In one sentenceIncome tax the business will pay in future years because of temporary differences that make today's accounting profit higher than taxable profit.
Simply put
Sometimes tax rules allow faster depreciation than in your books, so you pay less tax today. But the difference comes back later, so you now record a liability for the tax you will pay when the difference reverses.
International standard IAS 12 governs this for income tax. The temporary difference is multiplied by the tax rate expected to apply when it reverses.
Worked example
A company subject to income tax: the carrying amount of its equipment is 500,000 SAR and its tax base is 400,000 SAR, assuming a tax rate of 20% for illustration.
Temporary difference: 500,000 − 400,000100,000 SAR
Tax rate (assumed)20%
Deferred tax liability: 100,000 × 20%20,000 SAR
Don't confuse it with
Deferred tax assetA deferred asset is tax you will save in the future, and a deferred liability is tax you will pay in the future.