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1 IFRS Foundation 30 Cannon Street London EC4M 6XH Grant Thornton International Ltd Grant Thornton House 22 Melton Street London NW1 2EP 8 January 2016 Submitted electronically through the IFRS Foundation website ( DI/2015/1 Uncertainty over Income Tax Treatments Grant Thornton International Ltd is pleased to comment on the IFRS Interpretations Committee's (Interpretations Committee) Draft Interpretation DI/2015/1 Uncertainty over Income Tax Treatments (the DI). We have considered the DI, as well as the accompanying draft Basis for Conclusions. We support the Interpretations Committee's decision to develop an Interpretation on how to account for income taxes when uncertainty exists over tax treatments. Although it can be argued that IAS 12's existing principles already provide sufficient guidance, we acknowledge that diversity has arisen in practice in this area. We also agree with the DI's proposed approach, subject to some minor clarifications and drafting suggestions set out in the Appendix. Our responses to the DI's Invitation to Comment are also set out in the Appendix. **************************** If you have any questions on our response, or wish us to amplify our comments, please contact our Global Head of IFRS, Andrew Watchman (andrew.watchman@gti.gt.com or telephone ). Yours sincerely, Kenneth C Sharp Global Leader - Assurance Services Grant Thornton International Ltd "Grant Thornton" refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton International Ltd (GTIL) and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another s acts or omissions.

2 Responses to Invitation to Comment questions Question 1 Scope of the draft Interpretation The draft Interpretation provides guidance on accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. Such uncertain tax treatments may affect taxable profit (tax loss), tax bases, tax credits or tax rates that are used to recognise and measure current or deferred tax liabilities or assets in accordance with IAS 12 Income Taxes. Do you agree with the proposed scope of the draft Interpretation? If not, why and what alternative do you propose? We agree with the proposed scope. In our view, IAS 12 already addresses uncertainty in requiring that current tax liabilities are measured at the amount expected to be paid (paragraph 46 of IAS 12). Nonetheless, we acknowledge that diversity has arisen in practice in regard to the recognition and measurement of current and deferred tax in the face of uncertainty in the applicable tax laws. Accordingly, we support the Interpretations Committee's view that more detailed and explicit guidance is called for. We also agree that the scope of any additional guidance should include deferred tax as well as current tax. Question 2 When and how the effect of uncertainty over income tax treatments should be included in determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates The draft Interpretation requires an entity to consider whether it is probable that a taxation authority will accept an uncertain tax treatment, or group of uncertain tax treatments, that it used or plans to use in its income tax filings. If the entity concludes that it is probable that the taxation authority will accept an uncertain tax treatment, the draft Interpretation requires the entity to determine taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates consistently with the tax treatment included in its income tax filings. If the entity concludes that it is not probable that the taxation authority will accept an uncertain tax treatment, the draft Interpretation requires the entity to use the most likely amount or the expected value in determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates. The method used should be the method that the entity concludes will provide the better prediction of the resolution of uncertainty. Do you agree with the proposal in the draft Interpretation on when and how the effect of uncertainty should be included in the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates? If not, why and what alternative do you propose? 2

