2013 Tax Accounting Update - Slides

Tax Accounting Update
2013

10 December 2013
Tax Accounting Update - 2013 Page 2
Todays Agenda
2013 AQR results
Changes to income tax supplement
Required professional practice consultations;
Transfer pricing appendix
Audit risks for income taxes in the current environment;
Accounting for recently enacted international tax
measures;
Presentation of unrecognized tax benefits
Accounting for uncertain tax positions;
2013 AQR results
AQR - Findings
Working papers do not contain sufficient referencing and documentation to
conclude that appropriate procedures were performed to agree the balances
of foreign entities to the source records and the financial information to the
audited working papers.

Based on the file in GAMx, the audit manager signed off on the work steps
and foreign and consolidated TARs. However, an audit manager or higher did
not sign off on all tax working papers indicating a detailed review as done by
the audit team. It appears the required detailed second level review was not
completed by the assurance team. The tax partner signed-off on substantially
all of the tax working papers including the TAR, U281 and rate reconciliation,
however did not sign off on the deferred tax working paper which would be
considered a significant working paper. As this is a listed entity, it is required
for a tax partner sign off on all significant tax working papers reviewed in
addition to the detail and second level reviewer.
AQR Findings contd
Various reviews of the tax working papers are absent prior
to the release date. The majority of the tax working
papers are signed off by the audit senior manager
subsequent to the audit report date. Similarly, the tax
partner's review is also documented subsequent to the
audit report date.
US tax working papers were not archived in the file. The
US Tax partner did not provide the team with the working
papers or information necessary to assess the provision.
AQR Findings contd
An incorrect superseded version of the deferred tax
working papers were included in the archived GAMx file
and/or working papers appeared to be missing
documentation.
The financial statements disclose there are no uncertain
tax positions, but no evidence existed in the file to assess
this.
AQR Findings contd
Several identified errors relating to deferred taxes recorded on intangibles and
ITC's from a purchase equation, as well as government tax credits. These errors
were not appropriately included on the SAD and communicated to management
and those charged with governance. Details are as follows:
Deferred income taxes were not initially recorded on indefinite life intangibles
in the purchase equation in 2010.
Deferred income taxes were not initially recorded on the ITCs in the
purchase equation in 2010.
Deferred income taxes were calculated on the federal SRED pool and the
Ontario ORDTC. The federal SRED pool should have a deferred tax asset
recorded. The Ontario ORDTC is a tax credit and is taxed in the current year.
It should have been recorded as an ITC (subject to valuation of the ITCs
overall) and not tax effected.
On the tax return, severance expenses were treated as not currently
deductible. However, a deferred tax asset was not recorded. Therefore the
deferred tax expense was overstated. The ITCs utilized and the ending
balance of ITCs were correctly recorded based on the tax return so there
appears to be a missing tax entry to record the DTA.
AQR Findings contd
The TAR memo identifies the reasoning for recognizing the deferred tax asset being
future projections, however there was no file documentation connecting the audit work
regarding future accounting projections and future taxable profits or explaining the work
done to get comfortable for tax purposes. In addition, there is no documentation in the
file regarding the assessment and/or need for a PPD consult given future projections
are being relied on and losses in the immediate history.
In addition, UK deferred tax liability related to goodwill is indicated as maintained at top
CDN consolidation. However, there is no documentation or evidence in the Canadian
tax working papers this amount was evaluated. Based on discussions with the audit
team, this amount is an isolated adjustment for a difference between UKGAAP and
IFRS and ties directly to their financial information. Since this DTL amount is material,
it should be tied out and documented as such. The UK TAR only refers to the deferred
tax asset relating to losses but does not address the deferred tax liability. Further, at
the local UK level, realizability of the DTA relied on future taxable profits pursuant to the
TAR, but documentation of the procedures completed to arrive at this conclusion was
not evident. Although the UK was subject to specific scope, income taxes including
related deferred tax accounts were determined by the audit team to be part of the
specified scope components.
AQR Findings contd
At the end of 2012, the entity had approximately $56M of ITCs. As part of the
impairment analysis, 50% of this balance was written off. The SRM states that "EY has
audited this calculation and believes that management's calculation is reasonable". The
tax working paper documentation to support this write off is a memo that says that the
range of outcomes for writing this amount off is between $0 and $56M, the client has
chosen to write off half the amount and that this result is "not unreasonable". The SRM
contains the following: "We discussed with management whether they expect to utilize
these credits over the next 20 years. Based on the impairment test for the refinery
mentioned above management concluded that there was some uncertainty as to the
amount of ITCs it would have available. In reviewing managements VIU calculation,
while some tax planning strategies do exist, most of these ITCs would not be utilized
until 2018. Accordingly, we concur with management impairment amount of $ 27.7
million." In addition to the ITCs, significant deferred assets exist on the entity's balance
sheet so sufficient taxable income will be required to utilize both the deferred tax assets
and the ITCs. To retain an ITC asset of $28M and record a $28M write off, additional
documentation/analysis should have been included in the working papers.
The engagement team provided a verbal explanation as to why retaining 50% of the
ITCs and write off the remainder was reasonable and documented its support for the
existence of the gross amount of the ITCs ($56M). The engagement team had
performed extensive procedures on the VIU calculation prepared by management.
Changes to income tax supplement
Background
In early July 2013 a new Global EY GAM Supplement on
Audit Procedures for Tax Accounts was released. This
supplement now replaces the previous Canadian guidance.
Significant reorganization of the guidance previously
contained in the Canadian supplement
Canadian guidance has largely been retained but is
significantly reorganized
Previously all guidance was contained within one
document, now located in three locations:
GAM supplement TX_Taxes Supplement
AS_4.14 (O) Income Taxes
AS_4.15 (OO) Non-income Taxes

