Effect of Temporary Differences on Deferred Tax in the Banking Sector in Rwanda

Abstract

This study examines the recognition and measurement of deferred taxes of banking sectors in Rwanda under IAS 12 and ICPAR. Deferred tax liabilities are recognized for taxable temporary differences and deferred tax assets are recognized for deductible temporary differences. The specific objective of the study is to determine the magnitude of change in deferred tax assets, deferred tax liabilities and current taxes following the adoption of IAS 12. Two research hypotheses were formulated for the study. This study adopted the descriptive survey research design. The sample of the study comprises of 16 banks in Rwanda. The study relied on secondary data from annual financial statements of the banks. The research used universal sampling technique. The formulated hypotheses were analyzed using paired samples t-test for difference, while linear regression was used to check for dependence. The analysis was performed with the aid of SPSS version 16. The dependent variables were proxied using deferred tax assets and liabilities as per IFRS reporting period while the independent variable were proxied using taxable and deductible temporary difference reporting period. The study finds statistical significant change in deferred tax assets and tax liabilities. The findings also revealed a positive connection between deferred tax of banking sectors in Rwanda under IFRS and RRA. As a result the P-Value of revaluation asset property on deferred tax liability is (0.006) which is less than the significance level of (0.05) thus there is alternative hypothesis for these independent variables. The research can therefore conclude that revaluation asset property and deferred tax liability has significance effects on liability. When you analyse the objective there found the first objective which has the independent variable as capital allowance is significant on deferred tax asset at a level of (0.012) hence the model fits the data. While others independent variables are not significant on analysis done. The study suggested the following recommendations as a measure to improve on revenue collection performance at Rwanda Revenue Authority. The government should allocate the organization with more human and financial resources in order to strengthen the organization capacity in revenue collection. The employees should be regularly trained on modern revenue collection procedures and more staff should be recruited.