Fin 48: The IRS Version

Transcription

1 Institute of International Bankers Seminar on U.S. Taxation of International Banks Fin 48: The IRS Version Andrew D. Barkin, Head of Tax, The Bank of Tokyo-Mitsubishi UFJ, Ltd. William J. Wilkins, Chief Counsel, Internal Revenue Service Charles N. Collucci III, Partner, Ernst & Young LLP Donald P. Favre, Partner, PricewaterhouseCoopers LLP Lawrence M. Hill, Partner, Dewey & LeBoeuf LLP June 21, 2010 New York, NY

2 IRS Announcement : Background/Rationale Factors driving this proposal Overlap with other recent transparency initiatives Linkage to financial reporting good or bad? 2

3 IRS Announcement : Background/Rationale Why is the IRS seeking increased transparency? Currently the Service spends as much as 25% of its audit time searching for issues rather than auditing issues. Current sustention rates for corporate tax adjustments and costs associated with sustention efforts. Goal is to reduce time spent searching for issues and better focus on completing examinations. 3

4 IRS Announcement : Background/Rationale IRS Transparency Initiatives to date include: Compliance Assurance Program (CAP) Schedule M-3 International disclosures Reportable Transaction Disclosures Commissioner Shulman s discussion with Corporate Board members 4

5 IRS Announcement : Background/Rationale IRS Commissioner announced the comprehensive disclosure proposal at the New York State Bar Association Tax Section s Annual Meeting on January 26, The proposal seeks a listing of business taxpayers uncertain tax positions at the time they file their corporate tax returns. 5

6 IRS Announcement : Background/Rationale Announcement proposes annual disclosure of uncertain tax positions for taxpayers who have both: A financial statement prepared under FIN 48 or other similar accounting standards reflecting uncertain tax positions; and Assets greater than $10 million. Uncertain tax positions would also include positions for which the taxpayer or a related entity has not recorded a reserve because: The taxpayer expects to litigate the position; or The taxpayer has determined that the IRS has a general administrative practice of not examining the position. 6

7 IRS Announcement : Draft Schedule UTP On April 19, 2010, in Announcement , the IRS unveiled a draft schedule (Schedule UTP), along with draft instructions, to be used to report uncertain tax positions. The draft schedule and instructions provide that the following taxpayers must file Schedule UTP beginning with the 2010 tax year: Corporations who are required to file Form 1120; Insurance companies who are required to file Form 1120-L or Form 1120-PC; and Foreign corporations who are required to file Form 1120-F. 7

8 IRS Announcement : Draft Schedule UTP The draft instructions provide that a tax position must be reported on Schedule UTP attached to a particular tax year s return if: At least 60 days before filing the tax return a reserve has been recorded with respect to that tax position, or at least 60 days before filing the tax return a decision was made not to record a reserve based on an expectation to litigate or an IRS administrative practice; and The tax position has been taken by the corporation in a tax return for the current tax year or a prior tax year. 8

9 IRS Announcement : Draft Schedule UTP Tax positions taken by the corporation on the current year s tax return are reported on Part I of Schedule UTP. Tax positions taken by a corporation on a prior year s tax return are reported on Part II of Schedule UTP, but a corporation is not required to report a tax position it has taken in a prior tax year if the corporation reported that tax position on a Schedule UTP filed with a prior year s tax return. The draft instructions provide a transition rule such that a corporation is not required to report on Schedule UTP a tax position taken in a tax year beginning before December 15, 2009 regardless of whether or when a reserve was recorded with respect to that tax position 9

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12 IRS Announcement : Draft Schedule UTP What must be disclosed on Schedule UTP: A concise description of each UTP the description must include information that reasonably can be expected to apprise the IRS of the identity of the tax position and the nature of the uncertainty; and The maximum amount of potential federal tax liability attributable to each UTP. 12

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14 IRS Announcement : Draft Schedule UTP A determination of a maximum tax adjustment amount is not required for valuation or transfer pricing tax positions. Instead, the maximum tax adjustment reporting requirement is satisfied by indicating whether the tax position is a valuation or a transfer pricing tax position and by providing a ranking of these tax positions based on either: The amount recorded as a reserve for United States federal income tax for that position taken on the tax return; or The estimated adjustment to the United States federal income tax that would result if the tax position taken on the tax return is not sustained. 14