Tax Supplement
Presentation title

Presentation title
Professional Practice Consultations
Income Taxes
Majority of changes are contained in the consultation
requirements, which are now listed in TX_12 Consultation
and partner in charge requirements
Uncertain tax positions
We are required to consult with the Sub-Area PPD in instances when:
The sustainability of tax positions or transactions is necessary for the entitys
ability to continue as a going concern
The terms and structure of a transaction dictate a required distribution or
otherwise reduce the flexibility of management
Complex tax-advantaged transactions (consultation to include Tax Q&RM)
An entity records in the current period a material tax benefit and we are
concerned that the entitys documented evidence does not indicate a
sufficiently strong likelihood of prevailing

Income Taxes
Uncertain tax positions supported by third-party opinion
Given the nature of tax contingencies and diversity in practice, we are required to consult with the Sub-
Area PPD when we encounter any of the following circumstances:
We believe that the tax advice (i.e., the tax opinion, earnings-and-profits study, transfer pricing
study, other tax only valuation report) of a third-party advisor presents a level of confidence that
understates the merits of the position, and the difference affects the accounting or our audit
conclusion (e.g., the third-party tax providers opinion is substantial authority and we believe the
facts and circumstances and technical merits warrant an opinion with greater assurance, e.g. a
more-likely-than-not level opinion). We expect this situation to be rare.
The entity received a tax opinion from a third-party advisor that implies a high likelihood of success,
with which we concur, for a transaction or tax position initially recognized in the current period, but
the entity also records a material tax exposure liability related to that tax benefit. The entity needs to
document the basis for its tax exposure liability and we include such documentation, as well as the
basis for our conclusion on such liability, in the audit work papers.
The entity, for an open tax period, received an opinion from a third-party advisor that provides a
lower level of assurance, namely less than 50% likelihood of success, but has reflected a material
benefit in a current or prior period.
We conclude the third-party advisors opinion overstates the merits of the position and the resulting
accounting effect is material.
The entity records in the current period a significant tax benefit and we are concerned that the
documented evidence does not indicate a sufficiently strong likelihood of prevailing.

Income Taxes
Recognition of deferred tax assets
In addition, discussion with a professional practice partner, and relevant tax professionals is encouraged
in any situation when:
An entity has recognized significant gross deferred tax assets, the recovery of which is based on
either tax planning strategies or expectations as to future taxable income.
Consultation with a professional practice partner is required in any situation when:
When IFRS is the applicable financial reporting framework: The utilization of deferred tax assets
(those arising from either deductible temporary differences or tax operating loss carry forwards) is
dependent on future taxable profits in excess of the profits arising from the reversal of existing
taxable temporary differences and the entity has suffered a loss in either the current or preceding
period in the tax jurisdiction to which the deferred tax assets relates; or serious consideration is
being given to a report modification for material uncertainties relating to the entity's ability to
continue as a going concern; or the entity has recently emerged from bankruptcy.
When US GAAP is the applicable financial reporting framework: Deferred tax assets (those arising
from either deductible temporary differences or tax operating loss carry forwards) are recognized by
an entity based on projections of future income, and the entity is in a cumulative loss position (as
described in 6.6.1, Cumulative losses, in the US FRD, Income Taxes); or serious consideration is
being given to a report modification for material uncertainties relating to the entity's ability to
continue as a going concern; or the entity has recently emerged from bankruptcy.

