2.2 Taxes Based on Income

Although ASC 740 provides no further guidance on this matter, the term “taxes based on income” implies a tax system in which the tax payable is calculated on the basis of the entity’s revenue minus the expenses allowed by the jurisdiction being considered. For the tax to be an income tax, the tax computation would not need to include all income statement accounts but should include some determination that would be meaningful to most taxpayers or meaningful in relation to the specific income being taxed. A tax levied on a subset of the income statement, such as a tax on net investment income (i.e., a tax on investment income less investment-related expenses), would also qualify as a tax based on income since it would be computed on the basis of a portion of net income less expenses incurred to generate the income.

For a tax to be an income tax within the scope of ASC 740, revenues and gains must be reduced by some amount of expenses and losses allowed by the jurisdiction. Therefore, a tax based solely on revenues (e.g., gross receipts or sales tax) would not be within the scope of ASC 740 because the taxable base amount is not reduced by any expenses. A tax based on gross receipts, revenue, or capital should be accounted for under other applicable authoritative literature (e.g., ASC 405, ASC 450). See Section 2.2.4 of Deloitte’s Roadmap Contingencies, Loss Recoveries, and Guarantees for further discussion of differentiating between contingent liabilities and contractual or legal liabilities in connection with taxes that are not within the scope of ASC 740.