treatment of which is either unclear or is a matter of unresolved dispute between the
reporting entity and the relevant tax authority. Uncertain tax treatments generally occur
where there is an uncertainty as to the meaning of the law, or to the applicability of the
law to a particular transaction, or both. For example, the tax legislation may allow the
deduction of research and development expenditure, but there may be disagreement as
to whether a specific item of expenditure falls within the definition of eligible research
and development costs in the legislation. In some cases, it may not be clear how tax law
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applies to a particular transaction, if at all. In other situations, a tax return might have
been submitted to the tax authorities, who are yet to opine on the treatment of certain
transactions, or may even have indicated that they disagree with the entity’s
interpretation of tax law.
Estimating the outcome of an uncertain tax treatment is often one of the most complex
and subjective areas in accounting for tax. However, IAS 12 does not specifically
address the measurement of uncertain tax treatments, which are therefore implicitly
subject to the general requirement of the standard to measure current tax and deferred
tax at the amount expected to be paid or recovered, [IAS 12.46, 47], (see 5 above).
Uncertain liabilities are generally accounted for under IAS 37 and historically entities
have been drawn to this standard for guidance. However, IAS 37 does not apply to
income taxes (see Chapter 27 at 2.2.1.B). [IAS 37.5]. In 2014, the Interpretations
Committee was asked to consider the interaction between IAS 12 and IAS 37 in the
situation where entities are required to make advance payments on account to the tax
authorities before an uncertain tax treatment is resolved (see 9.7 below). The
Committee concluded that IAS 12, not IAS 37, provides the relevant guidance on the
recognition of current tax, in particular that probability of recovery (rather than virtual
certainty) was the threshold for recognition of an asset for the advance payment.31 It
then embarked on a project to give guidance on the recognition and measurement of
income tax assets and liabilities in circumstances where there is uncertainty, in
particular in relation to how probability and detection risk should be reflected.32
In June 2017, the Committee issued IFRIC 23. The Interpretation is mandatory for
annual reporting periods beginning on or after 1 January 2019, with earlier application
permitted provided that this is disclosed. [IFRIC 23.B1]. On initial application, entities can
either apply the Interpretation with full retrospective effect, in accordance with IAS 8
– Accounting Policies, Changes in Accounting Estimates and Errors, provided that this
is possible without the use of hindsight, or by an adjustment to the opening balance of
equity at the beginning of the first annual reporting period of application and without
restating comparative information (see 9.8 below). [IFRIC 23.B2].
9.1
Scope of IFRIC 23 and definitions used
The Interpretation clarifies how to apply the recognition and measurement
requirements of IAS 12 when there is uncertainty over income tax treatments. Those
requirements should be applied after determining the relevant taxable profit (tax loss),
tax bases, unused tax losses, unused tax credits and tax rates for the entity. [IFRIC 23.4].
The following issues are addressed by the Interpretation: [IFRIC 23.5]
a)
whether an entity should consider uncertain tax treatments separately;
b)
the assumptions an entity should make about the examination of tax treatments by
taxation authorities;
c) how an entity should determine taxable profit (tax loss), tax bases, unused tax
losses, unused tax credits and tax rates; and
d) how an entity should consider changes in facts and circumstances.
2442 Chapter 29
The Interpretation applies only to income taxes within the scope of IAS 12 and
therefore does not apply to levies and other taxes not within the scope of that Standard.
[IFRIC 23.BC6]. Despite a request from a number of respondents to the Draft Interpretation
to do so, IFRIC 23 does not include requirements relating to interest and penalties
associated with uncertain tax treatments. Instead the Committee noted that an entity
may or may not regard a particular amount for interest and penalties as an income tax
within the scope of IAS 12 and apply the Interpretation only to those determined to be
in scope. [IFRIC 23.BC8, BC9]. In September 2017, the Committee decided not to add a
project on interest and penalties to its agenda, but nevertheless observed that the
determination of whether interest and penalties are within the scope of IAS 12 is a
judgement and not an accounting policy choice for entities.33 We discuss at 4.4 above
the attributes that might be relevant to determining whether interest and penalties fall
within the scope of IAS 12.
The Interpretation uses the following terms in addition to those defined in IAS 12:
[IFRIC 23.3]
• tax treatments refers to the treatments used or planned to be used by the entity in
its income tax filings;
• taxation authority is the body or bodies that decide whether tax treatments are
acceptable under the law. This might include a court;
• uncertain tax treatment is a tax treatment over which there is uncertainty
concerning its acceptance under the law by the relevant taxation authority. For
example, an entity’s decision not to submit any tax filing in a particular tax
jurisdiction or not to include specific income in taxable profit would be an
uncertain tax treatment, if its acceptability is unclear under tax law.
