Care should be taken whenever a tax position is taken by a taxpayer, for example, a decision on whether or not an amount is tax deductible. Some tax positions taken by taxpayers, could not only result in understatement penalties, but could also create uncertain tax positions that should be separately presented in the annual financial statements. In this newsletter, we briefly discuss the IFRS presentation requirements for uncertain tax positions, and the impact thereof on tax risk management.
What is an uncertain tax position?
Paragraph 3 of IFRIC 23 defines an ‘uncertain tax position’ as “…a tax treatment for which there is uncertainty over whether the relevant taxation authority will accept the tax treatment under tax law. For example, an entity’s decision not to submit any income tax filing in a tax jurisdiction, or not to include particular income in taxable profit, is an uncertain tax treatment if its acceptability is uncertain under tax law.”
Presenting uncertain tax positions
IFRIC 23 Uncertainty over Income Tax Treatments supplies guidance on the recognition and measurement requirements of IAS 12 Income Taxes, where there is an uncertain tax position. Therefore, IAS 12, together with the guidance provided In IFRIC 23, should be applied to determine when and the amount at which any uncertain tax positions should be recognised.
Because neither IFRIC 23 nor IAS 12 contain requirements on how uncertain tax positions should be presented, the International Financial Reporting Standards Interpretations Committee recently concluded that the presentation requirements of IAS 1 apply.
In terms of paragraph 54 of IAS 1, “…the statement of financial position shall include line items that present: …(n) liabilities and assets for current tax, as defined in IAS 12; (o) deferred tax liabilities and deferred tax assets, as defined in IAS 12…’ In terms of paragraph 57 read with paragraph 29 of IAS 1, the items in paragraph 54 are sufficiently different in nature or function to warrant separate presentation, unless they are immaterial.
Following from the above, an entity is required to present:
- Uncertain tax liabilities / assets as current tax liabilities / assets;
- Uncertain deferred tax liabilities / assets as deferred tax liabilities / assets.
It is, therefore, advisable that taxpayers carefully consider any uncertain tax positions taken, as the separate presentation requirement highlights the existence of uncertain tax positions that could increase the risk of a tax dispute with SARS. The obtaining of tax opinions as part of an entity's tax risk management strategy may be very useful in supporting any tax position taken.