Disclosure of uncertain tax positions

IFRIC 23 Uncertainty over Income Tax Treatments applies to entities subject to International Financial Reporting Standards (IFRS) and deals with the disclosure, recognition and measurement of Uncertainty over Income Tax Treatments in an entity’s annual financial statements (AFS).

IFRIC 23 applies to financial years commencing on or after 1 January 2019, with earlier application permitted. It deals with income taxes within the scope of IAS 12 Income Taxes; therefore other taxes such as value-added tax, employees’ tax and customs and excise duties are not included. However, entities should note that where, for example withholding taxes represent IAS 12 income taxes as defined, then such withholding taxes would fall within the ambit of IFRIC 23.

Since tax legislation, case law and tax authority practice do not always provide clarity on all transactions, uncertainty sometimes exists as to the income and deferred tax treatment of certain positions which are open to interpretation. IFRIC 23 now clarifies how an entity should reflect and disclose these uncertainties in its AFS.

An “uncertain tax treatment” is a tax treatment for which there is uncertainty whether the relevant tax authority will accept the tax treatment under the local tax law. IFRIC 23 does not include requirements relating to interest and penalties associated with uncertain tax treatments.

• The following examples illustrate types of uncertain tax positions:
  Whether or not to include particular income in an entity’s taxable income;
• Uncertainty as to the deductibility of an amount for tax purposes;
• Uncertainty whether the tax authority and the courts will accept a certain transfer pricing methodology;
• Uncertainty created regarding the correct interpretation of the tax law as a result of a new tax court case;
• Different interpretation of legislation between the tax authority and the taxpayer/tax advisors; and
• Different interpretation of a Double Taxation Agreement between the relevant tax authority and the taxpayer/tax advisors, for example, whether an amount is subject to withholding taxes or not.

IFRIC 23 applies to the recognition and measurement of both current and deferred tax assets and liabilities (within the scope of IAS 12 Income Taxes) and clarifies that the recognition of uncertain tax positions is to be based on the presumption of a 100% detection risk by the relevant tax authority.

However, the entity should also determine the probability that a tax authority will accept an uncertain tax treatment.

If it is considered probable that a tax authority will accept an uncertain tax treatment, the entity should determine its taxable income or tax loss, tax bases, unused tax losses, unused tax credits or tax rates in its AFS consistently with the tax treatment used or planned to be used in its income tax return filings. The receipt of an independent legal or tax practitioner opinion may provide an entity with valuable information for it to determine the likelihood that a tax treatment will be acceptable or not to a tax authority.

If it is not probable that a tax authority will accept an uncertain tax treatment, the entity should reflect the effect of the uncertainty in determining its taxes in its AFS. The effect of the uncertainty should be reflected by using certain methods as per the guidance contained in IFRIC 23. IFRIC 23 further provides that the disclosure of uncertain tax amounts should follow the related current or deferred tax disclosure together with the judgements made in determining the entity’s taxable profit or tax loss, tax bases, unused tax losses, unused tax credits, tax rates and information about the assumptions and estimates made in this regard. The above can be explained through the below example –

An entity has a gain on disposal of an asset and is of the view that the gain is subject to a 22.4% South African capital gains tax rate (and will reflect the gain as a capital gain in the filing of the income tax return). However, there is a high risk that the revenue authority will tax the gain at the income tax rate of 28%.

Typically, the tax provision is initially booked at 22.4% of the gain consistent with the AFS tax calculation and tax return treatment. Then to book the IFRIC 23 exposure a further journal is recorded to take account of the difference between the tax at 28% and 22.4%. Effectively this means that for AFS purposes the tax charge is booked at 28% as that is determined to be the most probable tax outcome. The corresponding entry would be booked to a tax provision account and disclosed as part of the tax liability. Such tax provisions are usually booked in a separate account in the financial records so that the amounts can be separately tracked and easily distinguished from the actual revenue authority liability account.

When the uncertainty no longer exists or is believed to no longer exist, for example, when the revenue authority has assessed the gain as a capital gain, audited the return or the assessment has prescribed, the tax provision will be released in the same way that an AFS to tax return over-provision is released. The timing of the release will require judgement to be applied and will depend on the particular circumstances.

It is therefore important for entities subject to IFRS to take note of the new interpretation surrounding uncertain tax positions and to consider the impact of IFRIC 23 on the current measurement of uncertain tax positions together with the potential AFS disclosure requirements around uncertain tax positions.