, ensuring certain subsidiaries of the group enjoy the SME’s status by making sure the threshold on authorized capital not exceeded, might be some suggestions to reduce ETR

So look out carefully this reconciliation in your company’s notes to the financial statement and please plan ahead to try to lower ETR to enhance company’s shareholder value. Incidentally, one part of the kpa/kpi of an inhouse tax manager is to reduce the ETR of the group/company.