Tax law is not a science, but it’s going to have to move in that direction when Australia adopts an accounting standard on uncertain tax positions along the lines of FIN 48 in the United States. And then there’s the question of what the tax authorities will do with that extra information, which is already starting to play out.
The recognition and measurement of uncertain tax positions has been a very controversial issue in the United States over the last few years. Essentially an interpretation of a US Accounting Standard better known as FIN48 requires reporting entities to take a close look at every tax position they have taken and assign a probability of that position being upheld following an examination by the Internal Revenue Service. That’s no easy task given that tax law is not a science. If the probability assigned is 50% or less then the entity has to take a provision for that tax in the accounts.
The coming convergence between United States generally accepted accounting principles and international financial reporting standards means that something very similar to FIN48 is going to becoming Australia ways very soon. In fact the International and Australian Accounting Standards Boards published an exposure draft which went further than FIN48 and would have required entities to make a provision in their accounts where the tax position was anything less than 100% certain. Thankfully the response to that draft accounting standard has been such that we probably won’t see that extreme position and we will see something closer to FIN48. What’s even more interesting from a tax law perspective is what Revenue Authorities will do with this increased tax disclosure.
In the United States we have already seen the Internal Revenue Service add a schedule to the annual income tax return. That schedule requires entities to provide a lot more disclosure in relation to their uncertain tax positions. They have to describe the issue for the IRS, they have tell the IRS the legislative provisions that it relates to, and they have to disclose the maximum exposure that they have in relation to that issue. This issue has significant implications going forward. It will affect how tax advise is sought and received, how tax audits are conducted, how financial reports are prepared and how tax litigation subsequently unfolds. In the United States people are also saying that this represents a watering down of the IRS policy whereby it will not seek access to accountants work papers except in unusual circumstances.
In Australia the ATO has a similar policy often known as the “Accounts Concession” and this change will probably represent a watering down of that policy as well. What that means is that an ability to rely on legal professional privilege going forward will be all the more important.
