2008 Tax Conference
-
Upload
arthur-norris -
Category
Documents
-
view
37 -
download
0
description
Transcript of 2008 Tax Conference
2008 Tax Conference
2008 OFII Tax Conference 2 La Quinta, CA
Michael Burak – PricewaterhouseCoopers John Hildy – Mayer Brown Rowe & Maw
The views expressed in this presentation are not intended as, and should not be relied on, as accounting, auditing, regulatory or tax advice. The outcome of any independent situation depends on the specific facts and circumstances in which the issue arises and on the interpretation of FAS 109 and other relevant literature, laws and regulations in effect at the time.
IRS Access to Tax Accrual Workpapers
2008 OFII Tax Conference 4 La Quinta, CA
US Audit Environment
• FASB FIN 48 (2006)– Provides structure for analyzing uncertain tax positions and, for
many filers, increases the level of detail behind tax reserve analyses
• PCAOB AS3 (2004)– Audit documentation must be sufficient to allow an experienced
auditor, with no prior connection to the audit, to understand conclusions reached
• AICPA AU 9326 (revised 2003)– Tax accrual and support are responsibility of client– Where support is based upon an opinion of outside advisor,
auditor generally needs access to the opinion, notwithstanding privilege claims
2008 OFII Tax Conference 5 La Quinta, CA
IRS Environment
• Pressures surrounding– Audit currency– Resources– Tax gap
• The IRS has authority to examine any books, records, or papers that may be “relevant” – Arthur Young (1984): US Supreme Court held that tax accrual
workpapers (“TAW”) were “highly relevant” to an IRS audit• Tax accrual workpapers (“TAW”) can be an irresistible treasure
trove– TAW “Cadre” established within LMSB– 6 hours of mandatory FAS 109 training
2008 OFII Tax Conference 6 La Quinta, CA
Fluid IRS “TAW” Policy• IRS historically has followed a self-imposed “policy of restraint” to
resist making blanket request for tax accrual workpapers• In 2004, the policy of restraint began to weaken
– For “listed” transactions• If taxpayer claims benefits from one disclosed “listed”
transaction, requests for TAW for that transaction are mandatory
• If taxpayer claims benefits from one undisclosed “listed” transaction, requests for all TAW are mandatory
• If taxpayer claims benefits from two or more disclosed “listed” transactions, all TAW may be requested as a discretionary matter
– Other transactions: requested in unusual circumstances
2008 OFII Tax Conference 7 La Quinta, CA
IRS Definition of “TAW”
• IRS’s definition of “TAW” is broad:
“those audit workpapers, whether prepared by the taxpayer, the taxpayer’s accountant, or the independent auditor, that relate to the tax reserve for current, deferred and potential or contingent tax liabilities, however classified or reported on audited financial statements, and to footnotes disclosing those tax reserves on audited financial statements. These workpapers reflect an estimate of a company’s contingency analysis, tax cushion analysis, or tax contingency reserve analysis.” IRM 4.10.20.2(2)
• Initially, IRS Chief Counsel advised this did not include ETR reconciliation workpapers, but that advice was withdrawn
2008 OFII Tax Conference 8 La Quinta, CA
Potential Defenses to Discovery
• Attorney-Client Privilege• Section 7525 Tax Advisor Privilege• Work Product Privilege
2008 OFII Tax Conference 9 La Quinta, CA
Attorney-Client and 7525 Privileges
• Applies to communications between attorney/tax advisor and client intended to be confidential– Communications must be for the purpose of providing legal advice– Even 7525 must involve “lawyer’s work,” since there is no parallel
federal accountant privilege (Supreme Court in Arthur Young)– Protects communications, but it does not protect facts
• Waiver– Waived on disclosure to any third party, including financial auditors– Waiver to one party generally waives the privilege with respect to all
parties – Waivers typically extend to all communications on same subject
matter– Even describing the “gist” of communication is a waiver (e.g. “our
counsel gave us a favorable opinion on this issue”)
2008 OFII Tax Conference 10 La Quinta, CA
Work Product Privilege• Protects materials prepared “in anticipation of litigation or for trial”• Courts interpret the “in anticipation” test differently
– First, Second Circuits: protects materials created “because of the prospect of litigation”
– Fifth Circuit: protects documents where “primary motivating force was to assist in possible future litigation”
– Some Circuits: articulation of the standard is somewhat ambiguous• Waiver
– Waived where disclosure is made to an adversary, or where the disclosure makes it more likely that an adversary will obtain document
• Cases discussing financial auditors are split:– Textron, American Steamship, Jaffe, Merrill Lynch find no