3 We agree with these proposals. In expressing this support, we have considered whether the proposals could result in unnecessary complexity, by: treating 'uncertain' tax treatments differently to normal (or 'certain') income tax liabilities and assets, and consequently requiring entities to analyse their overall tax position into uncertain and certain components specifying a two-step accounting model for 'uncertain' tax treatments (ie a recognition threshold and a measurement principle). An approach that requires entities to measure their overall income tax liabilities or assets at the most likely or probability-weighted amount (assuming detection by tax authorities), without explicitly separating the uncertain components(s), could be simpler. On balance, however, we support the proposed approach. We think the proposed approach will result in greater rigour by requiring entities to focus on areas of significant uncertainty. We support the use of a 'probable' threshold for recognition on the basis that: as noted in the [draft] Basis for Conclusions, a probability threshold is used in other aspects of income tax accounting in accordance with IAS 12, including recognition of deferred tax assets it has a practical advantage of not requiring entities to make (potentially complex and highly uncertain) estimates of outcomes when the probability of rejection by the tax authority is low. On a point of detail, we note that paragraphs refer to acceptance of uncertain tax treatments without any reference to the possible partial acceptance (or rejection). We think it would add clarity to specify that 'acceptance' refers to acceptance in full. In other words, if it is not probable that the tax authority will accept a tax treatment in full, the entity should apply the measurement guidance in paragraph 16. We also agree with the proposal to use either the most likely amount or the expected value for measurement purposes. This approach has recent precedent in other standards, notably IFRS 15. It also allows for the use of judgement to determine the approach that results in the most useful information in particular circumstances. Question 3 Whether uncertain tax treatments should be considered collectively The draft Interpretation requires an entity to use judgement to determine whether each uncertain tax treatment should be considered independently, or whether some uncertain tax treatments should be considered together, in order to determine taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates. Do you agree with the proposal in the draft Interpretation on the determination of whether uncertain tax treatments should be considered collectively? If not, why and what alternative do you propose? We think the unit of account for considering uncertain tax treatments should be a matter of judgement depending on the specific facts and circumstances. 3

4 Question 4 Assumptions for taxation authorities examinations and the effect of changes in facts and circumstances The draft Interpretation requires an entity to assume that a taxation authority with the right to examine any amounts reported to it will examine those amounts and will have full knowledge of all relevant information when making those examinations. The draft Interpretation also requires an entity to reassess its judgements and estimates if facts and circumstances change. For example, if an entity concludes that new information indicates that it is no longer probable that the taxation authority will accept an uncertain tax treatment, the entity should reflect this change in its accounting. The expiry of the period in which the taxation authority may examine the amounts reported to it would also be an example of a change in circumstances. Do you agree with the proposal in the draft Interpretation on the assumptions for taxation authorities examinations and on changes in facts and circumstances? If not, why and what alternative do you propose? We believe the proposal to assume that a taxation authority with the right to examine any amounts reported to it will examine those amounts is consistent with IAS 12. This is because paragraph 5 of IAS 12 defines taxable profit (or tax loss) in terms of the rules established by the taxation authorities upon which income taxes are payable (recoverable). The proposed requirement to reassess judgements and estimates if facts and circumstances change, and the supporting guidance about the results of examinations, provide a reasonable basis for updating the accounting to reflect new information. Question 5 other proposals Disclosure The draft Interpretation does not introduce any new disclosure requirements, but highlights the relevance of the existing disclosure requirements in paragraphs 122 and of IAS 1 Presentation of Financial Statements, paragraph 88 of IAS 12 and IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Transition The draft Interpretation requires an entity to apply its requirements by recognising the cumulative effect of initially applying them in retained earnings, or in other appropriate components of equity, at the start of the reporting period in which an entity first applies them, without adjusting comparative information. Full retrospective application is permitted, if an entity can do that without using hindsight. Do you agree with the proposals in the draft Interpretation on the disclosure and the transition requirements? If not, why and what alternative do you propose? We think it will be helpful to constituents to emphasise the existing disclosure requirements that apply, or could apply, to uncertainty in accounting for income taxes. 4

5 We welcome the proposal to permit alternative transition methods. We think that it will often be difficult to apply a full retrospective approach without using hindsight. Accordingly, it is helpful and appropriate to provide explicit relief from restatement of comparatives. We also agree that full retrospective application should be permitted provided this is done without any significant use of hindsight. Editorial suggestions We have the following editorial suggestions: Reference Para. 21, 5 th line Suggestion Change "..as tax-related contingencies.." to "as a taxrelated contingency.." B2, final paragraph Change to: "Retrospective application in accordance with IAS 8 is permitted if the entity has the information necessary to do so and this information is prepared without the use of hindsight." IE3, 10 th line Change: "..affect.." to: "..affects.." 5