Uncertainty over Income Tax Treatments – Ind AS 12

Issue

  • It may be unclear how tax law applies to a particular transaction or circumstance. The acceptability of a particular tax treatment under tax law may not be known 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.
  • When there is uncertainty over income tax treatments, this Appendix addresses:
  • whether an entity considers uncertain tax treatments separately;
  • the assumptions an entity makes about the examination of tax treatments by taxation authorities;
  • how an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; and
  • how an entity considers changes in facts and circumstances.

Accounting Principles

  • Whether an entity considers uncertain tax treatments separately
  • An entity shall determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments based on which approach better predicts the resolution of the uncertainty.
  • In determining the approach that better predicts the resolution of the uncertainty, an entity might consider, for example, (a) how it prepares its income tax filings and supports tax treatments; or (b) how the entity expects the taxation authority to make its examination and resolve issues that might arise from that examination.

Examination by taxation authorities

  • In assessing whether and how an uncertain tax treatment affects the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, an entity shall assume that a taxation authority will examine amounts it has a right to examine and have full knowledge of all related information when making those examinations.

Determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates

  • An entity shall consider whether it is probable that a taxation authority will accept an uncertain tax treatment.
  • If an entity concludes it is probable that the taxation authority will accept an uncertain tax treatment, the entity shall determine the taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates consistently with the tax treatment used or planned to be used in its income tax filings.
  • If an entity concludes it is not probable that the taxation authority will accept an uncertain tax treatment, the entity shall reflect the effect of uncertainty in determining the related taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates. An entity shall reflect the effect of uncertainty for each uncertain tax treatment by using either of the following methods, depending on which method the entity expects to better predict the resolution of the uncertainty:
  • The most likely amount—the single most likely amount in a range of possible outcomes. The most likely amount may better predict the resolution of the uncertainty if the possible outcomes are binary or are concentrated on one value.
  • The expected value—the sum of the probability-weighted amounts in a range of possible outcomes. The expected value may better predict the resolution of the uncertainty if there is a range of possible outcomes that are neither binary nor concentrated on one value.
  • If an uncertain tax treatment affects current tax and deferred tax (for example, if it affects both taxable profit used to determine current tax and tax bases used to determine deferred tax), an entity shall make consistent judgements and estimates for both current tax and deferred tax.

Changes in facts and circumstances

  • An entity shall reassess a judgement or estimate required by this Appendix if the facts and circumstances on which the judgement or estimate was based change or as a result of new information that affects the judgement or estimate.
  • For example, a change in facts and circumstances might change an entity’s conclusions about the acceptability of a tax treatment or the entity’s estimate of the effect of uncertainty, or both.

Changes in facts & circumstances

  • Examples of changes in facts and circumstances or new information that, depending on the circumstances, can result in the reassessment of a judgement or estimate required by this Appendix include, but are not limited to, the following:

(a) examinations or actions by a taxation authority. For example:

(i) agreement or disagreement by the taxation authority with the tax treatment or a similar tax treatment used by the entity;

(ii) information that the taxation authority has agreed or disagreed with a similar tax treatment used by another entity; and

(iii) information about the amount received or paid to settle a similar tax treatment.

(b) changes in rules established by a taxation authority.

(c) the expiry of a taxation authority’s right to examine or re-examine a tax treatment.

  1. An entity shall reflect the effect of a change in facts and circumstances or of new information as a change in accounting estimate applying Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors. An entity shall apply Ind AS 10, Events after the Reporting Period, to determine whether a change that occurs after the reporting period is an adjusting or non-adjusting event.

Disclosure

  • When there is uncertainty over income tax treatments, an entity shall determine whether to disclose:
  • judgements made in determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates applying Ind AS 1, Presentation of Financial Statements; and
  • information about the assumptions and estimates made in determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates applying Ind AS 1.
  • If an entity concludes it is probable that a taxation authority will accept an uncertain tax treatment, the entity shall determine whether to disclose the potential effect of the uncertainty as a tax-related contingency.

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