Income taxes are an expenses incurred in operating most businesses, and as such are to be reflected in the entity's operating results. The recognition of income tax is based on the liability method. The liability method is statement of financial position–oriented to understand the application of the liability method as incorporated in IAS 12. IAS 12 is applied in the accounting for income taxes. Income taxes include all domestic and foreign taxes which are based on taxable profit, including withholding taxes payable on distributions by the reporting entity. Although IAS 12 does not deal with the accounting of government grants and investment tax credits, it deals with the accounting of temporary differences on such transactions. The relationship between tax expense and accounting profit is explained.