Questions:
ABC llc made $1,604,299 in profits in the year 2023; $224,000 in Australia, $248,389 in Canada, $128,763 in the United Kingdom, $524,682 in the United States and $478,465 in India.
It paid corporate tax of $22,400 in Australia, $62,097.25 in Canada, $51,505.20 in the United Kingdom, $178,391.88 in the United States and $112,439.28 in India. 

What is the effective tax rate of ABC in the year 2023?

ABC llc has a reporting date of April 30, 2023. The company obtains tax relief of $2 million for research and development expenditure on a cash paid basis in Canada. The recognition of a material development asset during the year, in accordance with IAS 38, created a significant taxable temporary difference as of April 30, 2023.

On 6 June 2023, the Canadian government passed legislation to lower the company tax rate to 20% from 1 January 2024 onward.

What will be the company's deferred tax liability for the year ended 30 April 2024?

Reference answers:
To compute the effective tax rate, we can use the following formulas:

Tax Rate = Taxes Paid / Net Profits
Profits Percentage = Net Profit /  Total Profit
Profit weighed share of the profits = Profits Percentage * Tax Rate
Effective tax rate = Sum of the Profit weighed share of the profits in the individual countries

We can use these to fill out the following table:


|                           | Australia  | Canada      | United Kingdom | United States | India       | Total         |
|-------------------|-------------|---------------|----------------|---------------|-------------|---------------|
| Net Profits         | $224,000.00 | $248,389.00 | $128,763.00     | $524,682.00   | $478,465.00 | $1,604,299.00 |
| Taxes Paid         | $22,400.00  | $62,097.25  | $51,505.20      | $178,391.88   | $112,439.28 |               |
| Tax Rate             | 10.00%      | 25.00%      | 40.00%          | 34.00%        | 23.50%      |               |
| Profits Percentage      | 13.96%      | 15.48%      | 8.03%           | 32.70%        | 29.82%      |               |
| Profit weighed share of the profits | 1.40%   | 3.87%      | 3.21%           | 11.12%        | 7.01%       |               |

Effective Tax Rate = 1.40%  + 3.87% + 3.21% + 11.12% + 7.01%  = 26.61%   

Therefore, the effective tax rate was 26.61%.

Tax liability  = 25% * $2 million = $0.5 million

Deferred tax liabilities and assets should be measured using the tax rates expected to apply when the asset is realized. This tax rate must have been enacted or substantively enacted by the end of the reporting period. The government enacted the 20% tax rate after the period end. Therefore, it should not be used when calculating the deferred tax liability for the year ended 30 April 2023. The current 22% rate should be used instead.

As per IAS 10, changes in tax rates after the end of the reporting period are a non-adjusting event. However, if the change in the tax rate is deemed to be material, then AZ should disclose this rate change and an estimate of the financial impact.

According to IAS 12, changes in tax rates and deferred tax liabilities are addressed as follows:
- Measure deferred tax liabilities using the tax rate expected to apply when the liability is settled or reversed.
- Adjust deferred tax liabilities for changes in tax rates.
- Recognize the effect of tax rate changes in profit or loss, except to the extent it relates to items previously recognized outside profit or loss (e.g., goodwill or revaluation surplus).
- Adjust the carrying amount of deferred tax liabilities when tax rates change, with no impact on the statement of financial position.
- Consider the expected tax rate when the temporary difference is expected to reverse, rather than the current tax rate.