15 IRS Announcement : Background/Rationale Impact on taxpayers with greater than $10 million in assets: Roles & responsibilities of taxpayers, accountants, and regulators; Oversight responsibilities for board members and corporate executives; and Impact on Corporate Tax Directors 15

16 IRS Announcement : Background/Rationale Potential Taxpayer Actions: Identify and inventory uncertain tax positions for all issues that affect the taxpayer s U.S. federal income tax liability. Quantify tax benefit and impact for each issue - assess all open years. Evaluate impact of prior year transaction and/or reserves. Assess actions to achieve certainty sooner. Evaluate IRS options to accelerate resolution of open years and achieve currency. 16

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18 IRS Announcement : IRS Chief Counsel Perspective Reasons for UTP initiative/why now?: The list of issues was being created anyway. The list has high value for return selection and issue selection. IRS wants to shift resources from hunting for issues to other priorities. The use of UTP schedule for selecting returns for examination drives decisions on: Time of return filing (vs. time of audit disclosure only); Maximum Tax Adjustment or alternative assessment of significance; Covering exceptions (administrative practice, expectation of litigations) that might otherwise grow to swallow the rule. 18

19 Special Challenges for International Banks Are branches of non-us banks treated differently from subsidiaries of such banks? Reserves may not recorded on US books of branches and subsidiaries. Differing accounting standards for uncertain tax positions. 19

20 Comments Received by IRS from Interested Parties The IRS invited public comment on the proposal. IRS Announcement extended the comment period until June 1, comment letters received Big 4 Accounting Firms Law Firms FEI, TEI, Bar Associations, AICPA Senator Carl Levin 20

21 Comments Received by IRS from Interested Parties Selected Comment Topics: Recommendations for withdrawal of proposal and/or delay of effective date; Taxpayers participating in CAP or CIC programs; The two exceptions under which taxpayers must report positions with no reserves (intent to litigate and administrative practice); More certainty around technical issues needed; Maximum tax adjustment/materiality standard; Concise description of UTP; Training of IRS agents needed. 21

22 Uncertain Tax Positions: U.S. GAAP vs. IFRS IRS Announcement : IRS Chief Counsel Perspective U.S. GAAP FIN 48 (ASC ) provides extensive guidance on accounting for UTPs. A two-step approach to UTPs first is the decision whether to recognize and second is the determination of the measurement. A benefit is recognized when it is more-likely-than-not to be sustained based on the technical merits of the position. The amount of the benefit to be recognized is based on the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. Detection risk is precluded from being considered in the analysis. Disclosures include a tabular rollforward, specific detail where it is reasonably possible amounts will significantly change within twelve months and a policy statement with regard to interest and penalties. 22

23 Uncertain Tax Positions: U.S. GAAP vs. IFRS IRS Announcement : IRS Chief Counsel Perspective IFRS IAS 12 does not address UTPs. Measure current tax liabilities (or assets) at the amount expected to be paid (or recovered). In practice the recognition principles in IAS 37 on provisions and contingencies are frequently applied. IAS 37 requires that a provision should be recognized when: An entity has a present obligation as a result of a past event. It s probable (more-likely-than-not) that the obligation will be settled; and a reliable estimate can be made of the amount of the obligation. Practice varies regarding the consideration of detection risk. Disclosures in accordance with IAS 37 (i.e., a brief description and estimate of financial effect including uncertainties related to the amount or timing). 23

24 Uncertain Tax Positions: U.S. GAAP vs. IFRS IRS Announcement : IRS Chief Counsel Perspective IFRS IAS 12 ED addresses UTPs [issued March 2009] The approach is different than under ASC The ED suggests a single-step approach where measurement should be based on a weighted-average probability analysis of all possible outcomes assuming the tax authorities will examine the position. Disclosures include a description of the uncertainty, an indication of the UTPs possible effects on the amounts recognized for taxes (including timing), and a policy statement with regard to interest and penalties. IASB decided to stop the 2009 IAS 12 ED in November 2009 and commenced with a limit scope project which includes UTPs. Objective is to resolve problems in practice under IAS 12: Without change to fundamental approach Without increasing divergence from U.S. GAAP 24

25 Fin 48: The IRS Version QUESTIONS?????