Income Taxes
Addressing entity concerns regarding documentation of
tax exposure accruals
If management attempts to restrict the nature and extent of our procedures and/or our
documentation we maintain in our work papers related to tax exposure items, we are
required to consult with the Sub-Area PPD.
Addressing entity concerns regarding our tax work
papers
Any requests to gain access to our tax work papers are discussed promptly with the
engagement partner (and generally the tax reviewer) who is required to obtain the
advance approval of the Sub-Area PPD and Sub-Area Tax Quality and Risk
Management and general counsel prior to granting access to our tax work papers.
If, after discussion and review of our policy regarding access to our work papers, the
entity requests additional information about our precautions regarding the nature extent
and timing of our documentation of tax exposure items, the engagement team consults
with the Sub-Area PPD and others as appropriate.

Tax Supplement - Transfer Pricing
The new guidance contains TX_Appendix_1 Transfer Pricing
Previous Canadian guidance had no similar section
This appendix provides teams with additional guidance on completing
audit procedures around transfer pricing
Key points:
Audit of transfer pricing, like other tax accounts is the responsibility of
the audit team the inclusion of transfer pricing professionals is a
matter of professional judgment;
If it is determined that transfer pricing professionals are involved, they
should attend the team planning event;
Appendix provides guidance on significant classes of transactions, IT and
internal controls, design and execution of audit procedures, and
documentation requirements;
All audits of transfer pricing should be conducted in accordance with the
guidance in the Appendix.

Tax Supplement Transfer Pricing
Audit Objectives:
Tax expense reflects transactions between related parties that
have been recorded at arms length;
Tax expense reflects transactions that have been recorded in
accordance with an agreed up Advance Pricing Arrangement;
Uncertain tax positions associated with transfer pricing are
appropriately recognized;
Disclosures are appropriate
The following factors are considered to assess the need to
involve transfer pricing professionals / and whether transfer
pricing is considered a significant risk:
Proper pricing of transactions:
Material related party transactions;
Transactions between countries that do not have a tax treaty with one another;
Transactions between countries with significant differences in tax rates;
Significant losses resulting from intercompany transactions;
Intangible property transactions;
Cost sharing arrangements;
Restructuring functions and risks moved between entities;
Fundamental industry changes;
Entity has a business model which differs from the industry generally;
Extensive use of intercompany debt financing;
Use of complex transfer pricing methods;
Existence of transfer pricing controversy

Additional factors to be considered in assessing the need
to involve transfer pricing professionals / and whether
transfer pricing is considered a significant risk:
Proper documentation to support pricing:
Non-documented / non-compensated transactions;
Insufficient evidence to support non-arms length pricing;
Equity accounted for investments with significant transactions;
Proper accounting for the documented price
Significant number of intercompany transactions;
Potential for intercompany transactions not to be recorded;
Accounting records are inconsistent with the arms length price
documented in transfer pricing studies
New Form U281
US Firm issued a new Form U281 in November 2013.
Canadian version of U281 currently being updated, and
should be available for December 31, 2013 audit
engagements;
Ensure using the correct U281 for all audit engagements
New Form U281 - Continued
New U281 contains new or clarified procedures to
address recurring quality inspection findings, including:
Additional steps for reviewing assertions with respect to the
reversal of outside basis differences in investments in subsidiaries,
branches, associates and joint ventures;
Additional steps related to the audit of transfer pricing;
Additional steps for income tax matters associated with business
combinations;
New U281 also clarifies guidance on when a technical
subject matter professional should be part of the
engagement team.

