The arrival of income taxation and the conflict with financial accounting

It was in AD 10 when the fist known income tax was instituted by Emperor Wang Mang (45 BC-AD of Xin Dynasty of China, where the income tax rate is 10% flat rate of profits.

While the first graduated income tax system from 8.33% to 10% was implemented in 1798 in Britain by William Pit (the Younger) in his budget to pay for weapons and equipment in preparation for the Napoleonic wars.

In the United States, the first income tax was imposed in July 1861 with a rate of 3% of all income over 600 dollars.

In our country, the Philippines, the first income tax law was created on March 31, 1913. Currently, our tax laws imposes a graduated tax rates from 5% to 32% for the Individual Tax Payers, while beginning 2009, a flat rate of 30% was implemented for the taxable income of non-sole proprietorship businesses (meaning, for partnerships and corporations).

With the arrival of income taxation laws, this became another major event in accounting history.

Income tax returns were treated as legal documents, being such, the lawyers initially thought of them as they are the ones who have the exclusive rights to prepare them.

However, Accountants disagreed to such view and argued that since the preparation of Income Tax Returns (ITRs) starts with accounting involvement and preparing the schedules and financial reports as basis of the contents of the ITRs are mostly accounting tasks, hence, it is more proper to classify the ITR preparation as an accounting work.

Because US law firms in the 1920s were slow to integrate income tax preparation into their skills and practices, Public Accountants saw that its a new profitable endeavor and leapt into doing tax works since they also have the expertise in readying the data for ITRs content.

By the time the lawyers contested the accountants for practicing law even without a license, the  income tax preparation had been so absolutely identified with the accountants, and subsequently the lawyers lost their case.

Tax Accounting was born as a specialized field of accounting with this development where CPAs are infused with taxation works.  In tax accounting, accountants offered services regarding tax computations, tax planning, tax advisory to legally minimize taxes of clients.

Observe too that there are several conflicts with accounting and taxation. Remedies are done thru preparation of financial reports for tax purposes aside from the preparation of basic financial statements and the reconciliation of the two.