FIN 48 Applicability to Inbound Companies.ppt

1、1,FIN 48 Applicability to Inbound Companies,2,Michael Burak PricewaterhouseCoopers Nathaniel Carden 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 situ

2、ation 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.,3,Agenda,Fin 48 Overview SAB 74 & 10-Q Trends Inbound v. Outbound Disclosure Requirements Key Implementation

3、 Considerations,4,Transparency developments,IRS Developments Reportable transaction regulations Policy with respect to “tax accrual” work papers (Announcement 2002-63) Schedule M-3 SEC Developments December 2003 MD&A guidance Reportable transactions regulations SEC Chief Accountant statement in 2004

4、 SEC comment letters,5,FIN 48 Scope and Summary,Applies to domestic and foreign SEC registrants Covers all tax positions accounted for in accordance with FAS 109 Effective for annual periods beginning after December 15, 2006 Income tax uncertainties Change in net assets considered as change in accou

5、nting principle SAB 74 disclosure,6,Potential Tax Positions/Unit of Account,Federal tax examples: Character of Income Income Recognition Accounting Methods IRC Sec.199 R&E Tax Credits Merger & Acquisition Transactions Purchase Price Allocations (Valuation) Hedging & Other Treasury Transactions Trans

6、action Cost Analyses Executive compensation/Stock options FSC/ETI IRC Sec. 382,7,Potential Tax Positions/Unit of Account,International Tax (US and Non-US) examples: Permanent Establishment Transfer Pricing Withholding Tax Debt/equity Determination Treaty Positions Hedging and Foreign Currency Anti-d

7、eferral Regimes (i.e., US Subpart F) Foreign Tax Credits IP Migration Cross Border Financing Specific Jurisdictional Issues Tax Holidays Cash Repatriation,8,Tax Positions/Unit of Account,State Tax examples:,Nexus P.L. 86-272 Economic Nexus Agency Nexus Unitary/Combined Filing Groups Apportionment Fi

8、ling Positions Gross vs. Net Receipts Intercompany Sales/Eliminations Cost of Performance Joyce vs Finnegan Taxable Income State Addbacks and Exceptions State Depreciation Adjustments State Dividend Received Deductions Business/Non-Business Income Transfer Pricing,Affiliated Entities Intangible Hold

9、ing Companies Factoring Companies Finance Companies Captive Insurance Companies Sales Companies Procurement Companies REIT/RIC Check-the-box entities Tax Attributes Net Operating Losses Credits Impact of Federal & International Tax Positions,9,Two-Step Process,Recognition: A tax benefit from a UTP m

10、ay only be recognized if it is “more likely than not” that the position is sustainable based solely on its technical merits (i.e., excluding detection risk) and any relevant administrative practices. All positions should be evaluated, even if not yet filed. Measurement: The tax benefit of a qualifyi

11、ng position is the greatest amount of benefit that is cumulatively 50% likely of being realized. Subsequent recognition and measurement: The assessment of the recognition threshold and the measurement of the associated tax benefit are subject to change based on new information. Unrecognized tax bene

12、fits should be recognized (derecognized) in the period the position reaches (falls below) the recognition threshold, which may occur prior to final resolution of the matter.,10,Key Concepts & Issues,Netting Interest & Penalties Indemnifications Refund claims Timing items Valuations allowances & NOLs

13、 Business combinations Subsequent events,11,Audit issues Multiple Adjustment Theories,U.S. subsidiary responsible for U.S. portion of multinational business Foreign parent provides periodic services to affiliates, including U.S. subsidiary. Files 1120F asserting no U.S. business income Prior audit e

14、xperience IRS focused on transfer price paid to FP and deducted by U.S. Sub No attention to FPs return or income,U.S. Sub (U.S. taxpayer),Foreign Parent (Protective 1120F Filer),12,Audit issues Multiple Adjustment Theories,Analysis of U.S. Subs Deduction Sections 162/482 Focus on Functions performed

15、 for U.S. Sub Benchmarks used for prices or markups U.S. Sub deduction turns on Demonstration of benefit Appropriateness of price paid to FP,Analysis of FPs Income Treaty (if applicable) and U.S. ECI rules Focus on Existence of Permanent Establishment U.S. Trade or Business FP income turns on Attrib

16、ution of income to PE U.S. ECI rules,13,Audit issues Multiple Adjustment Theories,Tax Position FIN 48 defines “tax position” as “a position in a previously filed tax return or a position expected to be taken in a future return” Also includes “characterization of income or a decision to exclude repor