waiver– Medinol, Diasonics find waiver
– Waivers generally extend only to the items produced, not other materials
2008 OFII Tax Conference 11 La Quinta, CA
Case Study: Textron
• Textron was embroiled in a contentious IRS audit– 7 of 8 past audits had gone to Appeals; 3 disputes resulted in
litigation– Subsidiary had done 9 listed transactions (SILOs)
• IRS issued a summons for TAW of Textron’s consolidated group– “Master” reserve schedules, plus supporting schedules, notes
and memos– According to Textron, these TAW were prepared by in-house
Tax Department counsel and reflected their advice and legal conclusions on the prospects of prevailing
– Textron had shown these TAW to its outside auditor (E&Y), but had not allowed E&Y to keep copies
– E&Y had agreed to keep the information confidential• When Textron refused to comply with the summons, IRS brought
suit in federal district court in Rhode Island
2008 OFII Tax Conference 12 La Quinta, CA
District Court’s Holding• Last August, the district court held that the workpapers were
covered by ACP/7525, but these protections had been waived upon disclosure to E&Y
• But the court held the documents were protected as work product– Applied controlling First Circuit test: whether the document was
acquired “because of” the prospect of litigation.” • Ask: would the document have been prepared in
substantially the same form irrespective of the anticipated litigation?
– District court held documents were prepared “in anticipation of litigation”, applying a “but for” approach:
“If Textron had not anticipated a dispute with the IRS, there would have been no reason for it to establish any reserve or to prepare the workpapers used to calculate the reserve.”
– So the holding is that, by definition, all of the tax reserve workpapers for all issues must be “in anticipation”
2008 OFII Tax Conference 13 La Quinta, CA
District Court’s Holding (cont.)
• Moreover, court held disclosure to E&Y did not give rise to waiver of work product privilege– E&Y itself was not an “adversary,” despite its public watch dog
role– Nor did the disclosure to E&Y increase likelihood that a true
adversary would subsequently obtain the documents• E&Y had given assurances of confidentiality• E&Y was under professional obligations to keep confidential
2008 OFII Tax Conference 14 La Quinta, CA
Practical Implications
• The district court’s opinion is a great victory for taxpayers• But be cautious…
2008 OFII Tax Conference 15 La Quinta, CA
Practical Implications (cont.)
• It is, after all, a district court opinion • IRS has appealed to Court of Appeals for the First Circuit• Current status of appeal:
– Government opening brief (January 2008)– Textron opening brief (March 2008)– Amicus briefs supporting Textron (April 2008)– Government reply brief (due May 5)
2008 OFII Tax Conference 16 La Quinta, CA
Practical Implications (cont.)
• Attorney-Client and 7525 arguments are very difficult once disclosure to auditor is made– Textron has not even pursued these arguments in its brief– This is true even if auditor does not keep copies
2008 OFII Tax Conference 17 La Quinta, CA
Practical Implications (cont.)
• The work product holding was based on the First Circuit’s friendly “because of” test
• In a Circuit that follows the less-friendly “primary purpose” test, Textron likely loses– The primary reason to create TAW is to compute and support
tax reserve, not to assist in litigation
2008 OFII Tax Conference 18 La Quinta, CA
Practical Implications (cont.)• This is the first opinion to extend work product protection to any TAW,
much less to all of them as a blanket matter
– Government’s brief:
• There is no work product protection for documents that are prepared in the ordinary course of business or that would have been prepared in the same form irrespective of litigation
– Textron’s brief:
• The workpapers were prepared “because of” the potential dispute with the IRS
• If there had been no anticipation of litigation, there would be no reserve
• The fact that TAW were also used for some secondary business purpose (financial statement audit) does not forfeit protection
2008 OFII Tax Conference 19 La Quinta, CA
Practical Implications (cont.)
• The district court’s holding that Textron anticipated litigation rests on factual determinations– Is it credible to anticipate litigation on each and every item in
your reserve schedule?• Is it true that, just because a taxpayer identifies a tax issue
and reserves accordingly, it “anticipates litigation”?– More traditional facts supporting Textron’s claim:
• 7 of 8 cycles went to Appeals• 3 went to litigation• 9 listed transactions• 500 IDRs
– Are there other consequences of anticipating litigation?
2008 OFII Tax Conference 20 La Quinta, CA
Practical Implications (cont.)
