Corporate Income Tax

Block II. Quantification of the taxable base.

Book-to-tax adjustments

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Index

01 02 03
Quantification of Adjustment for Criteria for
the taxable base Corporate Income temporary
Tax expense imputation

Corporate Taxation. Corporate Income Tax. Block II. Pág. 2

01
Quantification of the
taxable base

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3
 1. Quantification of the taxable base.
a) Estimation regimes

The taxable base is the quantitative expression of the taxable event. In the case of CIT it consist of the
amount of income obtained in the tax period reduced by offsetting tax losses of previous tax years.

For the quantification of the taxable event (income made by the taxpayer), the rule uses different types of
estimation regimes.

In the case of CIT, the direct estimation regime is essentially used. According to this method, to
quantify the taxable event the rule starts from the accounting result, and this is corrected by the
adjustments established in the CIT Law (book-to-tax adjustments).

Other estimation regimes, such as the objective estimation regime (reserved for some special regimes
such as shipping companies) or the indirect estimation regime (of subsidiary application according to the
General Tax Law), are not addresed in this course.

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 1. Quantification of the taxable base.
b) Differences between accounting result and taxable base

As it has been said, in the direct estimation regime, the CIT Law uses accounting result only as a starting
point for quantifying the taxable event.

The objectives and principles guiding accounting and taxation are different. While accounting is guided by
the principle of prudence, taxation is subject to the principle of economic capacity. This generates
differences in criteria between accounting and taxation, which will require that to make in adjustments in
the tax returns to the accounting result (the accounting books are not modified).

These differences may be:

- Temporary imputation: accounting expenses/income are recorded in different years for tax purposes.
- Characterization: accounting expenses/income are not considered for tax purposes.
- Valuation: transactions or assets/liabilities have different accounting and tax value.

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 1. Quantification of the taxable base.
b) Differences between accounting result and taxable base

Accounting/merca Differences in
accounting-tax Tax rules
ntile rules
criteria

Tax result
Accounting result
(taxable base)

Book-to-tax adjustments

Principle of Economic
prudence capacity

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 1. Quantification of the taxable base.
c) Adjustments to the taxable base

These differences require adjustments to the accounting result in order to determine the
taxable base.

Accounting +/- Permanent differences (do not

result reverse in the taxable base of future tax
years)
+/- Book-to-tax adjustments
+/- Temporary differences (are reversed
in the taxable base of future tax years
Previous with the opposite sign)
taxable base

- Offsetting of tax loss carryforwards and other reductions

Tax result /
taxable base Pág. 7
 1. Quantification of the taxable base.
c) Adjustments to the taxable base

These adjustments can be classified in

- Depending on their sign: positive (increase the taxable base) or negative (decrease the
taxable base) sign
- Depending on their temporary or permanent nature

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 1. Quantification of the taxable base.

The taxpayer shall make a positive adjustment:

• If the accounting expense recorded is greater than that which is tax-deductible, increasing its taxable
base in the amount of the accounting expense that is not deductible.

• If the tax-imputable income is higher than the accounting income, increasing its taxable base in the
amount of the taxable income to be considered.

The taxpayer must make a negative adjustment:

• If the tax-deductible expense is greater than the accounting expense, reducing its taxable base in the
amount of the expense to be considered for tax purposes.

• If the taxable income is lower than the accounting income, reducing its taxable base in the excess of the
accounting income.

Where the accounting and tax income/expense coincide, no adjustment shall be made.
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 1. Quantification of the taxable base.

Accounting expense Unaccounted tax Unaccounted tax Accounting income

not tax deductible income expense not taxable

Negative Negative
Positive adjustment Positive adjustment adjustment taxable
taxable base adjustment taxable
taxable base base
base

Increase taxable Increase taxable Taxable base Taxable base

base base decreases decreases

Increases CIT Increases CIT Decreases CIT Decreases CIT

debt debt debt debt

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 1. Quantification of the taxable base.

Book-to-tax adjustment Tax base

Accounting expense > tax expense Positive It increases

Accounting expense < tax expense Negative It decreases

Accounting income > Tax income Negative It decreases

Accounting income < tax income Positive It increases

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 1. Quantification of the taxable base.

Permanent differences

Differences between the accounting result and the taxable base of a given tax year which do not reverse in
subsequent tax years.

• Negative:

• Accounting income that will never be taxed.

• Tax-deductible expenses that will never be registered in the accounting books.

• Positive:

• Taxable income that will never be accounting income.

• Accounting expenses that will never be tax deductible.

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 1. Quantification of the taxable base.
Temporary differences

Differences between the accounting result and the taxable base of a given tax year, which revert in subsequent tax years.

• Negative:

• Accounting income that is not taxable in that year but in another subsequent year.

• Tax-deductible expenses that are not accounted for in the year but will be accounted for in successive periods.

