IFRIC 23… The new way forward?
18 November 2019
Developed as an Interpretation of IAS 12, IFRIC 23 has been put into effect to promote transparency of both financial and tax data and relates to income taxes specifically dealt with under the ambit of IAS12.
To the dismay of auditors globally, IFRIC 23 will be applicable to all reporting periods beginning as soon as 01 January 2019. The main take away of this Interpretation would be that all entities are now required to calculate their current tax liabilities in their annual financial statements as if the relevant tax authorities were going to perform a tax audit. Due to the optimistic view that entities tend to gravitate towards i.e. factoring in the detection risk of uncertain tax provisions as well as the outcomes thereof, IFRIC 23 more likely than not will result in higher tax liabilities being recognised at an earlier date for uncertain tax provisions.
There are four areas of focus covered by IFRIC 23 and these are listed below:
- Whether an entity recognises uncertain tax treatments in isolation or in combination
- The assumptions that an entity makes about the examination of tax treatments by tax authorities
- How an entity determines its taxable profits/losses, tax bases, unused tax losses, unused tax credits, and tax rates
- How an entity considers changes in facts and circumstances
Importantly, IFRIC 23 will only be applicable to situations in which it is NOT probable (i.e. <50%) that the relevant tax authority will accept a certain tax position. Should this be the case entities are required to make use of the “most likely amount” or the “expected value” in determining its tax balances. Unfortunately, there are no hard and fast rules which outline the process that can be followed when determining whether a tax position is probable or not, and as such, this could prove to be a cumbersome task.
The Interpretation is unlikely to be welcomed by preparers of financial statements because it requires the preparation of a register of uncertain tax positions, documentation of positions adopted and the recognition of higher current tax liabilities at an earlier date which could potentially pose as a threat to exposure within the audit environment. However, this is a “burden” that can be shared across the fields of both audit and tax and in particular transfer pricing as this is likely to be a key area of focus for MNEs especially considering the ongoing uncertainty surrounding the recent base erosion and profit shifting changes.
IFRIC 23 simply reinforces the importance of MNEs preparing their first annual statements according to the new rules in order to ensure that they have sufficient documentation which can be used to support their TP positions. The absence of such documentation will leave MNEs scrambling to reach a conclusion that their intercompany transactions will “probably” be accepted by the relevant tax authority. To reduce the chances of this happening, BDO’s TP team is able to assist with the diagnosis, understanding and development of a solution, implementation, and post-implementation of potential uncertain TP positions.
For further guidance on this Interpretation, please contact Marcus Stelloh at BDO.
Read more BDO Insights