• The district court’s holding that there was no waiver rests on factual and legal determinations– Facts:
• E&Y had agreed to keep materials confidential• E&Y was bound by professional obligations of confidentiality
– Legal:• Federal district courts are divided on the issue of whether
auditor is an “adversary”• No appellate court has faced this issue
2008 OFII Tax Conference 21 La Quinta, CA
Practical Implications (cont.)
• The decision does not protect information prepared by outside auditors
– Government’s brief points out that its summons also sought workpapers in possession of E&Y
• Government wants to make this argument because in Arthur Young, the Supreme Court held tax accrual workpapers created by audit firm were not protected as work product
– Textron’s brief:
• E&Y workpapers (if any) are irrelevant; we do not control them
• IRS really wants the ones prepared by Textron’s attorneys, which E&Y does not possess
• Too late to make that argument
2008 OFII Tax Conference 22 La Quinta, CA
Questions
Income Tax Accounting Update: The Emergence
of IFRS
2008 OFII Tax Conference 24 La Quinta, CA
IFRS Overview – A Global Revolution
Countries converging to IFRS with the goal of adoption
Countries that require or permit IFRS
Countries with no current plan to adopt
Source: Economist Intelligence Unit
More than 100 countries require, permit or are converging to IFRS
Top 10 Global Capital Markets
Country Standard ($ in trillions)
US US GAAP 17.0
Japan Converging to IFRS
4.7
UK IFRS 3.1
France IFRS 1.7
Canada Converging to IFRS
1.5
Germany IFRS 1.2
Hong Kong IFRS 1.0
Spain IFRS 1.0
Switzerland IFRS or US 0.9
Australia IFRS 0.8
2008 OFII Tax Conference 25 La Quinta, CA
Reasonable timeline for the US transition to IFRS
2008 2010
2009
2012 2014
2007 2011 2013 2015
March 2007 SEC roundtable on US GAAP reconciliation for IFRS filers
July 2007 SEC proposal eliminating US GAAP reconciliation for IFRS filers
August 2007 SEC concept release on use of IFRS for US companies
November 2007Reconciliation eliminated
Between January 2009 and 2010Potential voluntary application of IFRS permitted for US companies
Between January 2013 and 2015Potential mandatory application of IFRS by US companies
2008 OFII Tax Conference 26 La Quinta, CA
Convergence
2008 OFII Tax Conference 27 La Quinta, CA
Income Taxes Key Differences and Short Term Convergence
IFRS US GAAP
Tax base Dependent on expected manner of recovery or settlement of asset or liability- Use, sale, use and sale.
No definition of tax base
Tentative Convergence outcome:
The Board’s decided on a common definition of a tax base IASB to eliminate requirement that management intent on recovery can affect tax base
IASB decided to clearly establish that the tax base of an asset is determined by the amount deductible by the entity if it sold or otherwise disposed on the asset for its carrying amount at the balance sheet date.
2008 OFII Tax Conference 28 La Quinta, CA
Income Taxes Key Differences and Short Term Convergence
IFRS US GAAPInitial Recognition Exemption
Prohibits recognition of a deferred tax asset/liability for temporary differences that arise from the initial recognition of asset /liability in a transaction that:
–Is not a business combination–At the time of the transaction affects neither accounting nor taxable profit.
IAS 12 states explicitly that an entity does not subsequently recognize changes in this unrecognized deferred tax asset or liability.
Does not provide this exception.
Tentative convergence outcome:
The IASB eliminated this exception.The IASB eliminated this exception.
Fair value of such assets and liabilities should be measured on initial recognition using the same assumptions about the tax base that would be made by other market participants
2008 OFII Tax Conference 29 La Quinta, CA
Income Taxes Key Differences and Short Term Convergence
IFRS US GAAPAcquisition of assets with a tax basis not equal to book basis
IAS 12 currently prohibits the recognition of deferred tax on initial recognition of an asset in a transaction that is not a business combination and does not affect accounting or taxable profit.
No initial recognition exemption;
Uses EITF 98-11
Tentative convergence outcome:
The IASB decided to eliminate the initial recognition exception.
The FASB decided to eliminate EITF 98-11The Boards decided to move to a FV purchase discount model. It was concluded that the deferred tax asset or liability should be recognised as the difference between the fair value of the asset and its tax base multiplied by the tax rate. Any difference between the consideration paid and the sum of the fair value of the asset and the recognised deferred tax amount is recognised as a purchase discount allowance on the deferred tax.
2008 OFII Tax Conference 30 La Quinta, CA
Income Taxes Key Differences and Short Term Convergence
IFRS US GAAPTax rate Enacted or substantively
enactedEnacted
Tentative convergence outcome:
For operations within US taxing jurisdictions: to retain the current approach in FAS 109.
