how uncertainty on tax treatment affects companies

What is IFRIC 23 uncertainty over income tax treatments?

Accordingly, the IFRS IC developed IFRIC 23 Uncertainty over Income Tax Treatments (IFRIC 23 or the Interpretation) to address how to reflect uncertainty in the recognition and measurement of income taxes.

How does an entity decide which uncertain tax treatments to consider?

An entity shall determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments based on which approach better predicts the resolution of the uncertainty.

When do you have to disclose uncertainty to the tax authority?

If it is probable that a taxation authority will accept an uncertain tax treatment, there may be a need to disclose the potential effect of that uncertainty as a tax-related contingency in accordance with paragraph 88 of IAS 12 Income Taxes. On initial application, an entity may apply IFRIC 23:

What is an example of a tax uncertainty?

Examples include tax deductibility of certain expenses, tax-exemption of certain income, and transfer pricing rules to allocate income between jurisdictions. What’s new in IFRIC 23? Current IFRS does not explicitly address the accounting for tax uncertainties.

What is an uncertain tax treatment?

Uncertain treatments will be defined by reference to two criteria: that a provision has been made in the accounts for the uncertainty; or that the position taken by the business is contrary to HMRC's “known” interpretation, as stated in the public domain or in dealings with HMRC.

What is the purpose of a uncertain tax position?

The IRS defines a UTP as a position taken on a tax return for which the corporation or a related party has recorded a reserve in its audited financial statements. A UTP also refers to instances in which a company hasn't recorded a reserve for the position because it expects to litigate it.

How interest and penalties recorded for an uncertain tax position should be classified on the income statement?

The classification of interest and penalties in the income statement is an accounting policy decision that should be consistently applied. ASC 740 permits interest to be charged as either income tax expense or interest expense, while penalties may be recorded as income tax expense or another expense classification.

How would an entity determine the unrecognized tax benefit arising from uncertainty in income taxes?

To determine how to reflect the effect of tax uncertainty, an entity needs to consider if it is probable that the tax authority would accept the entity's treatment.

What are the criteria for recognizing the benefits of an uncertain tax position?

For a position to qualify for benefit recognition, the position must have at least a more-likely-than-not chance of being sustained based on its technical merits if challenged by the relevant taxing authorities and taken by management to the court of last resort.

What are the two steps used for reporting uncertain tax positions quizlet?

C. A two-step approach is applied: (1) Is the uncertain position more likely than not to be sustained?, (2) If yes, then a probabilistic approach is applied to determine the amount of benefit recognized in the current year.

How does the company treat interest and penalties related to its unrecognized tax benefits?

We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet.

What is FIN 48 Uncertain tax positions?

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) requires companies to recognize, measure, present and disclose uncertain tax positions they take, or expect to take, in their tax returns.

Does IFRS have uncertain tax positions?

The IFRS Interpretations Committee (IFRS IC) issued IFRIC 23, which clarifies how the recognition and measurement requirements of IAS 12 Income taxes, are applied where there is uncertainty over income tax treatments.

How does the company classify its income taxes payable related to its unrecognized tax benefits on the balance sheet?

Where on the balance sheet does a company report its unrecognized tax benefits? Recognized as part of its income taxes payable on the balance sheet (this liability usually is included in "other liabilities" on the balance sheet).

What is deferred tax benefit not Recognised?

However, IAS 12.24 prohibits the recognition of a deferred tax asset if that asset arises from the initial recognition of an asset or liability in a transaction that: • is not a business combination and • at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

What is effective tax reconciliation?

Tax rate reconciliation: The average effective tax rate, sometimes called “theoretical tax rate”, which is your tax expense or income divided by your accounting profit.

When will uncertainty over tax be common?

04 June 2019. As tax legislation can be difficult and judgemental to apply, uncertainties over tax are common. In the absence of specific guidance, there has been diversity in how companies account for uncertainties over income tax treatments. A new interpretation, IFRIC 23, clarifies the requirements and is likely to result in changes ...

What factors should an entity consider in determining the most appropriate approach?

Factors that an entity might consider in determining the most appropriate approach include: How it is expected the taxation authority will investigate and resolve issues. The assumptions an entity should make about the examination of tax treatments by taxation authorities.

Does IAS 12 address uncertainty?

Since IAS 12 does not specifically address uncertainties relating to tax, many companies have previously applied the guidance in IAS 37 Provisions, Contingent Liabilities and Contingent Assets, instead of IAS 12, when recognising and measuring provisions and in disclosing contingent liabilities relating to uncertain tax treatments.

What Are Uncertain Tax Positions?

Companies account for income taxes, both current and deferred, by applying the income tax legislation, case law, and knowledge of the practices of the revenue services to estimate the amount of income tax payable.

Recognition of Effects of Uncertain Tax Positions

Entities should recognize the effects of an uncertain tax position when they believe that it is more-likely-than-not that the revenue authorities will, upon examination, sustain their tax position. More likely than not means that there is, in management's opinion, a likelihood of more than 50 percent.

Measurement of Effects of Uncertain Tax Positions

When an uncertain tax position has met the recognition criteria, the amount to be recognized should be calculated by using the cumulative probability approach, which means that the effects of the uncertain tax position should be measured at the amount for which the cumulative probability is higher than 50%. This process involves:

What is considered probable when a taxation authority accepts an uncertain tax treatment?

If an entity concludes it is probable that the taxation authority will accept an uncertain tax treatment, the entity shall determine the taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates ...

Is there a need for change in tax law?

Need for change. It may be unclear how tax law applies to a particular transaction or circumstance. The acceptability of a particular tax treatment under tax law may not be known until the relevant taxation authority or a court takes a decision in the future.

General description of the measure

This measure will require large businesses to notify HMRC where they have adopted an uncertain tax treatment that HMRC is not already aware of through its ongoing customer compliance relationship.

Policy objective

The objective is to reduce the legal interpretation portion of the tax gap, which is estimated at £5.8bn (in 2019-20). £3.2bn of the legal interpretation tax gap is attributable to large businesses.

Background to the measure

At Budget 2020, the government announced a new regime requiring large businesses to notify HMRC of uncertain tax treatments.

Detailed proposal

The measure will apply to the Corporation Tax, Value Added Tax and Income Tax returns (via Self-Assessment and including amounts collected via PAYE) of large businesses that are due to be filed on or after 1 April 2022.

Monitoring and evaluation

HMRC have conducted a consultation with large businesses. Feedback from consultees about the impacts has been taken into account in changing the policy design. HMRC has specifically asked consultees for details of the potential impacts and has used these in informing their assessment.

Further advice

If you have any questions about this change, please contact Adrian Morton on 07816 296155 or email: [email protected].

What is the consensus of tax treat­ments?

Consensus. Whether tax treat­ments should be con­sid­ered col­lec­tively. An entity is required to use judgement to determine whether each tax treatment should be con­sid­ered in­de­pen­dently or whether some tax treat­ments should be con­sid­ered together.

What is an entity assumption?

An entity is to assume that a taxation authority with the right to examine any amounts reported to it will examine those amounts and will have full knowledge of all relevant in­for­ma­tion when doing so.

When Does IFRIC 23 Apply?

What Is Changing Under IFRIC 23?

Disclosure Requirements

• IFRIC 23 does not introduce any new disclosure requirements, but reminds companies that when there is uncertainty over income tax treatments there are existing IFRS requirements to disclose: 1. Judgements made in determining taxable profit or loss in accordance with paragraph 122 of IAS 1 Presentation of Financial Statements 2. Information about th...

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