Tax base

What it means

The tax base is the amount on which corporate income tax is computed. It starts from the result in the annual accounts but is not the same figure: it is adjusted by add-backs and deductions.

What the law does not accept as deductible is added back; what has already been taxed or what the law allows is deducted. So an accounting loss can sit alongside a positive tax base, and the reverse.

For an individual the tax base is made up of partial bases, from employment, from business income or from rental, say, and each is calculated separately. A business loss does not reduce the employment base, so a sole trader with a loss and a job on the side still pays tax on the salary.

How it works in practice

The usual add-backs: non-deductible expenses, liabilities unpaid beyond the statutory period, the gap between accounting and tax depreciation, and unrecognised provisions and impairment allowances.

On the deduction side sit mainly tax losses from earlier years and items the law expressly permits. The whole computation goes into the tax return and its schedules.

Some of the add-backs are only temporary. A typical case is a contractual penalty or late-payment interest the company booked as a cost but has not yet paid: this year it is added back, and it becomes tax-deductible only in the year it is paid. At the year-end close we keep such items on a list so they are not forgotten as deductions the following year.

What to watch out for

The tax result cannot be inferred from accounting profit without knowing the adjustments - which is exactly why it is tracked during the year. A company that computes it in March learns its tax and its advances too late to do anything about them.

The company sells services or goods to a related party at a price that does not match the market. Under transfer pricing rules the difference from the price independent parties would have agreed goes into the tax base, and if only an inspection finds it, a penalty and interest are added to the extra tax.