Several specific deductions under US tax law have been identified under US GAAP as special deductions. Special deductions are recognized in the period in which they are claimed on the tax return. Entities subject to graduated tax rates should evaluate whether the ongoing availability of special deductions is likely to move the entity into a lower tax band which might cause deferred taxes to be recorded at a lower rate.

Special deductions are not defined under IFRS but are generally treated in the same way as tax credits. Tax credits are generally recognized in the period in which they are claimed on the tax return, however certain credits may have the substantive effect of reducing the entity’s effective tax rate for a period of time. The impact on the tax rate can affect how entities should record their deferred taxes. In other cases, the availability of credits might reduce an entity’s profits in a way that moves it into a lower tax band, and again this may impact the rate at which deferred taxes are recorded.

It is preferable to account for investment tax credits using the “deferral method” in which the entity spreads the benefit of the credit over the life of the asset. However, entities might alternatively elect to recognize the benefit in full in the year in which it is claimed (the “flow-through method”).

IAS 12 states that investment tax credits are outside the scope of the income taxes guidance. IFRS does not define investment tax credits, but we believe that it is typically a credit received for investment in a recognized asset. Depending on the nature of the credit it might be accounted for in one of three ways:

Deferred taxes are not recorded for any tax holiday but rather the benefit is recognized in the periods over which the applicable tax rate is reduced or that the entity is exempted from taxes. Entities should, however, consider the rate at which deferred taxes are recorded on temporary differences. Temporary differences expected to reverse during the period of the holiday should be recorded at the rate applicable during the holiday rather than the normal statutory income tax rate.

While IFRS does not define a tax holiday, the treatment is in line with US GAAP in that the holiday itself does not create deferred taxes, but it might impact the rate at which deferred tax balances are measured.