Ind
AS 12 Uncertainty over Income Tax Treatments (Appendix C) is effective
for the financial years beginning 1st April, 2019. An ‘uncertain tax
treatment’ is 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.
Uncertain
tax treatments generally occur where there is uncertainty as to the meaning of
the law, or to the applicability of the law to a particular transaction, or
both. For example, the tax legislation may allow the deduction of research and
development expenditure, but there may be disagreement as to whether a specific
item of expenditure falls within the definition of eligible research and
development costs in the legislation. In some cases, it may not be clear how
tax law applies to a particular transaction, if at all.
One
of the questions that was not clear in Appendix C was with respect to the presentation
of uncertain tax liabilities / assets. Whether, in its statement of financial
position, an entity is required to present uncertain tax liabilities as current
(or deferred) tax liabilities or, instead, within another line item such as
provisions? A similar question could arise regarding uncertain tax assets.
The
presentation of uncertainty over income tax treatments is very sensitive as it
may lead the Income-tax authorities to draw conclusions on the entities’
conclusion over the outcome of the uncertainty, or may provide information that
may lead to an investigation. Therefore, given a choice, entities would like to
combine uncertain tax provisions with another line item such as provisions.
AUTHOR’S RESPONSE
The
following points are relevant to respond to the question:
(i)
uncertain tax liabilities or assets
recognised applying Appendix C are liabilities (or assets) for current tax as
defined in Ind AS 12 Income Taxes, or deferred tax liabilities, or
assets as defined in Ind AS 12; and
(ii)
neither Ind AS 12 nor Appendix C
contain requirements on the presentation of uncertain tax liabilities or
assets. Therefore, the presentation requirements in Ind AS 1 Presentation of
Financial Statements apply. Paragraph 54 of Ind AS 1 states that ‘the
statement of financial position shall include line items that present:… (n)
liabilities and assets for current tax, as defined in Ind AS 12; (o) deferred
tax liabilities and deferred tax assets, as defined in Ind AS 12…’
Therefore,
applying Ind AS 1, an entity is required to present uncertain tax liabilities
as current tax liabilities (paragraph 54[n]) or deferred tax liabilities
(paragraph 54[o]); and uncertain tax assets as current tax assets (paragraph
54[n]), or deferred tax assets (paragraph 54[o]).
Similarly,
Ind AS Schedule III to the Companies Act 2013 requires separate
presentation of current tax asset, current tax liability, deferred tax asset
and deferred tax liability. Additionally, General Instruction No. 2 for
preparation of financial statements of a company required to comply with Ind AS
clarifies that the requirements of Ind AS will prevail over Schedule III, if
there are any inconsistencies.
In
particular, one should note that:
(a)
when there is uncertainty over
income tax treatments, Appendix C specifies how an entity reflects any effects
of that uncertainty in calculating current or deferred tax in accordance with
Ind AS 12. Paragraph 4 of Appendix C states (emphasis added):
‘This
Appendix clarifies how to apply the recognition and measurement requirements in
Ind AS 12 when there is uncertainty over
income tax treatments. In such a circumstance, an entity shall recognise and
measure its current or deferred tax asset or liability applying the
requirements in Ind AS 12 based on taxable profit (tax loss), tax bases,
unused tax losses, unused tax credits and tax rates determined applying this
Appendix.’
(b)
An entity therefore applies
Appendix C in determining taxable profit (tax loss), tax bases, unused tax
losses, unused tax credits and tax rates when there is uncertainty over income
tax treatments. These amounts are in turn used to determine current / deferred
tax applying Ind AS 12, which in turn flow through to be current / deferred tax
liabilities if the amounts relate to the current or prior periods but are
unpaid / unreversed.
