Looking for Uncertainty?
On 26 January, 2010, the IRS dropped a bombshell on US taxpayers with Announcement 2010-9, a new requirement which may have far reaching consequences for UK companies that file returns of subsidiaries or branches in the US. Additionally, US companies with UK subsidiaries may need to disclose uncertain UK tax positions on their US tax returns in specific circumstances. However, the international implications of the proposals were not addressed in the Announcement.
The IRS intends to require "certain business taxpayers" to report uncertain tax positions in future tax returns, and intends to "publish the new schedule quickly" and "mandate the new schedule for uncertain tax positions be filed with returns after release of the schedule."
In the opening paragraph of the Announcement, the IRS states that it is "considering changes to reporting requirements regarding certain business taxpayers' uncertain tax positions in order to improve tax compliance and administration." In the concluding sections of the Announcement, it solicits comments but does not indicate that it intends to hold any public hearings. It is, therefore, unclear as to whether UK multinational companies paying taxes in the US will have any influence over the ultimate wording of these future requirements.
Who is Affected?
UK multinational companies that file tax returns in the US may be caught by this Announcement. The stated targets are "business taxpayers" with more than $10 million in total assets. The threshold is low enough that most UK multinational companies will exceed the threshold. However, whether they will escape this requirement because they do not adopt FIN48 is unclear.
What are the Requirements?
Taxpayers within the scope of the Announcement will have to attach a schedule to their return that:
- Lists all of these uncertain tax positions;
- Provides a concise description of "each uncertain tax position;" and
- Discloses the "maximum amount1 of potential federal tax liability attributable to each uncertain tax position (determined without regard to the taxpayer's risk analysis regarding its likelihood of prevailing on the merits)."
The "concise description" required to be supplied by the taxpayer has at least two parts, and in particular situations even three. The first concise description must contain information that provides "a rationale for the position." The second concise description is a "general statement of the reasons for determining that the position is an uncertain tax position." To be sufficient, this second concise description must contain:
- The Code sections potentially implicated by the position;
- A description of the taxable years to which the position relates;
- A statement that the position involves an item of income, gain, loss, deduction or credit;
- A statement that the position involves an item that is permanent, temporary or both;
- A statement of whether the position involves a determination of the value of any property or right; and finally,
- A statement of whether the position involves a computation of basis.
The descriptions provided by the taxpayer do not need to disclose the taxpayer's risk assessment or tax reserve amounts.
Finally, it appears that items requiring disclosure are only those where a tax reserve is recorded in the financial statements of a taxpayer. While the Announcement specifically mentions FIN 48, it appears to include the possibility that other accounting standards that require tax reserves will satisfy this requirement. Therefore, it is possible that UK companies with US subsidiaries or / branches that prepare accounts under IFRS will be caught by these requirements. However, there is a severe lack of clarity.
Preliminary Thoughts and Issues
Over the coming weeks and months, we will all uncover issues in this Announcement, but here a few things to start thinking about:
- Could the Announcement require a US company to disclose an uncertain tax position overseas, if it gives rise to a change in the way foreign tax credits would be offset in the US parent company’s returns? Or, if there are transfer pricing uncertainties, would US companies need to provide details of uncertain tax positions that arise in dealings with HM Revenue & Customs?
- If those provisions were held at the UK consolidation level, rather than entity level, and the US subsidiary did not produce US GAAP accounts, would a UK multinational company that prepares accounts under IFRS be caught in respect of tax provisions for uncertain tax positions in relation to its US subsidiary,?
- Is there a difference between the "maximum amount" and an "entire amount" for each uncertain tax return position? Could the "maximum amount" relate to just the uncertain position, whereas the "entire amount" encompasses all correlative adjustments that may result for the potential disallowance of the uncertain tax position? So, for example, if a disallowance of a repair expense would result in the creation of a depreciable asset, could the benefit of the depreciation deduction be a component of the "entire amount" but not a component of the "maximum amount?"
- Can the disallowance of one item on a list of uncertain amounts result in the theoretical increase of another item on the same list? For example, a taxpayer has two items on its disclosure schedule, one being an abandonment loss, which is uncertain, and the other being the deduction of an expense as a research cost, which is also uncertain. If the disallowance of the research deduction serves to increase the amount of the abandonment loss, which itself is an uncertain tax position, should the taxpayer report that the "entire amount" is a zero dollar impact?
- How does the disallowance of temporary items affect the calculation reporting of permanent items, such as percentage depletion and the domestic production deduction?
- Will the filing of this schedule necessitate a reassessment of the reserve amount that might be required under FIN 48 or FAS 5 (Financial Accounting Standard No. 5)?
- Does a taxpayer need to disclose an uncertain tax position if it has no reserve established for it? For example, the taxpayer may be 95 per cent certain that its position is correct and, therefore, decides that no reserve is needed.
- If an uncertain tax position involves a deduction related to an amount that was determined by valuation, must all lost positions presume a zero valuation?
- Will taxpayers need to perform a "with and without" tax calculation for each individual uncertain tax position, or can grouping be used to reduce calculation burdens?
- Are taxpayers bound by the "unit of account" determinations in their formulation of uncertain tax positions, and how will the IRS be able to audit the veracity of these new schedules without compelling production of the audit accrual workpapers?
- Does a taxpayer need to identify or explain any and all legal authorizes that weigh against a position that it has taken as part of its "general statement of the reasons for determining that the position is an uncertain tax position"?
- Will taxpayers in Compliance Audit Program (CAP) audits be exempt from these rules?
Alvarez & Marsal Taxand Says:
These and many other issues, observations and questions will no doubt surface as taxpayers and preparers respond to the request for comments. UK companies are already entering a period of heavy-handed regulation at home and it would appear that there will be no respite in the US.
We will be monitoring this issue carefully with the assistance of our colleagues in the US. No doubt, there will be some twists and turns before we fully understand the impact of the new regulations on UK companies.
We would also expect that HMRC will monitor this development closely.
1. The "Schedule" section of the Announcement contains the terms "maximum amount of potential federal tax liability" and "entire amount of United States federal income tax." We believe that these refer to the same calculation, but clearer drafting would surely help reduce possible confusion.
Managing Director, London
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Managing Director, London
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