Different tax rates applicable to retained and distributed profits

An entity operates in a jurisdiction where income taxes are payable at a higher rate on undistributed profits (50%) with an amount being refundable when profits are distributed. The tax rate on distributed profits is 35%. At the balance sheet date, 31 December 2013, the entity does not recognise a liability for dividends proposed or declared after the balance sheet date. As a result, no dividends are recognised in the year 2013. Taxable income for 2013 is €100,000. Net taxable temporary differences have increased during the year ended 31 December 2013 by €40,000.

The entity recognises a current tax liability and a current income tax expense of €50,000 (€100,000 taxable profit @ 50%). No asset is recognised for the amount potentially recoverable as a result of future dividends. The entity also recognises a deferred tax liability and deferred tax expense of €20,000 (€40,000 @ 50%) representing the income taxes that the entity will pay when it recovers or settles the carrying amounts of its assets and liabilities based on the tax rate applicable to undistributed profits.

Subsequently, on 15 March 2014 the entity declares, and recognises as a liability, dividends of €10,000 from previous operating profits. At that point, the entity recognises the recovery of income taxes of €1,500 (€10,000 @ [50% – 35%]), representing the refund of tax due in respect of the dividends recognised as a liability, as a current tax asset and as a reduction of current income tax expense for the year ended 31 December 2014.