PwC Podcast

Welcome to this PricewaterhouseCoopers podcast. I’m Andrew Wiggins a director in the UK tax practice and with me today Jeremy Curd and Andrew Bancroft who are tax specialists whose in-depth knowledge of FIN 48 and tax accounting. We will be talking today about some of the challenges faced by our US colleagues who are already applying FIN 48 and looking at how UK companies can learn from their experience.

Firstly to Jeremy:

What do you think has been the most challenging issues surrounding transfer pricing for our US colleagues?

One of the most commonly asked questions coming up in practice is whether transfer pricing report companies are preparing to support their tax returns is sufficient to conclude that no reserve is required for FIN48 purposes. As we know, transfer pricing documentation that companies are preparing seeks to address the inter-company transfer pricing arrangements being on an arms length basis. This often requires consideration of a range of possible outcomes. These then demonstrate that the companies have made a reasonable attempt to tax authorities to be on an arms length basis and therefore provide penalty protection on their tax findings. Whereas the FIN 48 documentation requires companies to assess how these positions are going to be resolved through tax audits. Which I think is a slightly different spin on the fact of having to arrange a possible outcome. Therefore the challenge for companies will be to ensure that there is a consistency between the transfer pricing documentation they’re preparing for their tax return and the 48 evaluations where they determine where they expect these issues to be resolved.

Does that mean then that companies are going to need different types of documentation from their advisors in relation to transfer pricing reports going forward, one for FIN 48 purposes and one for penalty protection purposes.

What has come across in the US is that companies are beginning to pass different conclusions on their transfer pricing report to give some kind of indication of the level of comfort being provided. Haven’t seen that outside of the US yet. But as thing develop may be there will be a change in practice again.

OK. One to watch. Andy, can you give us your thoughts on how FIN 48 has been applied in EU case law?

One area that US companies have faced around disclosure is regarding a new case law. This is one of those areas where companies would have filed their tax return but then it wouldn’t pass the more likely than not threshold and it’s quite difficult for these companies to determine when they may pass that threshold, therefore where they might recognise the benefit. A good example of this is the recent CFC case has gone through the EU court where it found in favour of the tax payer, however, there were a enough uncertainties in the ruling and the companies are not taking the benefit for that, they don’t think its passed the more likely than not threshold. This has led to quite some large disclosures of uncertain positions in their accounts.

OK. I think that’s definitely the case, because there are some large EU claims out there I’m aware of. Jeremy, what’s been the Tax Authorities attitude towards FIN 48 so far?

Well, Tax Authorities know that FIN48 exists and I think that all the literature about they are aware that companies got detailed documentation now of what’s in their tax reserves and where their uncertain tax positions are. So obviously any tax inspector would be very interested to get hold of those papers. In the UK, our view is that the Tax Authorities probably don’t have the right access to those papers although come companies will provide them on request because they want to keep a good relationship with the Tax authorities and actually, probably have nothing to hide in their uncertain positions. If you look at the US, the IRS are re-considering their policy of restraint of requesting tax reserve papers, and I think there are a lot of development to go there before their position becomes clear again. An then if you look at around the world then we know the examples of companies who has requested tax reserve papers and given them and then we obviously need to be concerned about how Tax Authorities share that information and can it get back into the UK. So for me the companies are going to have a challenge to prepare their FIN 48 papers to satisfy their external auditors, but at the same time they need to be consistent for their tax filing position and make sure penalty protection is preserved.

Obviously the first instance not providing the answers to the Inland Revenue or other Tax Authorities is the right way forward.

I think that’s the biggest worries for companies at the moment.

Sure. The other big worry for companies is in relation to the level of disclosure they would have to make. Andrew, what’s been the quarter one experience so far and in the US?

There are obviously a number of companies that have now disclosed their quarter one result for 2007, which would include the FIN 48 provisions for the first time. Overall the impact has been quite mixed with some companies increasing their level of provisions and some companies decreasing their level of provisions, although the general trend appears to be that more companies are releasing their provision than not. As expected we are seeing a general increase in or the amount of disclosure made into the account which is expected to be in line with the guidelines of FIN 48. Although probably not up to the level we that we’d expect for the full year accounts just yet.

Thank you Andrew. Thank you Jeremy. And as we can tell from that there are still some technical issues people are still pondering on on FIN 48 on in relation to transfer pricing. What is the worrying companies with regards to Tax Authorities attitudes towards FIN 48. What disclosures we are making so that people are aware of what tax uncertain tax positions are out there. Clearly all the developing areas though we’ll be keeping in touch with what’s happening in the US. You can find more information on FIN 48 on our website pwc.com/uk.