For operations beyond US taxing jurisdictions: to require an approach that is consistent with IFRS.
2008 OFII Tax Conference 31 La Quinta, CA
Income Taxes Key Differences and Short Term Convergence
IFRS US GAAPInvestments in subsidiaries, treatment of undistributed profit
Deferred tax liability is recognised except when the parent is able to control and it is probable that the temporary difference will not reverse
Deferred tax liability is required on temporary differences arising after 1992 that relate to investments in domestic subsidiaries, unless such amounts can be recovered tax-free and the entity expects to use that method. No deferred taxes are recognised on undistributed profits of foreign subsidiaries that meet the indefinite reversal criterion.
Tentative convergence outcome:
The IASB tentatively decided to adopt the current FAS109 approach including the APB23 exception.
2008 OFII Tax Conference 32 La Quinta, CA
Income Taxes Key Differences and Short Term Convergence
IFRS US GAAPIntercompany Transfers of Assets
Contains no exception
Intercompany transfer of assets between jurisdictions is a taxable event and establishes a new tax base for those assets.
Taxes must be paid by the seller on intercompany profits.
Prohibits the establishment of a deferred tax asset for basis differences.
Tentative convergence outcome:
FASB will amend FAS109 to eliminate this exception.
2008 OFII Tax Conference 33 La Quinta, CA
Income Taxes Key Differences and Short Term Convergence
IFRS US GAAP
Foreign Non-monetary Assets and Liabilities
IAS 12 contains no exception.
Prohibits recognition of a deferred tax asset or liability for differences related to assets and liabilities that, are remeasured from the local currency into the functional currency using historical exchange rates and that result from (i) changes in exchange rates or (ii) indexing for tax purposes.
Tentative convergence outcome:
The FASB decided to amend SFAS 109 Para 9f to eliminate this exception
2008 OFII Tax Conference 34 La Quinta, CA
Income Taxes Key Differences and Short Term Convergence
IFRS US GAAP
Distributed or undistributed rate
In measuring deferred tax assets and liabilities, IAS 12 requires use of the tax rate applicable to undistributed profits.
US GAAP requires the use of the tax rate applicable to distributed profits if the tax rate applicable to distributed profits is higher than the tax rate applicable to undistributed profits.
Tentative convergence outcome:
The IASB decided that in jurisdictions that have a different tax rate depending on whether taxable earnings are distributed to owners, an entity should use the rate(s) that it expects will apply to the item being measured, incorporating the entity’s past practices and future expectations of distributions. When determining future expectations of distributions, the entity must have the intention and ability to make distributions for the foreseeable future.
The FASB is still to consider this proposal.
2008 OFII Tax Conference 35 La Quinta, CA
Income Taxes Key Differences and Short Term Convergence
IFRS US GAAPUncertain Tax Positions - Guidance
•IAS 12 is silent on the issue of uncertainty in the amounts underlying current and deferred tax.
•Recognize tax benefit when it is more likely than not to be sustained, measured as the largest amount of benefit that is greater than 50% likely of being realized.
Uncertain Tax Positions - Recognition
•Unit of account is individual tax position, OR •The aggregate positions with a taxing authority for a taxable entity.
•Unit of account is the individual tax position.
Uncertain Tax Positions - Measurement
•Probability weighted average approach, OR•Single best estimate/most likely outcome
•Cumulative probability methodology
Tentative convergence outcome: To be announced
2008 OFII Tax Conference 36 La Quinta, CA
Income Taxes Key Differences and Short Term Convergence
IFRS US GAAPBalance Sheet Disclosure General guidance presented in IAS 12.5
focused upon income taxes including all foreign and domestic taxes based on taxable profits.
FIN 48 liability must be presented separately from other income tax liabilities.
Classification on Financial Statements
Must be presented as a component of current tax liability unless entity has an unconditional right to defer payment for more than 12 months.
Liabilities are classified as non-current unless a cash payment is expected within the next 12 months.
Classification of Interest and Penalties
When interest and penalties can be identified and separated from related tax liability, they must not be classified as tax expense in the income statement. They must be classified as finance costs or other operating expenses.
Accounting policy election that permits “above” or “below” the line treatment.
Disclosure of Reserves Not applicable Substantial interim and annual qualitative and quantitative requirements.