17、ting taxable income” Are these two tax positions? Two separate returns Related facts, but distinct legal theories,14,Audit issues Multiple Adjustment Theories,Recognition Requires more likely than not conclusion on each tax position Less significant for U.S. Sub Does arms length standard govern? Is

18、cost-based charging permissible? More complex for FP FIN 48 states that “each tax position must be evaluated without consideration of the possibility of offset or aggregation with other positions Unclear what happens to US transfer pricing position if you cannot reach more likely than not for FP,15,

19、Audit issues Multiple Adjustment Theories,Measurement Similar analysis for US Sub and FPwhat is the amount of U.S. tax benefit greater than 50 percent likely of being realized? Logically, measurement prong is where interaction between two tax positions should occur Disallowing deductions and taxing

20、income simultaneously is facially inconsistent Analogous to multijurisdiction/competent authority analysis Prior audit experienceincluding, presumably, treatment of issue as 482 issue for U.S. submay be taken into account,16,Audit issues Multiple Adjustment Theories,Other Wrinkles Statute of Limitat

21、ions May be different for FP ECI v. FDAP income SettlementWhat is the effect of resolution on 482 grounds with U.S. Sub? Closing agreement should cover all theories Could also factor into measurement prong,17,FIN 48 and Transfer Pricing Studies,Language in existing studies varies More likely than no

22、t that pricing is correct Proper application of Section 6662 regulations, which require reasonable application of Section 482 regulations Many transfer pricing studies will likely suffice because of the underlying analysis and other materials supporting management judgment, regardless of language,18

23、,Recognition and Measurement Technical Update,Proposed FSP FIN 48-a The proposed FSP eliminates the term ultimate settlement from FIN 48 and replaces it with the term effectively settled. The following three conditions must be met in order for an entity to conclude that a tax position is effectively

24、 settled: a) The taxing authority has completed its examination procedures including all appeals and administrative reviews that the taxing authority is required or expected to perform for the tax position. b) The enterprise does not intend to appeal or litigate any aspect of the tax position for th

25、e completed examination. c) Based on the taxing authoritys widely understood policy, the enterprise considers it highly unlikely that the taxing authority would subsequently examine or reexamine any aspect of the tax position included in the completed examination, presuming the taxing authority has

26、full knowledge of all relevant information.,19,Form 20-F: Item 17 v. 18Filing Requirements,Item 17 requirements Quantification of material differences between local GAAP to US GAAP Reconciliation of shareholders equity Material differences must be explained Item 18 requirements Reconciliation of loc

27、al GAAP to US GAAP Reconciliation of shareholders equity All US GAAP and Regulation S-X disclosures required,20,Disclosure Interim Periods for Outbound Organizations,21,Disclosure Year-end for Inbound Companies,22,Disclosure Implications of FIN 48,Recognition/derecognition and disclosures required b

28、y FIN 48 May provide “roadmap” to audit team May indicate when a team has missed an issue LMSB agents currently receiving FIN 48 training May increase the significance of Item 17 v. Item 18 filings,23,Potential Privilege Implications of FIN 48,Auditors increasingly requesting disclosure of opinions

29、and other tax advice Companies may create additional documentation and analyses specifically to support the FIN 48 position Disclosure of attorney/tax advisor advice Likely results in waiver of attorney-client privilege Cases are mixed on whether disclosure also results in waiver of work product pro

30、tections,24,Audit and Privilege Implications of FIN 48,Recognition/derecognition and disclosures required by FIN 48 may provide “roadmap” to audit team, or may at least indicate when a team has missed an issue LMSB agents currently receiving FIN 48 training IRS Policy of Restraint currently limits r

31、equests for accrual workpapers, including FIN 48 materials Traditionally, IRS has not sought tax accrual workpapers except where taxpayers have engaged in listed transactions December 2006-policy of restraint confirmed in light of FIN 48 February 2007-LMSB Commissioner Nolan indicates that IRS is re

32、viewing the policy generally Even if audit teams dont request workpapers, if an issue is litigated, the workpapers, including FIN 48 materials, will likely be requested,25,2006 Form 10-K SAB 74,Still assessing 23% Still assessing, do not expect adoption to be material 10% Do not expect adoption to b

33、e material 44% Quantified amount/range of expected adoption adjustment 23%,26,Implementation Challenges,Time Workplan Resources Documentation requirements US vs. rest of the world Differing auditor standards & approaches,27,FIN 48 Workplan example,Internal communication and education Formulation of implementation plan Identification of all significant uncertain tax positions Modify/develop accounting policies and processes affected by FIN 48 Assess and develop supporting documentation for uncertain tax