Audit risks in the current environment
Summary of current developments
Government deficits and debt are now driving a far greater focus on
raising tax revenue;
High rate of tax policy legislative and regulatory change continues, as
do changes in tax administration, to improve tax enforcement;
In many countries, tax activism and media coverage is sparking broad
public discussion and political focus on business taxation in a
multinational corporation context;
The G8 and G20 have been swift to express support for the
multilateral work of the Organisation for Economic Co-operation and
Development (OECD) in this area, and an action plan is now in place
The European Commission is active in this space
Media attention is increasingly focused on companies accused of not
paying a fair share of tax

Hearings before Government Committees
In May 2013, a U.S. Senate subcommittee held hearings to discuss
the tax planning strategies of multinational corporations, including
questioning of executives of Apple, Hewlett Packard and Microsoft
Focus on how they used international tax planning structures to
reduce their tax liability
Hearings before the U.K. Public Accounts Committee publicly
questioned executives from companies such as Starbucks and
Google as well as Big 4 professional services firms and the UK Tax
Authority including questions about tax strategies undertaken by
multinational corporations to reduce taxes paid in the U.K
Much of the questioning focused on whether the companies
current operations were in line with those considered when the
initial tax planning was implemented

OECD BEPS project
The OECD Action Plan on Base Erosion and Profit Shifting was released on 19 July
2013
Plan sets forth 15 Action areas where the OECD will focus work over the next 2
years, including:
Address concerns with respect to the digital economy (Action 1)
Establish international coherence of corporate income taxation (Actions 2
through 5)
Restore the full effects and benefits of international standards (Actions 6 and 7)
Assure that transfer pricing outcomes are in line with value creation (Actions 8
through 10)
Ensure transparency while promoting increased certainty and predictability
(Actions 11 through 14)
Address the need for swift implementation (Action 15)

Tax Transparency
A key issue in the fair tax debate is the demand (European
Commission, Extractive Industries Transparency Initiative, OECD,
G8) that multinational corporations should publish more information
in order to be transparent
Along with European Council proposals in this area, some countries
such as Australia are legislating for increased tax transparency
requirements
Implications of the need for increased transparency include:
The demand for greater public disclosure derives from the
complexity of multinational corporations international activities
Public stakeholders desire greater transparency from companies
but companies are concerned about misleading reporting and
maintaining commercial confidentiality
An increasing number of companies are considering voluntary
disclosure of tax and socio-economic contributions

Key areas of risk related to taxation
Transfer pricing & intercompany transactions;
Intercompany transactions involving intangibles;
Treaty shopping;
Intercompany transfers of assets;
Existing tax structures increased focus by tax authorities
on the execution of existing structures.
Considerations for our audit of income taxes
of multinational corporations
Our client specific audit strategies and procedures may need to be updated to address tax
specific risks. Additional procedures may include:
Reviewing the documentation supporting current tax planning and transfer pricing
structures for accuracy and completeness
Determining whether internal controls are designed to ensure periodic evaluation of
compliance with the objectives and requirements of these tax planning structures and
that these controls operate as designed
Assessing potential risks that the companys operations are not in line with the its
documented structures; continuing to test current tax structures to determine that
changes in the business have not increased risk or created exposure where one did not
previously exist
Considering potential permanent establishment exposures and whether the company
has sufficient internal controls to identify when such exposures arise
Reviewing material cross-border intercompany transactions and transfers of intellectual
property for potential tax risks; considering potential risks related to hybrid entities or
instruments if the tax rules were to change

Accounting for upstream loans outside
basis considerations

Under new rules, certain loans have consequences to a Canadian parent
company. The following are examples of loans that would be caught under
these rules.

Loan
CANCO
Loan
Loan to
Canco
Loan to
Foreign Parent
FA
FP
CANCO
FA CANCO
FA
FP
FA
Loan
Side to
Side Loan
Income inclusion to the taxpayer resident in Canada for
the amount of the upstream loan (special rules if equity
percentage in affiliates is less than 100%);
Loans between controlled foreign affiliates should
generally be exempt from these rules;
Exception to the income inclusion:
Loan is repaid with two years (of the date the loan was made) and
the repayment was not part of a series of loans and repayments;
Loans incurred on or before April 19, 2011 provided transitional
relief must be repaid prior to April 19, 2016.
Income inclusion can be reduced to the extent of:
Exempt surplus, taxable surplus or hybrid surplus;
Pre-acquisition surplus (i.e. tax basis)
Meant to replicate the consequences as if an actual
dividend had been paid up the chain to the taxpayer
resident in Canada
These rules have significant implications to the accounting
for an entities investment in its subsidiaries, associates,
branches and joint ventures;
Upstream loans form part of the assets of an underlying
subsidiary, and implicitly form part of the carrying value of
the subsidiary;
Previously, if there was no intention to distribute assets of
the subsidiary (including the upstream loan), then the
conditions not to record any deferred taxes associated
with an inherent outside basis difference may have been
met;
New rules may force the repatriation that was otherwise
not expected in the foreseeable future.

