IMPACT ASSESSMENT OF IFRIC 23, UNCERTAINTY OVER INCOME TAX TREATMENTS

NAME OF COMPANY
REPORTING DATE
DATE OF ASSESSMENT

INSTRUCTIONS:
Please fill out the Steps below in order to conclude on the impact of Philippine
Interpretation of IFRIC 23, Uncertainty Over Income Tax Treatments

Background of IFRIC 23
This Interpretation clarifies how to apply the recognition and measurement requirements in
PAS 12, Income Taxes when there is uncertainty over income tax treatments. In such a
circumstance, an entity shall recognize and measure its current or deferred tax asset or liability
applying the requirements in PAS 12 based on taxable profit (tax loss), tax bases, unused tax
losses, unused tax credits and tax rates determined applying this Interpretation.

Step 1: Is there uncertainty over income tax treatments of the entity?

Guidance:

Tax treatments – refers to the treatments used by an entity or that it plans to use in its
income tax filings.

Taxation authority – refers to the body or bodies that decide whether tax treatments are
acceptable under tax law. In our local jurisdiction, this includes a tax court.

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 include particular income in taxable profit, is an uncertain tax
treatment if its acceptability is uncertain under existing tax laws and regulations.

In assessing whether uncertainty over income tax treatments exists, an entity may consider a
number of indicators including, but not limited to, the following:

 Ambiguity in the drafting of relevant tax laws and related guidelines (such as
ordinances, circulars and letters) and their interpretations
 Income tax practices that are generally applied by the taxation authorities
in specific jurisdictions and situations
 Results of past examinations by taxation authorities on related issues
 Rulings and decisions from courts or other relevant authorities in addressing matters
with a similar fact pattern
 Tax memoranda prepared by qualified in-house or external tax advisors
 The quality of available documentation to support a particular income tax treatment
 Changes in tax laws or new rulings warranting reassessment of prior conclusions

In defining ‘uncertainty’, the entity only needs to consider whether a particular tax treatment
is probable, rather than highly likely or certain, to be accepted by the taxation authorities. If
the entity determines it is probable that a tax treatment will be accepted, then it will measure
its income taxes on that basis. Only when the entity believes that the likelihood of
acceptance is not probable, would there be an uncertain tax treatment to be addressed by
IFRIC 23.
Guidance (cont’d):

Instructions:
Please refer to the entity’s quarterly and annual income tax returns and financial statements
or adjusted trial balances in accomplishing the following tables. Please ensure to cover those
revenues and/or expenses with off-books reconciling items. Lastly, the assessment should
also include those tax credits when there is an uncertainty in its utilization.

For each significant account identified, (INSERT ACCOUNT NAME) please assess if there
are indicator/s of uncertain tax position (UTP) based on the guidance discussed earlier.

Identifying UTP should also consider transactions with related party transactions whether the
transfer price used complies with the arm’s length principle pursuant to existing transfer
pricing rules and regulations. Such identification should also include intra-company
transactions when a single entity has multiple tax regimes (e.g., allocation of
revenues/income and/or costs/expenses to business units with different income tax regimes).

Please explain in the “Remarks” column if the entity believes that there are no
indicators of UTP. For those accounts where there are potential indicators of UTP,
please proceed to perform Step 2.

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SECTION 1: TAXABILITY/NON-TAXABILITY OF REVENUE/INCOME/GAIN ACCOUNTS

UTP
1
Accounts Indicator Remarks
Present?
(Yes/No)
1. Sales from PEZA- No The Company’s sales from PEZA-registered
registered activities – activities are from export sales and clearly qualify
third parties as tax-exempt. These are properly included under
the tax-exempt section in the Company’s income
tax return.
2. Sales to related parties Yes Please refer to Step 2 for further explanation.

3. Interest income subject

to final tax

4. Gain on sale of real

estate property

5. Gain on sale of
investments

6. Other income Yes Please refer to Step 2 for further explanation.

7. <add items as
necessary>
1 The accounts listed herewith are for illustration only and should be customized.