(c)
Appendix C requires an entity to
reflect the effect of uncertainty in determining taxable profit, tax rates,
etc. when it concludes that it is not probable that the taxation authority will
accept an uncertain tax treatment (paragraph 11 of Appendix C). Consequently,
the taxable profit on which current tax, as defined in Ind AS 12, is calculated
is the taxable profit that reflects any uncertainty applying Appendix C. The
definition of current tax in paragraph 5 of Ind AS 12 does not limit the
taxable profit (tax loss) used in determining current tax to the amount
reported in an entity’s income tax filings. Instead, the definition refers to
(emphasis added) ‘the amount of income taxes payable (recoverable) in respect
of the taxable profit (tax loss) for the period’.
(d)
Paragraph 54 of Ind AS 1 states:
‘The
statement of financial position shall include line items that present the
following amounts:…
(l)
provisions;…
(n)
liabilities and assets for current tax, as defined in Ind AS 12 Income Taxes;
(o)
deferred tax liabilities and deferred tax assets, as defined in Ind AS 12;…’
Particularly,
requirements in paragraphs 54(n) and 54(o) of Ind AS 1 will preclude an entity
from presenting some elements of income tax within another line in the
statement of financial position, such as provisions. In particular, paragraph
29 of Ind AS 1 states ‘…an entity shall present separately items of a
dissimilar nature or function unless they are immaterial’. Paragraph 57 of
Ind AS 1 states that ‘…paragraph 54 simply lists items that are sufficiently
different in nature or function to warrant separate presentation in the
statement of financial position.’ Consequently, liabilities for current
(or deferred) tax as defined in Ind AS 12 are sufficiently different in nature
or function from other line items listed in paragraph 54 to warrant presenting
such liabilities separately in their own line item (if material).
CONCLUSION
When
there is uncertainty over income tax treatments, paragraph 4 of Appendix C
requires an entity to ‘recognise and measure its current or deferred tax asset
or liability applying the requirements in Ind AS 12 based on taxable profit
(tax loss), tax bases, unused tax losses, unused tax credits and tax rates determined
applying Appendix C’. Paragraph 5 of Ind AS 12 Income Taxes defines:
(1)
current tax as the amount of income
taxes payable (recoverable) in respect of the taxable profit (tax loss) for a
period; and
(2)
deferred tax liabilities (or
assets) as the amounts of income taxes payable (recoverable) in future periods
in respect of taxable (deductible) temporary differences and, in the case of
deferred tax assets, the carry forward of unused tax losses and credits.
Consequently,
uncertain tax liabilities or assets recognised applying Appendix C are
liabilities (or assets) for current tax as defined in Ind AS 12, or deferred
tax liabilities or assets as defined in Ind AS 12.
Neither
Ind AS 12 nor Appendix C contains requirements on the presentation of uncertain
tax liabilities or assets. Therefore, the presentation requirements in Ind AS 1
apply. Paragraph 54 of Ind AS 1 states that ‘the statement of financial
position shall include line items that present:… (n) liabilities and assets for
current tax, as defined in Ind AS 12; (o) deferred tax liabilities and deferred
tax assets, as defined in Ind AS 12…’.
Paragraph
57 of Ind AS 1 states that paragraph 54 ‘lists items that are sufficiently
different in nature or function to warrant separate presentation in the
statement of financial position’. Paragraph 29 requires an entity to ‘present
separately items of a dissimilar nature or function unless they are
immaterial’.
Similarly,
Ind AS Schedule III to the Companies Act 2013 requires separate
presentation of current tax asset, current tax liability, deferred tax asset
and deferred tax liability. Additionally, General Instruction No. 2 for
preparation of financial statements of a company required to comply with Ind AS
clarifies that the requirements of Ind AS will prevail over Schedule III if
there are any inconsistencies.
Accordingly, applying
Ind AS 1, an entity is required to present uncertain tax liabilities as current
tax liabilities (paragraph 54[n]) or deferred tax liabilities (paragraph
54[o]); and uncertain tax assets as current tax assets (paragraph 54[n]) or
deferred tax assets (paragraph 54[o]).