In determining ‘uncertainty’, the entity only needs to consider whether a particular tax
treatment is probable, rather than highly likely or certain, to be accepted by the taxation
authorities. As explained at 9.4 below, if the entity determines it is probable that a tax
treatment will be accepted, then it should measure its income taxes on that basis. Only
if the entity believes the likelihood of acceptance is not probable, would there be an
uncertain tax treatment to be addressed by IFRIC 23.
9.1.1 Business
combinations
The Committee considered whether the Interpretation should address the accounting
for tax assets and liabilities acquired or assumed in a business combination when there
is uncertainty over income tax treatments. It noted that IFRS 3 applies to all assets
acquired and liabilities assumed in a business combination and concluded that on this
basis the Interpretation should not explicitly address tax assets and liabilities acquired
or assumed in a business combination. [IFRIC 23.BC23].
Nonetheless, IFRS 3 requires an entity to account for deferred tax assets and liabilities
that arise as part of a business combination by applying IAS 12. [IFRS 3.24]. Accordingly,
the Interpretation applies to such assets and liabilities when there is uncertainty over
income tax treatments that affect deferred tax. [IFRIC 23.BC24].
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9.2
Whe
ther to consider uncertain tax treatments separately (unit of
account)
A key input to any estimation process is to determine the unit of account for uncertain
tax treatments. In practice this might be an entire tax computation, individual uncertain
treatments, or a group of related uncertain treatments (e.g. all positions in a particular
tax jurisdiction, or all positions of a similar nature or relating to the same interpretation
of tax legislation).
The Interpretation requires that entities determine whether to consider tax
uncertainties separately or grouped together on the basis of which approach provides
a better prediction of the resolution of the uncertainty. For example, if the entity
prepares and supports tax treatments as a group or if the entity expects the taxation
authority to assess items collectively during a tax examination, it would be appropriate
to consider those uncertain tax treatments together. [IFRIC 23.6]. This implies that
material tax uncertainties would be considered separately if there was no such inter-
dependency as to the expected outcome.
9.3
Assumptions about the examination of tax treatments
(‘detection risk’)
‘Detection risk’ is a term commonly used to refer to the likelihood that the taxation
authority examines the amounts reported to it by the entity. The Committee concluded
that in cases where the taxation authority has a right to examine amounts reported to
it, the entity should assume that it will do so; and that when it performs those
examinations, the taxation authority will have full knowledge of all related information.
[IFRIC 23.8].
The Committee noted that this position is consistent with the requirement in
paragraphs 46 and 47 of IAS 12 to measure the amount of a tax liability or asset based
on the tax laws that have been enacted or substantively enacted at the reporting
date. [IFRIC 23.BC11]. The Committee also rejected a suggestion by a few respondents
to the Draft Interpretation that the consideration of probability of examination should
be taken into account and would be particularly important if there was no time limit
on the right of the taxation authority to examine income tax filings. It determined that
no exception would be appropriate and noted that the threshold for reflecting the
effects of uncertainty is whether it is probable that the taxation authority will accept
an uncertain tax treatment and not based on whether the taxation authority will
examine a tax treatment. [IFRIC 23.12, BC13]. Indeed, in many jurisdictions, the tax law
imposes a legal obligation on an entity operating in that jurisdiction to disclose its full
liability to tax, or to assess its own liability to tax, and to make all relevant information
available to the taxation authorities. In such a tax jurisdiction it might be difficult, as
a matter of corporate governance, for an entity to argue that it can calculate its tax
liability on the basis that the taxation authority will not become aware of information
regarding a particular treatment which the entity has a legal obligation to disclose to
that authority.
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9.4
Determining the effect of an uncertain tax treatment or group of
tax treatments
A variety of methodologies had been applied in the past for determining the effect of
uncertain tax treatments on estimates of taxable profit (tax loss), tax bases, unused tax
losses, unused tax credits and tax rates. These included a weighted average probability
of outcomes, the most likely single outcome and an ‘all or nothing approach’ (i.e. no
liability is recognised for an uncertain tax treatment with a probability of occurrence
below the selected recognition threshold and a full liability for a position with a
probability of occurrence above the threshold).
