FIN 48 is one of the most significant developments in tax accounting for many years. It applies to public companies which prepare their accounts under US GAAP for accounting periods starting after 15 December 2006.
The Financial Accounting Standards Board has now confirmed a one year deferral for non-public entities. This means you will now have to provide against, and disclose, significant uncertain income tax positions. For the first time, you will need to evaluate the likely outcome of issues which could be subject to challenge by the relevant tax authority such as:
• Tax deductions claimed in the tax return – both in terms of their amount and the timing of deductions;
• Transfer pricing;
• Exposure to tax in other countries (eg where the company’s activities have led to a taxable presence in another country but for which no tax returns have been filed);
• The decision to treat some income as tax exempt (eg not taxing the profits of a potential controlled foreign company).
The implications of FIN 48 are significant. Not only could it hit your reported earnings (by requiring additional provisions) but also alert tax authorities to tax positions taken in tax returns over which there is uncertainty.
We can assist you by preparing FIN 48 disclosures and provisions, and by establishing procedures to help you comply going forwards. However, we can also work proactively with you to help to reduce the level of uncertain tax positions in your company. For example, if we undertake a transfer pricing review and preparing suitable supporting documentation for the company, the risk of significant transfer pricing adjustments can be identified. Our experience shows that having a functional analysis and transfer pricing report and full documentation is of significant assistance in defending against a transfer pricing enquiry. Other significant exposures in the international arena are complex controlled foreign companies legislation, which can tax the profits of overseas subsidiaries on the UK parent, and the risk of the company unwittingly creating a taxable presence in a foreign country. These are lucrative areas of attack for HMRC. If you have to disclose your uncertainties in your financial statements, this is likely to increase the level of tax authority interest. There are, needless to say, plenty of grounds for uncertainty on purely UK domestic tax grounds, not least because of the ever increasing complexity of UK tax legislation.
Could it apply in the UK?
A version of FIN 48 now looks set to enter into International Accounting Standards, with the IASB reportedly working on an Exposure Draft covering similar ground according to Accountancy Age. Accounting for income tax is covered by IAS 12, and the IASB have been working in conjunction with FASB towards convergence of treatment. The news that an IAS version of FIN 48 is on the cards is therefore not surprising. The Exposure draft is expected to be released in the summer of 2008. The implications are significant if the proposals find their way into IAS 12. UK companies reporting under IFRS will need to disclose material areas of uncertainty as regards its tax positions in their financial statements, with the effect that HMRC are likely to have access to information about the areas which companies would least like to disclose.
