Current Tax

What is Current Tax?

IAS 12.5 defines current tax as the amount of income taxes payable (or recoverable) in respect of the taxable profit (or tax loss) for a period. The starting point is not accounting profit. It is taxable profit, which the entity derives by adjusting accounting profit for items that are non-taxable or non-deductible under the applicable tax law. IAS 12.12 requires the entity to measure current tax liabilities (and assets) at the amount expected to be paid to (or recovered from) the tax authorities using the rates enacted or substantively enacted at the reporting date.

On a practical engagement, the current tax calculation sits in a tax computation that bridges accounting profit to taxable profit. The auditor tests this bridge. Typical adjustments include disallowed expenses (entertainment, fines, non-deductible provisions), exempt income (participation exemptions in Dutch and German tax law, for instance), and timing differences that create deferred tax rather than current tax. IAS 12.58 requires current tax and deferred tax to be recognised as income or expense in profit or loss unless the tax relates to items recognised outside profit or loss (in other comprehensive income or directly in equity).

ISA 540.13(a) applies because the current tax balance depends on management's interpretation of tax law, particularly where the treatment of specific transactions is not settled. The auditor evaluates whether the entity's method for computing taxable profit is appropriate and whether the inputs (applied tax rates, disallowance schedules, relief claims) are supported by the tax legislation and the entity's own filings.

Worked example: Rossi Alimentari S.p.A.

Client: Italian food production company, FY2025, revenue EUR 67M, IFRS reporter. Rossi reports accounting profit before tax of EUR 5,200,000. The Italian corporate income tax (IRES) rate enacted as at 31 December 2025 is 24%. The regional production tax (IRAP) applies at 3.9% on a different base but is outside the scope of IAS 12 for this example. Rossi has three significant tax adjustments.

Step 1 — Identify permanent and temporary differences: Rossi incurred EUR 180,000 in entertainment expenses that are non-deductible under Italian tax law. It received EUR 320,000 in dividends from a 25%-owned Italian subsidiary qualifying for the 95% participation exemption (EUR 304,000 exempt, EUR 16,000 taxable). Depreciation for tax purposes exceeds accounting depreciation by EUR 140,000 (a temporary difference creating a deferred tax liability).

Documentation note: prepare the accounting-to-taxable profit bridge. Record each adjustment with its statutory reference (TUIR article for Italian tax law). Separate permanent differences from temporary differences, as only permanent differences affect current tax in isolation.

Step 2 — Compute taxable profit: Start with accounting profit of EUR 5,200,000. Add back non-deductible entertainment of EUR 180,000. Subtract exempt dividend income of EUR 304,000. Subtract excess tax depreciation of EUR 140,000. Taxable profit is EUR 4,936,000.

Documentation note: cross-reference each adjustment to the supporting schedule. The excess tax depreciation creates a taxable temporary difference that the deferred tax computation will pick up separately under IAS 12.15.

Step 3 — Apply the enacted rate: Current tax payable is EUR 4,936,000 multiplied by 24%, producing EUR 1,184,640.

Documentation note: confirm the 24% rate was enacted (not merely proposed) at 31 December 2025 per IAS 12.46. Attach the legislative reference.

Step 4 — Assess prior-year adjustment: Rossi's FY2024 current tax provision was EUR 1,050,000. The final tax assessment received in October 2025 confirmed a liability of EUR 1,072,000, producing an underprovision of EUR 22,000. This flows through the FY2025 income tax expense under IAS 12.

Documentation note: record the prior-year variance, the cause of the underprovision (a disallowed expense identified during the tax authority's review), and confirm the adjustment is reflected in the FY2025 tax line. If the underprovision exceeds the firm's threshold for prior-year variances, investigate whether the estimation process needs improvement.

Conclusion: Rossi's current tax payable of EUR 1,184,640 for FY2025 is defensible because the accounting-to-taxable profit bridge is fully reconciled, each adjustment ties to a statutory provision, and the enacted rate is verified at the reporting date.

What reviewers and practitioners get wrong

• Teams frequently test the current tax balance by recalculating the tax charge at the statutory rate applied to accounting profit, without verifying the individual adjustments in the accounting-to-taxable profit bridge. IAS 12.79 requires disclosure of a reconciliation between the tax expense and accounting profit multiplied by the applicable rate. When the auditor does not test the components of that reconciliation, errors in the treatment of non-deductible expenses or exempt income pass through unchallenged. ISA 540.18 requires evaluation of the reasonableness of the point estimate, which means testing the inputs to the bridge, not just the output.
• Prior-year current tax provisions are often rolled forward without comparison to the final tax assessment. When the assessment arrives and shows a variance, the adjustment is booked but the root cause (a recurring disallowance the entity fails to anticipate, or an overly conservative provision) is not investigated. Repeated over- or under-provision in the same direction is a pattern the auditor should flag under ISA 540.32(a) as an indicator of possible management bias.

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