By its very nature, income tax law is subject to a range of interpretations. As a result, reporting entities and their auditors may be, in certain cases, uncertain about whether a position adopted in the entity’s tax return would ultimately be sustained. Further, given the diverse risk profiles of companies, and the absence of specific guidance on how to account for uncertain tax positions, significant disparity in how companies recognise and measure tax benefits recorded in their financial statements has arisen over time.
What has changed?
For annual reporting periods beginning on or after 1 January 2019, IFRIC 23 Uncertainty over Income Tax Treatments (implemented in Australia as AASB Interpretation 23 or “the Interpretation”) came into effect. The Interpretation was a response to the widespread diversity, that exists in practice, of the recognition and measurement of uncertain tax positions. These new obligations address the consideration of uncertain tax positions during financial statement audits. US companies have been subject to similar rules for a number of years by having to apply FIN 48.
How should the Interpretation be applied?
The Interpretation sets out suggested requirements around accounting for uncertain tax positions, as follows:
- If an entity concludes that it is probable the tax authorities will accept a tax position, no additional action is required. Tax balances will be calculated under the existing accounting standard.
- If an entity concludes that it is not probable the tax authorities will accept a tax position – it is required to use the “most likely amount” or “expected value” in determining its tax balances. Any variation between the “most likely amount/expected value” and the amount recorded in the accounts will need to be adjusted.
Most importantly, the Interpretation requires calculation of the current tax liability in the financial statements as if under tax authority audit, and the tax authority knew all the facts and circumstances about your tax position. There is no allowance permitted for detection risk, or for the revenue authority’s view of materiality thresholds.
Who will be impacted by these changes?
Transfer pricing is likely to be a key area of focus for multinational reporting entities, particularly in light of the inherent uncertainty triggered by recent BEPS changes. The Interpretation reinforces the need for entities to prepare for their first financial statement audit under the new rules to ensure they have sufficient documentation to identify and support their transfer pricing positions, because without such documentation, it will be very difficult for companies to conclude that their intercompany dealings are ‘probably’ going to be accepted by a tax authority.
The Interpretation is not likely to be welcomed by preparers of financial statements because it will require the preparation of a register of uncertain tax positions, documentation of positions adopted and the recognition of higher current tax liabilities at an earlier date.
How can BDO help?
BDO’s experts have in depth experience in the introduction and application of similar accounting requirements and recommend that you consider engaging an adviser who can both provide you with a clear road map to meet your obligations under the Interpretation and best represent your interests in an audit scenario.
If you would like to know more about this topic, I will be hosting a session at the upcoming TP Minds Australia 2019 conference on 21-23 May at the Sydney Harbour Marriott Hotel. Register using this link to receive a 50% discount off the registration fee.