• Positive:

• Taxable income that is not accounted for in the year but will be accounted for in successive periods.

• Accounting expenses that are not tax deductible in that year but in another subsequent year.

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02
Adjustment for Corporate
Income Tax Expense

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2. Adjustment for the expense for the Corporate Tax

Provided for in article 15 of the Law, the CIT expense recorded in the accounting books is not
tax deductible.

In other words, the CIT taxpayer’s prior taxable base is constituted by the accounting profit
registered before the CIT expense.

As a result, the CIT taxpayer will have to make a POSITIVE TAX ADJUSTMENT, which will
be considered a PERMANENT DIFFERENCE

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03
Criteria for temporary
imputation

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 3. Criteria for temporary imputation

3.1 Principles governing the criteria for temporary imputation

3.1.1 Accrual principle

Income and expenses derived from transactions or economic events shall be charged to the tax period in
which they are accrued, in accordance with accounting regulations, regardless of the date of payment or
collection, respecting the due correlation between them.

Entities that use, for accounting purposes, a criterion of temporary allocation of income and expenses other
than accrual (cash criterion) must submit an application to the Tax Administration so that the criterion has tax
effectiveness.

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 3. Criteria for temporary imputation

3.1 Principles governing the criteria for temporary imputation

3.1.2 Principle of accounting registration

Expenses that have not been registered in the profit and loss account or in a reserve account if
so established by law or regulation shall not be deductible, with the exception of assets that can
be depreciated freely or accelerated.

3.1.3 Principle of independency of tax years

From the tax perspective, each tax year is independent and “watertight”, not being therefore
indifferent to determine to which tax year the income or expenses accounted for should be
charged.

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 3. Criteria for temporary imputation

3.2 Adjustments arising from the different criteria for temporary imputation

A.- Accounting errors

Income and expenses charged in the profit and loss account or in a reserve account for a tax year other
than that for which it must be temporarily allocated shall be charged in the relevant tax period. Therefore,
the error must be corrected.

However, in the case of expenses charged accountably to those accounts in a tax period after that in
which they are temporarily allocated or of income charged to them in a previous tax period, the tax
allocation shall be made in the tax period in which the accounting allocation has been made, provided
that it does not result in lower taxation. Therefore, in these cases, correction is not appropriate.

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 3. Criteria for temporary imputation
3.2 Adjustments arising from the different criteria for temporary imputation

A.- Accounting errors

ACCOUNTING ERRORS TAX IMPUTATION ADJUSTMENTS ON A TAX BASIS

Positive adjustment that will revert

In a financial year PRIOR to accrual The accrual period with negative sign in the period of
Expense imputation (accrual)
wrongly
accounted for The tax year in which it was
In an financial year AFTER accrual accounted, unless there is a lower -
taxation
Positive adjustment that will revert
In an financial year AFTER accrual The accrual period with negative sign in the accounting
Income period
wrongly
accounted for The tax year in which it was
In a financial year PRIOR to accrual accounted, unless there is a lower -
taxation

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 3. Criteria for temporary imputation

3.2 Adjustments arising from the different criteria for temporary imputation

A.- Accounting errors

Examples:

a) The company “X” accounts in 2018 expenses of € 10,000 that will not accrue until the financial year 2020.The company
must make a positive tax adjustment in 2018 and negative in 2020 to impute them for tax purposes in that tax year 2020.

b) In 2020 the company “X” recorded expenses of € 5,000 whose accrual occurred in 2019 and therefore should have been
accounted in the financial year 2019.The company must not make any adjustment so therefore these expenses are tax
deductible in 2020 (accounting imputation).

c) In 2020, the company “X” recorded income of € 8,000 whose accrual occurred in 2018 and which, therefore, should have
been taxed in the tax year 2018.The company will impute such income for tax purposes in 2018, making a positive tax
adjustment in the tax return for that tax year, and a negative tax adjustment in 2020.

d) The company “X” registers in 2019 an accounting income of € 15,000 that will not accrue until the financial year 2020.The
company will impute said income tax to the tax year 2019 without making any adjustments (accounting imputation).

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 3. Criteria for temporary imputation
3.2 Adjustments arising from the different criteria for temporary imputation
B.- Term or deferred price transactions

In the case of term or deferred price transactions, the income is obtained for tax purposes proportionately as the
corresponding collections are due, unless the entity decides to apply the accrual criterion.

Term or deferred price transactions shall be considered to be those for which consideration is due, in whole or in part, by
means of successive payments or by means of a single payment, provided that the period between the accrual and the
maturity of the last or only term is greater than one year.

Example: Company X sells for € 1,000,000 a good, being payable half of the price in the current year and the rest in the
next year.

Current year Next year

accounting 1,000,000 -
Tax -500,000 + 500,000
Taxable base 500,000 500,000
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