Tue, Sep 24, 2019

Changes to Reporting Tax Uncertainties - AASB Interpretation 23

Recently, there have been a number of changes to Australia’s financial reporting landscape that have received a large amount of publicity from advisory firms. Some of these include changes to the revenue recognition rules as well as changes to the treatment of both financial instruments and leases. One issue that has probably not received as much publicity as the others but applies to financial years commencing from January 1, 2019 is AASB Interpretation 23, which addresses the uncertainty over income tax treatments. AASB 23 is the Australian equivalent of IFRIC 23 and is similar to the well-known U.S. accounting standard, FIN 48 (now ASC 740). AASB 23 requires a change in how Australian reporting entities calculate and record their current tax liabilities in their financial statements.

Although reporting entities are currently required to report their current tax liabilities in their financial statements, AASB 23 has clarified how those liabilities should be calculated and removed some of the contingencies associated with those calculations. The most telling change that AASB 23 brings is to clarify that in calculating their current tax liabilities, the entity must assume that a tax authority will have the right to examine the amounts reported and will examine those amounts, and in doing so, will have full knowledge of all relevant information in relation to those amounts. In the past, in calculating the current tax liabilities, some entities would take the probability of being audited, along with the probability of the tax authorities identifying all key information into account in their assessment. AASB 23 has removed those contingent considerations.

Taking those criteria into account, AASB 23 provides that if the entity concludes it’s not probable the tax authorities will accept a tax position then the taxpayer is required to determine its current tax liabilities by referring to “most likely amount” or “expected value” calculation methods (at the option of the entity). The “most likely amount” method looks to the single most likely amount in a range of possible outcomes while the “expected value” method looks to the sum of the probability-weighted amounts in a range of possible amounts.

What Does This Mean in Relation to Transfer Pricing?

AASB 23 is all about quantifying uncertain tax positions. Transfer pricing filing positions are inherently uncertain for a number of reasons, including the bilateral or multilateral nature of transfer pricing and the fact that determination of arm’s length outcomes is open to interpretation rather than being a definitive formulaic calculation. International experience (especially the U.S.’s FIN 48) has shown that transfer pricing is one of the main areas of contention in relation to uncertain tax positions. The fact that reporting entities need to assume that tax authorities will audit their transfer prices and in doing so, will have access to all relevant information (including all relevant details about the company’s international supply chain and structures), means that careful consideration of the company’s transfer pricing positions is imperative.

Many companies undertake transfer pricing analyses and prepare transfer pricing documentation to evidence their compliance with local tax and transfer pricing rules. The question that many auditors will be asking is whether they can rely on these analyses to support the current tax liabilities calculation.  Again, based on the U.S. ASC 740 experience, many taxpayers may experience situations where the arm’s length nature of the pricing and outcomes for some material transactions maybe be debatable, even where compliance documentation has been prepared. Therefore, it’s important for the auditors and company to evaluate the technical merits of each transaction in the context of AASB 23 in order to identify any tax uncertainties. The auditors and company will need to seek transfer pricing expertise to assist them in their evaluation of potential uncertainties. As part of this, consideration will need to be given to both the audit firm’s and company audit committee’s perspectives as to the independence of the audit team and transfer pricing experts. While there may be a range of issues where the audit firm and audit committee are comfortable to rely on the audit firm’s internal transfer pricing experts, there may be more contentious issues where the audit firm and audit committee will want to rely upon independent transfer pricing expertise. Clearly an audit firm should not sign off on a contentious matter without seeking independent advice. When to seek independent transfer pricing (or tax) advice is a judgment call and will be a matter that the audit firm and company’s audit committee will need to discuss and agree upon in advance of the engagement.

Reportable Tax Positions

Coinciding with the release of AASB 23 is the expansion of the taxpayers that need to prepare and file Reportable Tax Positions (RTP) with their annual tax returns. Again, transfer pricing is a key uncertainty in relation to RTP filings. However, in order to assist taxpayers, the Australian Taxation Office (ATO) has provided some guidance stating that a RTP is a position where, having regard to all the relevant authorities, the tax position is determined to be found to correct with a probability less than or equal to 50 percent (i.e. it is as likely or more likely to be found incorrect as it is to be found correct). In undertaking this assessment, taxpayers must have regard for all relevant matters including the anti-avoidance rules, integrity provisions, transfer pricing and market valuations.

The ATO guidance includes discussing the value of appropriate transfer pricing compliance documentation, the use of appropriate benchmarking analyses and the need for taxpayers to access appropriate transfer pricing expertise to assess their transfer pricing filing position.


It is expected that these two tax uncertainty reporting requirements will result in a significant amount of additional work being undertaken by multinationals operating in Australia. International experience certainly supports the view that companies need to dedicate a large amount of time and resources to collating, analyzing and documenting the relevant information in order to evaluate whether or not the company has any uncertain tax positions. Companies will need to consider the degree to which they can leverage their respective RTP and AASB 23 analyses while being mindful that these are separate analyses that potentially involve different considerations. 

As with all matters transfer pricing related, these analyses are not optional extras: they are mandatory and must be addressed appropriately from an Australian-specific perspective.

Duff & Phelps does not provide audit or assurance services. Therefore, our transfer pricing experts can provide independent expert advice in relation to either AASB 23 or RTP tax uncertainty assessments. Please contact your Duff & Phelps representative if we can be of assistance in these matters.

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