The upcoming IFRS 18 requires an entity to classify income and expenses included in the statement of profit or loss in one of five categories: operating, investing, financing, income taxes and discontinued operations. The income taxes category includes tax expense or tax income that is included in the statement of profit or loss applying IAS 12 Income Taxes, and any related foreign exchange differences. IFRIC recently discussed whether an entity applying IFRS 18 is permitted to present taxes or other charges that are not income taxes within the scope of IAS 12 either within the income taxes category or the “income tax expense or income” line item. It concisely concluded that this is not permitted, noting “that in accordance with paragraph 24 of IFRS 18, an entity presents additional line items and subtotals in a primary financial statement if such presentations are necessary for the statement to provide a useful structured summary.” On that basis it tentatively decided not to add a standard-setting project to the work plan.

For background, IFRIC had considered in the past whether a tax paid by shipping companies based on tonnage capacity can be considered an income tax in accordance with IAS 12, concluding that it can’t: “The IFRIC has previously noted that IAS 12 applies to income taxes, which are defined as taxes that are based on taxable profit, and that the term ‘taxable profit’ implies a notion of a net rather than a gross amount.” It had also considered whether “production-based royalty payments payable to one taxation authority that are claimed as an allowance against taxable profit for the computation of income tax payable to another taxation authority should be presented as an operating expense or a tax expense in the statement of comprehensive income.” It noted in that case “that it is the basis of calculation determined by the relevant tax rules that determines whether a tax meets the definition of an income tax (and that) neither the manner of settlement of a tax liability nor the factors relating to recipients of the tax is a determinant of whether an item meets that definition.” Against that backdrop, there wouldn’t seem to be much more to say. But some of the respondents to IFRIC’s tentative agenda decision raised the issue of Zakat, described by Wikipedia as follows:

• Zakat is the Arabic word for “giving to charity” or “giving to the needy”. Zakat is a form of almsgiving, often collected by the Muslim Ummah…
• As one of the Five Pillars of Islam, zakat is a religious duty for all Muslims who meet the necessary criteria of wealth to help the needy. It is a mandatory charitable contribution, often considered to be a tax.
• ..Today, in most Muslim-majority countries, zakat contributions are voluntary, while in Libya, Malaysia, Pakistan, Saudi Arabia, Sudan and Yemen, zakat is mandated and collected by the state (as of 2015).

This is from The Saudi Electricity Comp:

• ..we respectfully submit that the Tentative Agenda Decision would benefit from explicitly addressing Zakat—a mandatory levy imposed in the Kingdom of Saudi Arabia and in several other jurisdictions. Although not explicitly covered within IAS 12, Zakat is, in many jurisdictions, assessed on bases that are economically similar to those used for income taxation. In practice, it is closely aligned with income- or equity-related measures and is administered by tax authorities alongside income taxes.
• Given the widespread application of Zakat and its significance to financial reporting in affected jurisdictions, we encourage the Committee to consider providing clarity on whether levies such as Zakat—whose nature and economic substance are analogous to income taxes—may be presented within the income taxes category or be treated by analogy to IAS 12 when their characteristics align substantively with income-based taxation.
• Such clarification would enhance consistency across entities operating in these jurisdictions, reduce diversity in practice, and ensure that IFRS 18’s presentation principles adequately accommodate statutory obligations that, while jurisdiction-specific, serve functions similar to income taxation.

Others, such as Rami Khaled Al Kheder Accountants & Auditors, seem to have moved beyond that, concluding the standards don’t likely allow presenting Zakat within the income taxes category, with undesirable consequences:

• Reclassifying Zakat expense within operating expenses in the statement of profit or loss would not faithfully represent the economic substance of Zakat and may adversely affect the fair presentation of operating results and key operating performance indicators, in addition to reducing comparability among entities operating within the Kingdom (of Saudi Arabia).
• From a regulatory perspective, Zakat in the Kingdom is subject to mandatory procedures comparable to those applicable to income tax, including registration, filing of returns, assessment, and objection processes, which further supports the view that Zakat is, in substance, closer to income tax rather than an operating expense.

I’m not sure though that IFRIC will consider it within its mandate to make such a pronouncement. Absent additional standard-setting on the matter, and noting that in this case the strict technical analysis is fueled by deeply-embedded cultural considerations, could this be one of the “extremely rare” situations in which preparers and auditors in Saudi Arabia and related jurisdictions conclude that compliance with a requirement in an IFRS would be so misleading that it would conflict with the objective of financial statements set out in the Conceptual Framework…?

The opinions expressed are solely those of the author.