IFRIC 23 – Transfer Pricing related aspects

07 November 2019

In respect to transfer pricing, the application of tax law may be unclear and open to interpretations and may remain so until the relevant tax authorities or a court have taken a decision. Now, effective from 1 January 2019, IFRIC 23 tells us how to deal with this uncertainty in accounting for income taxes under the IAS 12 standard Accounting for Income Taxes[1].

Until now, there has been no agreement on this matter and companies took widely different approaches (i.e. factoring in the probability of having a tax audit and being very optimistic about it vs. taking into account the worst-case scenario). For annual reporting periods beginning on or after January 1, current tax liabilities under IFRS will have to be calculated as if the tax authorities were going to perform a tax audit and are aware of all the facts and circumstances about the taxpayer’s tax position.

Probability and effect of uncertainty of each tax position will have to be evaluated. If the probability for acceptance of a specific tax position lies above 50 %, the annual accounts have to be calculated in accordance with the income tax filings. However, if the probability for acceptance is not more than 50 %, the entity has to consider the effect of uncertainty in its calculations. In this respect, IFRIC 23 sets out two different methods – (1) the “most likely amount” in a range of possible outcomes or (2) the total of the probability-weighted amounts in a range of possible outcomes (so-called expected value method). In terms of transfer pricing, tax authorities might deny a tax deduction of an intercompany payment as such in lack of meeting e.g. the direct benefit test requirement; in this case the method of the “most likely amount” seems to be appropriate: either full acceptance of the tax position or not. In most cases, however, the arm´s length nature of a transfer price could lie somewhere along a certain range. In such a case, the expected value has to be calculated which basically does not correspond to the tax effect of the price adjustment which is expected at the highest probability. Above all, an entity also has to take into account any changes in facts and circumstances and re-assess any judgements or estimates when necessary.

For Austrian entities, IFRIC 23 actually is primarily relevant for tax positions of consolidated financial statements under IFRS. In this respect, only net tax liabilities have to be considered which may result from cases where no counter adjustment at the related party transaction partner is possible or in case that significant penalties are to be expected. Transfer pricing experts have to be increasingly involved in the preparation and audit of the financial statements in order to evaluate the effects of any future possible tax disputes.

Click here for more detailed information and examples in the original IASB document:  efrag.org/Download/IFRIC  

[1] The IFRIC 23 interpretation Uncertainty over Income Tax Treatments was issued in June 2017 by the International Accounting Standards Board (IASB) and endorsed by the European Union in October 2018. The European Union effective date is the same as the IASB's: 1 January 2019.