Deferred taxes in an individual financial statements

Due to the principle of materiality in tax law, if an annual financial statements is prepared according to the Swiss Code of Obligations (CO), it generally also produces the tax balance sheet. Nevertheless, temporal differences between the tax balance sheet and annual financial statements are always possible. Consequently, the question arises whether as to what extent deferred taxes are recognized in these differences. If questions of this nature have remained unanswered, our tax lawyers will be happy to help you.

Apart from the obligation to disclose direct tax expenses separately in an income statement, the CO does not provide any explicit rules for the treatment of taxes in individual financial statements. However, the recognized accounting standards as defined in Art. 962a CO, such as IFRS or Swiss GAAP FER, contain clear answers in this regard. Although there are some parallels between the CO and the aforementioned accounting standards, regulatory gaps in the CO cannot simply be filled by IFRS or FER regulations.

In accounting, a distinction is made between current and deferred taxes. Current taxes are the tax expense incurred according to the accounting regulations on tax balance sheets. Deferred taxes are the tax expense that arise according to the commercial success.

Due to the principle of materiality, taxes are perceived through the lens of the tax accounting regulations in a CO financial statements. In this way, provision or accrued liabilities must be formed for the probable future tax payments which have an effect on the income statement. Tax prepayments are relevant if the conditions for capitalization of a deferred asset or receivable are met. This method of tax expense recognition indicates the current tax method. However, there are some opinions in the literature that advocate the use of deferred taxes also at the level of the OR separate financial statements. This is mainly the case for taxed hidden reserves. Thus, there is some ambiguity regarding the use of deferred taxes in the separate financial statements, but it is clear that it is rather uncommon.

The instrument of deferred taxes is known in particular from the consolidated financial statements. Thus, the consolidated financial statements represent a fiction, whereby a certain number of companies and taxable entities are combined into a single, fictitious taxable entity. According to this logic, the consolidated balance sheet also corresponds to the tax balance sheet. The implementation of this result is made possible by the use of deferred taxes. Thus, the recognized tax expenses are shifted in time to the period in which they correspond to the consolidated balance sheet and no longer to the local effective tax balance sheets. This is not only in line with accounting standards such as IFRS or Swiss GAAP FER, but also with the Swiss Code of Obligations.

The same applies to ARR and IFRS in the case of individual financial statements. Thus, the individual tax values are to be deferred to the period in which they would have been recorded according to these regulations and not the local tax regulations. However, in this case, due to the lack of materiality, the recognition of deferred taxes has no concrete tax consequences.

This is not the case with the individual financial statements prepared in accordance with the Swiss Code of Obligations, which are inextricably linked to the cantonal and federal tax systems. Accordingly, entries under commercial law, as well as those of deferred taxes, have tax consequences. However, the purpose of deferred taxes is, as described, to separate the individual financial statements from the tax balance sheet, which is not possible according to the OR individual financial statements. Accordingly, the question arises as to how meaningful the use of the concept of deferred taxes is for the individual financial statements of the Swiss Code of Obligations.

Ultimately, application is not impossible, as the CO does not contain any prohibition to this effect. However, such an accounting approach is rather unusual and only convincing to a limited extent, but justifiable if all guidelines are complied with.

If you are unclear about tax law or explicitly about the use of deferred taxes, contact one of our tax lawyers.