Under these rules, where an upstream loan exists, an
income inclusion will result if the loan is not repaid. Since
the condition giving rise to this income inclusion already
exists (i.e. the loan is in place), this is a temporary
difference;
Canadian entities should include a deferred tax liability in
respect of the income inclusion associated with upstream
loans, unless rationale for not including exists.
The following are reasons why an entity may not record a
deferred tax liability in respect of an upstream loan:
The entity expect to repay the loan within the 2 year time period.
Must consider ability to repay loan;
Must revisit outside basis difference determination will the funds
repaid remain in the foreign subsidiary or will then be subsequently
repatriated?
The entity has sufficient surplus pools to shelter the income
inclusion (i.e. the measurement of the deferred tax liability would
be nil as a result of surplus pools or sufficient tax basis);
The entity can execute tax planning to reduce the exposure to the
upstream loan rules (limited tax planning can be considered for the
purposes of assessing the deferred tax liability on outside basis
differences);
Unrecognized tax benefits
During July 2013, the Financial Accounting Standards Board (FASB) issued an
Accounting Standards Update (ASU) of ASC Topic 740 (income taxes) related to the
presentation of unrecognized tax benefits when a net operating loss carry forward,
similar tax loss or tax credit carry forward exists.
ASU 2013-11 provides that a liability related to an unrecognized tax benefit would be
offset against a deferred tax asset for a net operating loss carry forward, a similar tax
loss or a tax credit carry forward if such settlement is required or expected in the event
the uncertain tax position is disallowed. In that case, the liability associated with the
unrecognized tax benefit is presented in the financial statements as a reduction to the
related deferred tax asset for a net operating loss carry forward, a similar tax loss or a
tax credit carry forward.
In situations in which a net operating loss carry forward, a similar tax loss or a tax credit
carry forward is not available at the reporting date under the tax law of the jurisdiction
or the tax law of the jurisdiction does not require, and the entity does not intend to use,
the deferred tax asset for such purpose, the unrecognized tax benefit will be presented
in the financial statements as a liability and will not be combined with deferred tax
assets.
The ASU is effective for fiscal years, and interim periods
within those years, beginning after 15 December 2013 for
public entities and 15 December 2014 for nonpublic
entities. Early adoption is permitted.
The ASU should be applied prospectively to unrecognized
tax benefits that exist at the effective date. Retrospective
application is permitted. The new guidance will likely
change balance sheet presentation of unrecognized tax
benefits and deferred tax assets.

Accounting for uncertain tax positions
As most tax systems are self assessment systems, most
GAAPs have evolved to one of supporting that an
enterprise has a right to a tax benefit taken (a benefit or
asset model)
A UTP exists when there are more than one possible
outcome related to a tax position taken by a taxpayer
IFRS, PE GAAP and US GAAP each have similar, but
slightly different ways, for accounting for UTPs
Because of the lack of detailed guidance, varying practice
exists for the accounting for uncertain tax positions.

No specific guidance under IFRS;
IAS 12 requires taxes to be recorded at the amount
expected to be paid
IAS 37 specifically excludes income taxes;
Significant variance in practice has resulted:
Use of the principals of IAS 37 (i.e. a two step approach to
determining a liability for uncertain tax positions)
Even under this approach, variance in practice over measurement
(single best estimate, weighted average probability, range, other)
Use of a one step model to recording uncertain tax positions (i.e.
Uncertainty of the outcome is reflected in the measurement of the
liability and not whether or not a liability is recorded)

US
GAAP

IFRS

ASPE
Initial recognition
More likely than not
that there is a
benefit
Liability method
one step or two
step approach
Probable that there is
a benefit (MLTN also
used in practice)

Measurement

Cumulative
probability >50%
Amount expected to
be paid or
recovered
different possible
methods
acceptable

Single best estimate
2013 Tax Accounting Update
Questions?

2013 Tax Accounting Update - Slides

Încărcat de

Informații document

Descriere originală:

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

2013 Tax Accounting Update - Slides

Încărcat de

Drepturi de autor:

Formate disponibile

Tax Accounting Update

S-ar putea să vă placă și