Why a company has two results

Atelier Roussel reports €120,000 of profit in its accounts. Its accountant announces that tax will be charged on €124,000. The director hunts for a bookkeeping error: there is none, both figures are right. Before reading on: why does a company have two results, and which one pays?

One starting point, two purposes

The accounting result answers one question: what was the year worth to those who read the accounts? The taxable result asks another: on what base is tax due? Both start from the same entries, but the second applies rules the first ignores.

The second is therefore not computed separately. The doctrine is explicit: to reach the net taxable result it is sometimes necessary to subject the net accounting result to extra-accounting adjustments, positive or negative, on account of particular provisions.

The word « extra-accounting » says the essential. These corrections alter neither the balance sheet nor the profit and loss account as published. A company taxed on €124,000 goes on showing €120,000 of profit to its members, and both presentations are accurate.

Territoriality: French profits only

One rule precedes all the others. Article 209 of the French Tax Code determines taxable profits by taking account only of profits made in businesses operated in France, together with those that international treaties allocate to France.

This is a French peculiarity that surprises foreign readers. The profit of a branch operated outside France escapes French tax in principle, where other states tax the worldwide result of their companies and then grant tax credits against it.

Why the two sets of rules diverge

Accounting seeks to give a true and fair view of the business to those who read it: members, bankers, suppliers. It therefore favours economic representation, even where that means carrying estimates nobody has yet paid, such as a provision for a probable risk.

Tax pursues another aim: to lay a charge evenly across taxpayers, without leaving each of them to judge what concerns them. It therefore refuses certain charges as a matter of principle, independently of their economic reality — a fine being the plainest case.

The two logics are not contradictory, they answer different questions. That is why the gap between the two results is never an anomaly to be corrected, but an expected consequence of the system as designed — and why it can move from one year to the next without anything having gone wrong.

One schedule, two regimes

The passage is not left to free drafting. It is set down in a schedule of the tax return package, whose number depends on the tax regime: schedule 2058-A for the normal regime, schedule 2033-B for the simplified one.

• Start from the net accounting result for the year, as it stands in the profit and loss account.
• List the recorded charges that tax does not admit, and add them back.
• List the income that is not taxable or has already been taxed, and deduct it.
• Carry the total to the schedule matching the tax regime.
• Keep the detail of every line, which must be justified in the event of an audit.

The order of those steps is not indifferent. Starting from the schedule rather than the profit and loss account leads to hunting for adjustments without knowing where they start from, and that is how a line ends up counted twice.

That schedule is the first document the authority reads in an audit. Each line names an adjustment and its amount: it does not merely state the result, it sets out the reasoning that leads to it, line by line.