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SECTION 2: DEDUCTIBILITY/NON-DEDUCTIBILITY OF COST/EXPENSE/LOSS
ACCOUNTS

UTP
Accounts1 Indicator Remarks
Present?
(Yes/No)
1. Costs of sales

2. Charges from related

parties

3. Payroll

4. Rent expense

5. Utilities

6. Loss on sale of assets

7. < add items as

necessary>
1 The accounts listed herewith are for illustration only and should be customized.

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Step 2: For accounts with identified potential UTP indicator/s (i.e., those answered
with a “Yes” above), discuss and explain the Background, Rationale of Assessment
and Conclusion.

Guidance:

In assessing whether and how an uncertain tax treatment affects the determination of
taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, an
entity shall assume that a taxation authority will examine amounts it has a right to examine
and have full knowledge of all related information when making those examinations.

If an entity assesses that it is not probable that the taxation authority will accept an uncertain
tax treatment, the entity shall reflect the effect of uncertainty in determining the related
taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates.

Instructions:

Background – should contain the detailed discussion of the nature of the source of
uncertainty over tax treatment.

Assessment – Is it to be considered separately or combined with other UTPs/group of UTPs

considered together? Is it probable that taxation authority will accept the UTP/s. If not
probable that the UTP/group of UTPs will be accepted by the taxation authority, please
proceed to perform Step 3.

For those transactions with related parties, an entity’s assessment will consider whether the
transfer price used complies with the arm’s length principle pursuant to existing transfer
pricing rules and regulations.

Rationale of assessment – should contain the detailed discussion of the basis of the tax
position that should be derived from tax laws (e.g., rulings, cases, implementing guidance,
legislations etc.) and how it applies to the circumstances of the location/entity. When the past
administrative practices and precedents of the taxing authority in its dealings with the entity
or similar entities are widely understood, for example, by preparers, tax practitioners and
auditors, those practices and precedents shall be taken into account.

For those transactions with related parties, the basis to conclude that the pricing is at arm’s
length would include a transfer pricing study/documentation in accordance with the BIR’s
Transfer Pricing regulations or OECD’s Transfer Pricing Guidelines which incorporates a
benchmarking analysis evidencing that the transfer prices used are comparable with similar
third-party transactions.

Conclusion – Response is whether “probable” or “not probable that the taxation

authority will accept the uncertain tax treatment”.

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SECTION 1: TAXABILITY/NON-TAXABILITY OF REVENUE/INCOME/GAIN ACCOUNTS

1. <indicate item>

Background

Assessment

Rationale of Assessment

Conclusion
Not probable that the taxation authority will accept the uncertain tax treatment. Please refer
to Step 3 for the calculation of the additional provision for income tax.

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SECTION 2: DEDUCTIBILITY/NON-DEDUCTIBILITY OF COST/EXPENSE/LOSS
ACCOUNTS

1. <indicate item>

Background

Assessment

Rationale of Assessment

Conclusion
Not probable that the taxation authority will accept the uncertain tax treatment. Please refer
to Step 3 for the calculation of the additional provision for income tax.

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Step 3. For accounts with a “Not probable that the taxation authority will accept the
uncertain tax treatment” conclusion statement, please proceed to perform the
calculation of the additional provision and discuss the basis thereof.

Guidance:

For those UTPs where the entity concluded that it is not probable that the taxation authority
will accept those tax treatments, the effect of these uncertainties should be calculated based
on either of the following, depending on which method the entity expects to better predict the
resolution of the uncertainties:

(a) the most likely amount – the single most likely amount in a range of possible
outcomes. The most likely amount may better predict the resolution of the
uncertainty if the possible outcomes are binary or are concentrated on one value; or

(b) the expected value – the sum of the probability-weighted amounts in a range of
possible outcomes. The expected value may better predict the resolution of the
uncertainty if there is a range of possible outcomes that are neither binary nor
concentrated on one value.

Instructions:

Basis of calculation – should indicate whether the most likely amount or the expected value
approach is used. Calculation should also be attached/referred from this assessment memo.
In addition, calculation of the provision should cover all open tax years.

Rationale of basis – should contain the detailed discussion on why one approach is more
reflective of the actual amount that will be needed to resolve the UTP/s taken.