Background

The IFRS Interpretations Committee issued a draft Interpretation Uncertainty over Income Tax Treatments in October 2015. The purpose of this session was for the staff to present the comment letters received, their analysis and recommendations. The remaining topics (including effective date and due process) will be discussed at a future meeting.

Staff analysis and recommendations

The staff focused on the following matters:

1. interaction with the revised Conceptual Framework;
2. scope of the Interpretation;
3. consensus;
4. transition;
5. first-time adopters; and
6. business combinations.

The staff indicated that there was general support for the Interpretation and accordingly, there were no significant changes proposed to the final Interpretation. Respondents agreed that the Interpretation would clarify how to apply the requirements in IAS 12 when income tax treatments are uncertain.

To address the concerns received in the comment letters, the staff proposed the following changes to the Interpretation:

1. Interest and penalties: The staff indicated that respondents raised concerns as to the lack of clarify of whether interest and penalties were part of the scope of the Interpretation. The staff noted that IAS 12 did not address interest and penalties and the Interpretation should follow the same path. The staff suggested adding a reference in the Basis for Conclusion to clarify this fact.
2. Results of examination by a taxation authority: The staff noted that there were concerns in relation to the interpretation of implicit vs explicit acceptance. For example it was difficult for entities to obtain objective evidence to determine whether an implicit acceptance was the result of a specific view or just a failure to detect the issue. The staff proposed restructuring the application guidance on the results of an examination by a taxation authority to focus on changes in facts and circumstances and remove the discussion of implicit acceptance of a tax treatment by the taxation authority;
3. Consideration of changes in facts and circumstances: The staff indicated that there were concerns in relation to the interaction with IAS 10, the meaning of period of change, and whether the changes should be considered changes in estimates per IAS 8. The staff proposed introducing references to IAS 8 (to reflect that changes in facts and circumstances are changes in estimates) and IAS 10 (to reflect that an entity is required to apply IAS 10 to determine whether the chance is and adjusting or non-adjusting event);
4. Transition: The staff proposed removing the requirement to disclose the transition method applied because the requirement is already in IAS 8 ; and
5. Transition for first-time adopters: The staff proposed providing short-term transition relief for first-time adopters to be able to apply the cumulative catch-up approach that is made available to existing users.

The following concerns were analysed by the staff and the staff concluded that there were no reasons to make changes to the interpretation:

1. Interaction with Conceptual Framework: The staff noted that one respondent asked to clarify the implications of the revised recognition criteria proposed in the Conceptual Framework. The staff indicated that the revised Conceptual Framework would not prompt any automatic change to any existing Standard. The staff did not believe that the recognition criteria in the revised Conceptual Framework should be revised.
2. Right to re-examine: The staff noted that respondents requested clarification on: (i) the period to be considered for the possibility of re-examination; and (ii) whether entities can consider the probability that the tax authority will re-examine instead of assuming that it will happen.  The staff considered that the assumption that a taxation authority will re-examine did not imply that there was a need to recognise an income tax uncertainty. The staff also did not recommend adding passage of time to consider when there was no statute of limitation because that fact would add more complexity.
3. Business Combinations: The staff noted that some respondents requested clarification on whether the Interpretation would also be applicable to uncertainties on income taxes that are part of a business combination. The staff considers that IFRS 3 does not address income taxes (it only address deferred taxes) and it is beyond the scope of the Interpretation to address such a matter.

Discussion

The Interpretations Committee approved the staff recommendations with the exception of the issue related to interest and penalties. In that regard, the Interpretations Committee requested the staff to assess whether it is feasible to address the issue of interest and penalties in the context of this Interpretation.

The discussion was mostly dedicated to the topic of interest and penalties. The majority of the members expressed concerns about not providing clarity about this issue, particularly that a significant number of respondents requested guidance. Some members noted that interest and penalties are intrinsically related to the uncertain tax position, and can be higher than the tax amount. Another argument was that interest and penalties need to be considered in order to appropriately measure the amount of the tax uncertainty. Some members disagreed with the staff argument that interest and penalties should not be part of the Interpretation because IAS 12 is silent. They argued that interest and penalties are a key part of uncertain tax items.  Another issue noted was that the Interpretation needs to address the presentation and disclosure related to interest and penalties. 

Some members suggested alternative approaches such as: (i) management should apply judgement to determine whether interest and penalties are directly related or not with the tax amount; or (ii) the Interpretations Committee should analyse the issue of interest and penalties separately from this Interpretation.

On the other hand, some Interpretation Committee members agreed with the staff recommendation not to expand the scope because the Interpretation has to be consistent with IAS 12. Another argument was that the issue would be difficult to address given the nature of tax issues which depend on the legislation applicable to each jurisdiction. Also, it was mentioned that in many cases the final outcome on interest and penalties depends on the particular negotiation between the entity and the tax authorities.

There were no significant concerns noted in relation to the remaining topics presented by the staff.

The staff will bring any remaining issues back to the next meeting, with a view to beginning the balloting process.