The tax rate reduction was announced for years ending on or after 31 March 2023. How should entities be accounting for the change in corporate tax from 28% to 27% and when?
The budget speech was presented by our current minister of finance Enoch Godongwana on 23 February this year, and in it the corporate tax rate was once again mentioned, made effective from years ending 31 March 2023. This time there are no ifs and buts, the related tax legislation to ensure the reduction is tax neutral was passed in January… so what now?
Last year it was announced that the corporate tax rates would reduce to 27% for years of assessment commencing 1 April 2022, this year the wording was changed slightly to: “for years of assessment ending on or after 31 March 2023”. It is probably a good time to be reminded of the requirements in accounting for these changes in accordance with the applicable accounting standards.
According to both IFRS and IFRS for SMEs, tax and deferred tax is measured using the tax rates and tax laws that are enacted or substantively enacted by the end of the entity’s reporting period. The IFRS for SMEs includes the wording in its measurement paragraphs mentioned above “An entity shall regard tax rates as substantively enacted when the remaining steps in the enactment process have not affected the outcome in the past and are unlikely to do so.” Current tax is measured at the amount expected to be paid or recovered (IAS 12.46) (IFRS for SME 29.6). Deferred tax must be measured at the tax rates that are expected to apply to the period in which the underlying asset or liability is realised or settled (IAS 12.46) (IFRS for SME 29.27).
With the tax rate only changing for years of assessment ending 31 March 2023, will this have an impact on the 2022 financial statements? The key question to then ask is: when is a change in tax rates considered to be substantively enacted?
- When the Minister announces it?
- On the effective date of the announcement?
- When it is approved by Parliament? or
When it is signed by the President?
Until last year, in South Africa, when the Minister announces a rate change to an existing tax it is applied without any further changes. Due to this high degree of certainty changes in tax rates, the decrease in the corporate tax rate is usually considered to be substantively enacted from the time it is announced.
Last year, however, there was confusion as the reduction in the tax rate was announced together with a statement that it would be tax neutral. This was later clarified to explain that the base-broadening and interest limitation tax impacts would also need to be approved, thereby effectively linking these changes in tax law to the change in the tax rate. With all the confusion additional guidance was issued by SAICA to say that entities must apply judgement in determining whether the tax rate was substantively enacted or not.
A change in a tax law or a tax rate linked to a change in tax law, is only considered substantively enacted when it has been approved by Parliament and signed by the President. The change limiting the use of assessed losses as well as the limitation of interest deductions is a change to the tax law. The base-broadening, as the assessed loss limitation is commonly referred to, as well as the interest rate limitation were promulgated in January 2022 subject to the tax rate change being effective. The announcement of the tax rate reduction to 27% is therefore considered substantively enacted from 23 February 2022, effective for years ended on or after 31 March 2023.
The changes to the rates and laws should be applied to the period to which they relate.
Below is a simple example of how the tax rate change should be applied for companies with three different year-ends.
Company A with a 31st December 2021 year-end;
Company B with a 28th February 20221 year-end; and
Company C with a 30th June 20222 year-end.
The Minister of Finance makes his announcement on 23rd of February 2021 which includes a reduction in corporate tax to 27%, effective for years ending on or after 31 March 2023. It is considered substantively enacted from that date.
Because there is so much confusion about this is South Africa, the Financial Reporting Standards Council issued Financial Reporting Pronouncement 1 to explain exactly this. Please refer to this should you need any guidance. Click here for the FRP 1.
1This is applicable to all year-ends between 23 February 2022 and 31 March 2022
2This will apply to all year-ends from 1 April 2022 until 30 March 2023
With these impacts plus the proposed reduction in what corporates may claim against their assessed losses, and the limitation of interest deductions there will be a lot to consider for 2022/23. It will be important that these are properly disclosed and explained in the financial statements.