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Accounting in accordance with the International Financial Reporting Standards and determining the base of the corporate income tax

The Czech Republic has got closer again to the international environment in the area of accounting since 1 January 2011. On 9 December 2010, Act No. 410/2010 Coll., amending Act No. 563/1991 Coll., on Accounting, as amended was passed. This Act has widened the range of companies that can use the International Financial Reporting Standards (IFRS) for accounting and preparing financial statements.

However, the amendment does not affect the Income Tax Act under which it still applies that accounting entities which are subject to corporate income tax in the Czech Republic use the comprehensive income, always without any influence of the IFRS, to determine the tax base.

In connection with the considerations about changing over to accounting pursuant to the IFRS, one often encounters the question:

How to determine the base of the corporate income tax?

In the Czech Republic, regulations allow that the comprehensive income ascertained from the accounts which are primarily kept pursuant to the IFRS can also be used to determine the base of the corporate income tax. This comprehensive income must be adjusted so that it complies with the Czech Accounting Standards (CAS). Adjustments are not made in the accounting software and must be properly documented. Usually, a special annex is attached for row 10 of the tax return, specifying and quantifying the influences which imply the difference between the comprehensive income ascertained pursuant to the IFRS and the comprehensive income ascertained pursuant to the CAS. Other adjustments of the tax base are indeed based on the Income Tax Act.

As an audit company, we recommend to most of our clients who are currently and regularly preparing financial statements in accordance with the IFRS and where the applicable regulations allow the clients to keep accounts in accordance with the IFRS that they change over to accounting in accordance with the IFRS. It is less demanding in both time and money to adjust the income tax base once in a tax period than to adjust the complete financial statements monthly or quarterly so that they comply with the IFRS.

Of course, we have to point out that there is some degree of uncertainty, related with tax administrators’ lack of hands on experience when using the IFRS. We expect, however, that the number of legal entities using the IFRS will grow and that tax administrators will be well prepared for this situation.

TACOMA Auditing will be pleased to provide its clients with full support and information needed for decision making regarding the application of the IFRS as well as technical assistance during the transition of the bookkeeping.

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