Every finance manager eventually hits the same confusion: the profit in the financial statements is not the profit the tax authority taxes. If you have ever wondered why your corporate income tax does not equal 20% of your reported net profit, this article explains the causes, walks through a reconciliation, and shows how deferred tax fits in. You will leave able to build the book-to-tax bridge yourself.

Why the two numbers differ

Accounting profit follows accounting standards, which aim to present a true and fair view of performance. Taxable income follows tax law, which aims to define what the state will tax. The two have different goals, so they treat some items differently. The gap is not an error – it is the normal result of two rule sets meeting the same transactions.

Permanent differences versus temporary differences

Permanent differences

These never reverse. An expense recorded in the accounts but not deductible for tax – such as non-deductible fines, certain unsupported expenses, or spending above a legal cap – increases taxable income permanently. It changes your tax this year and never comes back.

Temporary differences

These reverse over time. They arise when income or expense is recognized in one period for accounting but a different period for tax. Depreciation is the classic case: if you depreciate an asset faster in the books than tax allows, taxable income is higher now and lower later. The total over the asset’s life is the same; only the timing differs. Temporary differences give rise to deferred tax.

How deferred tax works

Deferred tax records the future tax effect of temporary differences so the accounts match economic reality. A deferred tax liability means you will pay more tax in future periods. A deferred tax asset means you will pay less – for example, from carried-forward tax losses or provisions not yet deductible. Under the accounting standard on income taxes, you recognize these using the tax rate expected to apply when the difference reverses.

A worked example

Suppose accounting profit before tax is 1,000. You recorded a 50 non-deductible fine (permanent difference) and booked 80 more accounting depreciation than tax allows (temporary difference). Taxable income becomes 1,000 + 50 + 80 = 1,130. At a 20% rate, current tax payable is 226. But the 80 depreciation difference will reverse later, so you also record a deferred tax asset of 16 (80 x 20%). Your total tax expense in the income statement is 226 minus 16 = 210, while cash tax this year is 226. The deferred tax bridges the gap.

Common mistakes and how to fix them

• Treating every difference as permanent. Fix: separate items that reverse (timing) from those that never do; only permanent items change lifetime tax.
• Ignoring deferred tax entirely. Fix: track temporary differences each year; skipping deferred tax misstates net profit and equity.
• Recognizing a deferred tax asset with no evidence of future profit. Fix: only recognize a deferred tax asset when future taxable profit is probable.
• Forgetting non-deductible expense caps. Fix: review capped items – certain interest, welfare, and undocumented costs – before filing.
• Not documenting the book-to-tax reconciliation. Fix: keep a schedule that starts at accounting profit and lists each add-back and deduction.

Reconciliation action steps

• Start with accounting profit before tax.
• Add back non-deductible expenses (permanent differences).
• Adjust for timing differences such as depreciation and provisions.
• Deduct any tax-exempt income and utilize eligible loss carry-forwards.
• Arrive at taxable income and apply the current tax rate.
• Calculate deferred tax on remaining temporary differences.
• Keep the full schedule as support for the tax return and audit.

Conclusion and next step

The gap between accounting profit and taxable income is predictable once you classify differences correctly. Your next step: build a standing book-to-tax reconciliation template with two clearly labeled columns – permanent and temporary – and update it every quarter, not just at year-end. It turns a stressful annual scramble into a routine calculation.

Frequently asked questions

Does higher accounting profit always mean higher tax?

Not exactly. Tax is based on taxable income, which starts from accounting profit but is adjusted for non-deductible items, tax-exempt income, and timing differences. The two move together but are rarely equal.

Is deferred tax an actual cash payment?

No. Deferred tax is an accounting entry reflecting future tax effects. Only current tax is paid in cash. Deferred tax explains why total tax expense differs from cash tax.

Can tax losses create a deferred tax asset?

Yes, if you can carry the loss forward and future taxable profit is probable. Without probable future profit, you should not recognize the asset.

Where do I report these differences?

The reconciliation supports your corporate income tax return, and deferred tax is presented in the financial statements. Keep the working schedule to justify both.

References

• Vietnamese Accounting Standard No. 17 – Income Taxes.
• Circular 96/2015/TT-BTC on corporate income tax, issued by the Ministry of Finance.