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Tackling tricky tax items

Jul 30 2010 13:06
Ruan Jooste
Johannesburg - An area of tax law that attracts a lot of comment is uncertain tax positions.

This refers to those cases in listed companies where the tax treatment is unclear because of a dispute with the taxman, or uncertainty on how legislation should be applied.

Currently no law or regulation governs the way listed firms account for such issues in their financial statements. According to Garth Coppin, national director of Accounting, Professional Practice Group at Ernst & Young, many accountants apply principles of other accounting standards to these tricky cases.

In March 2009, however, the International Accounting Standards Board (IASB) proposed changes on how companies should account for income tax.

In a draft it dealt with the fact that accounting standards on income tax do not cover uncertain tax positions, and asked whether there was support for its suggestions. The IASB assumed that the tax authority examines the amounts reported to it by the company, and that it has full knowledge of all relevant information.

The responses it received showed that while a few companies and associations supported the IASB's suggested changes, none of the global accounting firms or standard-setting bodies did so. 

"The main concern regarding uncertain tax positions," said Coppin, "is that such proposals can result in listed companies having an increased exposure to the scrutiny of tax authorities.

"If local companies disclosed information on uncertain tax positions in their financial statements, the South African Revenue Service could be alerted on which areas to focus upon," he said.

How your company should act

Because of the generally negative response to its proposals, the IASB decided not to proceed further with the matter for now.

Said Coppin: "That doesn't mean companies can ignore it. While they have probably developed their own approach, using guidance for similar areas in accounting, it has probably not been explained in much detail in their financial statements."

Coppin suggests that companies first need to decide how to assess uncertain tax positions. For example, it could be an individual tax item, the entire tax computation or tax computations relating to particular tax jurisdictions or tax items with similar characteristics.

"The next area of consideration is the measurement of uncertain tax positions, which should reflect the likelihood that the tax will become payable," he said. 

"Accordingly, a provision should be raised regardless of whether the likelihood is small or great, with the likelihood being reflected in the amount recorded."

Another issue to be considered is the detection risk - the chance of tax authorities discovering a tax issue they might challenge.
"This should be considered from the basis that many developed tax authorities operate on full disclosure. Companies should consider whether items are taxable or deductible, and not whether the tax authorities will detect items or have sufficient information to make their own assessment," said Coppin.

 - Fin24.com




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