In 2006, the Financial Accounting Standards Board in the US issued Financial Interpretation No 48 (FIN 48) in relation to recognizing, measuring and presenting uncertain tax positions under US GAAP.

It applies for accounting periods commencing after 15 December 2006, and as such, the 2007 financial year may be the first year of implementation for many US companies.

FIN 48 is a significant tax-reporting development, and it can cause quite significant practical and technical consequences for a US reporting entity in Thailand.  Such entities need to consider the adequacy of their processes for identifying their uncertain tax positions, and their approach to provisioning for income tax.

What is required?

FIN 48 essentially requires you to follow three steps in establishing the tax benefits to be recognized in the US GAAP accounts:

  1. Identify the uncertain tax positions;
  2. Determine the recognition of the tax benefits; and,
  3. Measure the tax benefits.

Identification of uncertain tax positions

FIN 48 applies to all “tax positions” related to income taxes subject to FAS 109.  The term refers to any tax position adopted by a company when filing an income tax return and any tax position adopted by a company with respect to current and deferred taxes in financial statements.

In the case of Thailand, a tax position would basically be a position taken by a company with respect to an item or items of accessibility or deductibility, but for which no tax regulation exists, for which the law may be unclear, or for which there are no tax precedents. 

In broad terms, a “tax position” could be determined and adopted by a company making a management decision with respect to:

  • The tax-exemption or deferral of income items in the financial statements for income tax purposes; and/or,
  • The claiming of tax expenses or the acceleration of tax deductions; and/or,
  • The carrying forward of tax costs from another year into the current year, such as carry-forward tax losses.

FIN 48 applies to all the tax positions adopted by a company, and you need to identify all the significant tax positions that require consideration under FIN 48.

Recognition of the tax benefits

In order for a tax benefit arising from a tax position adopted by a company to be recognized in financial statements, it has to have a “more likely than not” chance of being accepted on its technical merits by the tax authority.

The “more likely than not” assessment is made by a company’s management based on:

  • The technical merits of the position by reference to prescriptions in legislation, regulations, rulings, etc;
  • The applicability of the facts and circumstances; and,
  • The administrative practices of the tax authority in dealing with similar cases.

You should note that FIN 48 requires you to make this assessment without consideration of possible offsets or aggregations with other tax positions, and there is a presumption that the tax authorities have full knowledge of all relevant information.

Measurement of the tax benefits

Once it has been determined that a tax position meets the “more likely than not” criteria, the next step is to determine the amount of the tax benefit that can be recognized in the financial statements.

Under FIN 48, this is the highest amount of benefit that has a more than 50% chance of being sustained upon a tax examination of the matter (including any appeal or litigation to settle the matter).  The example provided in FIN 48 is as follows:

A company takes a deduction in an income tax return that results in a tax benefit of 100, and the company assesses its likelihood of settling this tax position at various levels, as follows:

Amount of tax benefit expected to be sustained

% likelihood the tax position will be sustained at this level

Cumulative likelihood the tax position will be sustained

100

30%

30%

80

10%

40%

60

15%

55%

30

25%

80%

20

20%

100%

 

The highest benefit which has a greater than 50% chance of being sustained is 60, so this is the benefit to be recognized under FIN 48 for this tax position.

A table such as the above may be necessary where there are a number of possible outcomes.  However, in many situations, the options could be just win, lose or settle, and therefore, there may be just a single amount for determining the more than 50% chance of being sustained upon a tax examination of the matter.  This is likely to be the case for Thailand tax positions.

Where tax planning has been entered into with a view to generating a source of income to support a deferred tax asset, FIN 48 applies in the same way to determine the amount of future available taxable income.

Penalties and surcharge

You should note that FIN 48 has determined that a benefit claimed in a tax return but not recognized in the financial statements effectively represents a tax position on which penalties and surcharges should be accrued in the financial statements.

Disclosure

The FIN 48 analysis will result in either a tax liability or a reduction in a deferred tax asset.  The FIN 48 tax liability will not be included in deferred tax, but must be separately classified from other tax balances in the financial statements.  Penalties can be classified as tax or other expenses, and interest surcharge can be classified as a tax or interest expense.

FIN 48 also requires significant disclosures in the notes to the financial statements, as follows:

  • Tabular roll-forward of aggregated unrecognized tax benefits;
  • Total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate;
  • Total amount of penalties and interest surcharge recognized in the income statement and accrued on the balance sheet;
  • Discussion of possible changes in unrecognized tax benefits in the next 12 months; and,
  • Description of open tax years.

RSM International tax consultants

RSM International tax consultants are here to assist you with your FIN 48 determinations and compliance matters.  We can identify your uncertain tax positions, perform technical reviews of your company’s position, determine a range of possible outcomes for the tax positions, and calculate the penalties and surcharges.

 

Steven Herring

Senior Taxation Consultant

RSM Thailand, International Tax