Point of View –
James Ravi –
“Nothing is certain in this world except death and taxes,” said Benjamin Franklin. While paying taxes is and perhaps always going to be certain, accounting for taxes is riddled with uncertainty as entities apply diverse reporting methods when the application of tax law is uncertain. For instance, in most of the tax regimes, issues such as bad debts written-off, related party expenses and charges, interest and rent paid to members or group entities, transfer-pricing issues are viewed deviously and treated differently at different times by tax authorities. This creates great deal of uncertainty at the time of preparation and audit of financial statements.
Currently in Oman, tax assessment for most of the companies are pending on an average of four or five years resulting in a high degree of uncertainty. The impact of these assessments when completed in the coming years, is expected to be significant on the local entities.
IFRIC 23: Background
At present, IAS 12 Income Taxes specifies requirements for current and deferred tax assets and liabilities. However, it does not prescribe how to reflect uncertainty. When an entity applies the requirements in IAS 12 based on applicable tax laws it needs to measure taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates. Sometimes, it may be unclear how a proviso of a tax law applies to a particular transaction or an event.
The acceptability of a particular tax treatment under tax law may not be known at the time of preparing the financial statements until the relevant taxation authority or a court takes a decision in the future. Consequently, a dispute or examination of a particular tax treatment by the taxation authority may affect an entity’s accounting for a current or deferred tax asset or liability which may in turn affect the fair presentation of the financial position and the financial performance.
In May 2017, the IFRS Interpretation Committee issued IFRIC Interpretation 23 — Uncertainty over Income Tax Treatments (the interpretation) which came into effect on January 1, 2019. IFRIC 23 provides guidance on how to account for uncertainty over income tax treatment under IAS 12.
Impact on companies
The Interpretation triggers remeasurement of existing deferred tax assets and liabilities, prepayments made to tax authorities in relation to uncertain tax treatments and also requires recognition of interest and penalties to be imposed by tax authorities. Entities shall reflect the effect of uncertainty for each uncertain tax treatment by using either “the most likely amount” method or “the expected value” method to measure these amounts. In order to be compliant, they shall re-assess the existing policies and establish a company-wide policy that is in line with the Interpretation.
IFRIC 23 provides additional guidance on reassessment of a judgement or estimate when there is a change in the facts and circumstances occurs or as a result of new information that affects the judgement or estimate becomes available. Under such circumstances, this IFRIC requires entities to reflect the effect of a change in facts and circumstances or of new information as a change in accounting estimate applying IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
An entity shall apply IAS 10 Events after the Reporting Period to determine whether a change that occurs after the reporting period is an adjusting or non-adjusting event.
IFRIC 23 is expected to bring in reduced level of uncertainty in the future financial position and performance of entities due to income tax assessments, if not completely eliminating it.