Tentative convergence outcome: To be announced
2008 OFII Tax Conference 37 La Quinta, CA
Income Taxes Key Differences and Short Term Convergence
IFRS US GAAP
Subsequent changes in deferred taxes related to items initially recorded directly in equity
Subsequent changes are recognized directly in equity. (i.e. full backward tracing with limited exclusions)
Subsequent changes are recognized in income, with limited exceptions.
Tentative convergence outcome:
The IASB decided to amend IAS 12 to adopt the intraperiod allocation requirements of SFAS 109. Subsequent changes in deferred taxes related to items initially recorded directly in equity may under the intraperiod allocation rules be recognized in other Income Statement categories e.g. continuing operations, discontinued operations or equity.
Current areas of divergence in the area of income taxes
2008 OFII Tax Conference 38 La Quinta, CA
Income Taxes Key Differences and Short Term Convergence
IFRS US GAAPDifference between book basis goodwill and deductible tax basis goodwill
IFRS does not allow for a DTL to be recorded on a day one difference between book basis goodwill and deductible tax goodwill. A DTA may however be recognized where tax exceeds book.
No deferred taxes are recognized for an excess of tax basis goodwill over book basis goodwill.
Tentative convergence outcome:
As part of the business combinations convergence project, it has been agreed that where there is tax goodwill in excess of book goodwill on acquisition, deferred taxes will be provided on the excess tax depreciation using a simultaneous equation methodology i.e. record the deferred tax asset.
2008 OFII Tax Conference 39 La Quinta, CA
Income Taxes Key Differences and Short Term Convergence
IFRS US GAAPBusiness Combinations Measurement of non-controlling
interests using fair value or the proportionate share of the acquiree’s identifiable assets
Measurement of non-controlling interests using fair value
Tentative convergence outcome:•Changes inside the measurement period will impact goodwill, then earnings – no reduction to intangibles•Changes outside the measurement period will impact earnings, not goodwill.•Changes to valuation allowance will be recorded in income.•Record deferred tax assets on excess tax-deductible goodwill•Transaction costs are expensed as incurred.
2008 OFII Tax Conference 40 La Quinta, CA
Income Taxes Key Differences and Short Term Convergence
IFRS US GAAPFinancial Statement disclosure differences
•The effect of changes in tax rates or laws substantively enacted after the balance sheet date
•Not required
•No specific disclosures relating to intercompany transfers of inventory
•No specific disclosures relating to intercompany transfers of inventory
•Reconciliation between tax expense and pre-tax accounting profit using aggregation of separate reconciliations using individual jurisdiction tax rates.
•Reconciliation between tax expense and pre-tax accounting profit using statutory tax rate
Tentative convergence outcome:
•Disclosure of the effect of changes in tax rates after the balance sheet date is not required.
•Disclose the component of deferred tax assets and liabilities representing the effect of intercompany transfers of assets between taxing jurisdictions with different effective tax rates.
•The IASB will amend IAS 12 to require the use of the statutory rate applicable to the parent company.
2008 OFII Tax Conference 41 La Quinta, CA
Key Differences Between IFRS and US GAAP
2008 OFII Tax Conference 42 La Quinta, CA
Differences Between IFRS and US GAAP – Hot Topics
• Revenue Recognition
• Inventory Reporting
• Business Combinations
• Components of Financial Statements
• Taxes
2008 OFII Tax Conference 43 La Quinta, CA
Inventory Reporting
IFRS US GAAPCosting Methods LIFO is prohibited. LIFO is an acceptable
method.
Measurement Inventory is carried at the lower of cost or net realizable value.
Inventory is carried at the lower of cost or market.
Reversal of Inventory Write Downs
Previously recognized impairment losses are reversed, up to the amount of the original loss.
Any write downs of inventory cannot be reversed.
2008 OFII Tax Conference 44 La Quinta, CA
Accounting for Income Taxes
IFRS Conversion Focuses on:
• Effective tax rate • Cash tax• International taxation• State taxation• Processes and controls
2008 OFII Tax Conference 45 La Quinta, CA
Tax Considerations of IFRS
• Effective tax rate considerations– Differences in pre tax income under IFRS– Income tax uncertainties
• Cash tax considerations– LIFO– Tax accounting methods
• Other considerations– Transfer pricing documentation– Share based payments and other compensation
matters
2008 OFII Tax Conference 46 La Quinta, CA
Tax Considerations of IFRS
• State and Local Taxation• Systems, Processes, and Controls• International Tax Considerations
– Tax Planning– Measurement Concepts– Financial Statement Impact
<Datum> <footer>2008 OFII Tax Conference 47 La Quinta, CA
Questions and Answers