Greater clarity on reflecting tax uncertainty

Tax transparency is a sensitive topic and often triggers much debate both within and beyond the boardroom. 

Interpreting grey areas in tax law can be complex. IFRIC 23 Uncertainty over Income Tax Treatments seeks to bring clarity to the accounting for income tax treatments that have yet to be accepted by tax authorities.

IFRIC 23 clarifies the accounting for income tax treatments that have yet to be accepted by tax authorities, whilst also aiming to enhance transparency. Although the filing deadlines for your tax return and financial statements may be months apart, IFRIC 23 may require more rigour when finalising the judgements about the amounts to be included in the tax return before the financial statements are finalised.

Sanel Tomlinson
KPMG’s global IFRS income taxes leader

Our'presentation can help you to understand IFRIC 23’s requirements and its possible impacts.

What’s new in IFRIC 23

It is sometimes unclear how tax law applies to a particular transaction or circumstance. So how do you decide what to put in your financial statements if you’re uncertain about a tax treatment that you’ve adopted in your tax return?

Under IFRIC 23, the key test is whether it’s probable that the tax authority will accept the company’s chosen tax treatment.

Consider a manufacturer that engages a consultant to improve the efficiency of its production process. The manufacturer believes that deducting the full expense from profit up-front would be consistent with the principles of its local tax law, and therefore applies that treatment in its tax return; however, it is not sure whether the tax authorities will agree.

Does the manufacturer apply the same treatment in its financial statements? In reaching a decision, it considers whether it’s probable that the tax authority will accept the treatment in the tax return.     

  • If yes, then the manufacturer records the same amount in the financial statements and considers making a disclosure about uncertainty.
  • If no, then the amount recorded in the financial statements differs to that in the tax return because its measurement reflects the uncertainty.

Key to the Interpretation is the assumption that tax authorities will have full knowledge of all relevant information in assessing a proposed tax treatment. This is an area where the new requirements bring clarity.

flow chart

The uncertainty is reflected using the measure that provides the better prediction of the resolution of the uncertainty – either:

  • the most likely amount; or    
  • the expected value. 

The Interpretation also requires companies to reassess the judgements and estimates applied if facts and circumstances change – e.g. as a result of examination or action by tax authorities, following changes in tax rules or when a tax authority’s right to challenge a treatment expires. 

Tax amounts in financial statements may change

Depending on your current practice, you may need to increase your tax liability or recognise an asset. The timing of derecognition may also change.

IFRIC 23 does not introduce any new disclosures but reinforces the need to comply with existing disclosure requirements about:  

  • judgements made;   
  • assumptions and other estimates used; and      
  • the potential impact of uncertainties that are not reflected.

The requirements may also affect how you reflect tax inspections. For example, if a tax authority examines different types of taxes together and issues a report with a single amount due, then it may be challenging to estimate only the income tax due.

Effective date and next steps

IFRIC 23 applies for annual periods beginning on or after 1 January 2019. Earlier adoption is permitted.

You may want to discuss the Interpretation with your advisors and tax specialists to understand fully its potential impact for your company.

View our presentation for a high-level visual summary of the new requirements. If you're unable to view the presentation online, you can download a PDF version (PDF 209 KB). We’ve also developed an IFRIC 23 Q&A, which considers the new requirements in more detail. You can also download a print-friendly version (PDF 127 KB) of this article and accompanying Q&A.

For more information speak to your usual KPMG contact.

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