Effects of changes in tax rate

CFA Level I FRA
#1

Hello everyone,

Let’s say we have a situation like this. The Government has already announced to increase tax rate for next year. Therefore, any deferred taxes are increased in this year (assume that the company is having net DTL) but the income tax payable is computed by using current tax rate. And we have this equation: income tax expense = income tax payable + Change in net DTL.

My question is, will the increase in DTL lead to higher income tax expense for this period which is supposed to be calculated based on current tax rate (as with income tax payable, in my opinion) ? If not, how can we reconcile 2 sides of the above equation?

Thanks

#2

This year’s income taxes payable (from their income tax return) is based on this year’s tax rate.

This year’s income tax expense, as you pointed out, will depend on income taxes payable and any changes in DTLs and DTAs. Here, the increase in the (net) DTL will increase this year’s income tax expense.