Tax Expense

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Definition: Tax Expense

The tax expense of a company is the profit before tax (PBT) multiplied by an appropriate tax rate given as per the government. It is also called as the tax charge. Generally, companies report the PBT to the shareholders under generally accepted accounting principles but under the tax law to the government. As a result of this, the tax expenses computation becomes more complex. 

These differences can be temporary or the permanent in nature. Permanent items are nontaxable. Expenses are considered as nondeductible by taxing authorities so they need to be added back. Tax expenses depend upon various tax rates in various jurisdictions, the range of the tax rates applicable to different income levels, multiple layers of the taxes on an income, etc.

Example: if in some country, the government is trying to promote the savings. Then it may exempt the interest income from the tax. Conversely, if a government is trying to balance its foreign trade, then it may not allow the deductions on the international travel expenses or on the foreign purchases.

Historically, a revenue expense method was used for the tax calculation purpose, in which the P & L account was seen as primary & the balance sheet as secondary. But according to the IFRS, tax charge is a result of computing current & deferred tax payable by using the asset liability method. So, the balance sheet is primarily seen & the income statement secondarily. Tax laws provide the different treatment from GAAP of the items of income & the expenses as a result of the tax policy.

Hence, this concludes the definition of Tax Expense along with its overview.


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