The Interpretations Committee decided that entities should first consider whether or
not it is probable that a taxation authority will accept an uncertain tax treatment or
group of uncertain tax treatments. [IFRIC 23.9]. The Interpretation does not define
probable, but is generally referred to in other IFRSs as meaning more likely than not
(see 7.1.2 above). If the entity concludes that it is probable that the taxation authority
will accept the tax treatment used or planned to be used in its tax filings, the entity
determines its tax position on that basis. [IFRIC 23.10]. This is consistent with the
requirement that current tax is measured at the amount expected to be paid or
recovered from the taxation authorities, [IAS 12.46], and that deferred tax is measured
using the rates and tax laws expected to apply when the related asset is realised or
liability is settled. [IAS 12.47]. This means that all likelihoods beyond the probable
threshold are treated in the same way. That is, any likelihood of acceptance by the
taxation authority beyond probable is treated in the same way as 100 per cent
likelihood of acceptance. Therefore it is not necessary to distinguish between outcomes
that are probable, highly likely or virtually certain.
If the entity concludes that acceptance of the uncertain tax treatment by the taxation
authorities is not probable, it should apply one of the following two methods for
reflecting the effect of uncertainty in its estimate of the amount it expects to pay or
recover from the tax authorities: [IFRIC 23.11]
(a) the most likely amount – the single most likely amount in a range of possible
outcomes; or
(b) the expected value – the sum of the probability-weighted amounts in a range of
possible outcomes.
The entity is required to use the method that it expects to better predict the resolution
of the uncertainty. The Interpretation suggests that the most likely amount may be a
better method if the outcomes are binary (for example where an item might be
deductible or disallowed for tax purposes) or are concentrated on one value (that is
clearly more likely than the alternative outcomes). The expected value method may be
more appropriate if possible outcomes are widely dispersed with low individual
probabilities (where a number of individual but related uncertainties have been
combined into a single unit of account). [IFRIC 23.11].
The Interpretation includes two examples to illustrate how an entity might apply its
requirements for hypothetical situations and based on the limited facts presented,
as follows:
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• when multiple tax treatments are considered together and when the expected
value is used to reflect the effect of uncertainty. [IFRIC 23.IE2-IE6]. (Example 29.35
below); and
• when current and deferred tax is recognised and measured based on the most
likely amount for a tax base that reflects the effect of uncertainty. [IFRIC 23.IE7-IE10].
(Example 29.36 below).
In both of these examples, the entities have assumed that the taxation authority will
examine the amounts reported to it and have full knowledge of all related information,
as discussed at 9.3 above. [IFRIC 23.IE1].
Example 29.35: Multiple treatments, expected value method
Entity A’s tax filing included a number of deductions related to transfer pricing. The t
axation authority in its
jurisdiction may challenge those tax treatments. Entity A notes that the taxation authority’s decision on one
transfer pricing matter would affect, or be affected by, the other transfer pricing matters. Entity A determines
that the tax treatments should be considered together, because this better predicts the resolution of the
uncertainty. At the end of the reporting period, Entity A concludes, on the basis of an evaluation of all
available evidence, that it is not probable that the taxation authority will accept all of the tax treatments.
Entity A estimates the probabilities of what would be added to its taxable profits (in Euros), as follows:
Estimated
Probability Expected
additional
value
amount
Outcome 1
– 5% –
Outcome 2
200 5%
10
Outcome 3
400 20% 80
Outcome 4
600 20%
120
Outcome 5
800 30%
240
Outcome 6
1,000 20%
200
100% 650
Outcome 5 is the most likely outcome, with a probability of 30%. However, entity A observes that the
possible outcomes are neither binary nor concentrated in one value. Entity A therefore concludes that the
expected value (€650) better predicts the resolution of the uncertainty. Accordingly, Entity A adds €650 to
its estimate of the taxable profit, in addition to the amount reported in its tax filing.
Example 29.36: Treatment relates to deferred tax asset, most likely amount is
applied
Entity B acquired a separately identifiable intangible asset for £100 that has an indefinite life and is, therefore,
not amortised in accordance with IAS 38. Tax law specifies that the full amount of the intangible asset is
deductible for tax purposes, but the timing of deductibility (i.e. period of amortisation under the tax law) is
uncertain. Entity B has no similar intangible assets and it therefore decides that this tax treatment should be
considered separately.
Entity B deducted £100 (the cost of the intangible asset) in calculating its taxable profit for Year 1 in its income
tax filing. At the end of Year 1, Entity B concludes, on the basis of an evaluation of all available evidence (e.g.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 487