Deferred Tax

Deferred taxes arise from differences between the commercial balance sheet and the tax balance sheet. Because both balance sheets value certain items differently, taxes arise that only become payable or refundable in the future. They show which tax burdens or tax benefits are shifted over time. A key source is temporary differences that reverse over time, for example from differing useful lives, different provisioning or the measurement of pension obligations.

Deferred tax liabilities represent future additional tax burdens. Deferred tax assets represent future relief. Usable tax loss carryforwards can also give rise to deferred tax assets. Their recoverability depends on sufficient future taxable profits being expected and on their use remaining legally available. Deferred taxes matter in purchase price allocation: if acquired assets are revalued in consolidated accounts without a corresponding increase in their tax bases, deferred tax liabilities may arise. These generally increase the residual goodwill calculated. They need separate consideration in price negotiations. An accounting balance is not automatically equivalent to an immediately payable tax bill. Buyer and seller therefore assess the actual future cash effects and whether these are already reflected in the valuation.

For comparisons between companies it should be noted that the amounts reported depend heavily on the tax rates applied and on assumptions about future use. A change in tax rate feeds straight into the balance without anything changing in the business. It should also be checked whether asset positions rest on loss carryforwards whose use presupposes a credible business plan. Diligence therefore regularly requests a reconciliation showing the origin and expected reversal date of each difference.

Note: This explanation is for general information only and does not constitute tax advice. Tax treatment depends on the individual case and may change with new legislation. For a binding assessment, please consult a qualified tax adviser.