The Effect of FIN 48 "Accounting for Uncertainty in Income Taxes" on Companies in Taiwan

Corporate group enterprises have often been aggressive in their use of taxation-oriented transaction structures to lower, defer or avoid taxes and reduce their group-wide tax burdens. These potential tax burdens have uncertain effects on financial statement disclosures. However, in the past, the definitions and scope of the accounting standards were not always clear, and this frequently led to inconsistencies in how corporate financial statements expressed disclosures. To address this problem, the U.S. Financial Accounting Standards Board (FASB) formally issued FASB Interpretation 48 (FIN 48) on "Accounting for Uncertainty in Income Taxes". This article will introduce the principal content of FIN 48 and discuss to whom it applies how it may affect them.

Applicability and Effective Dates

FIN 48, which supplements FAS 109, details the accounting treatment of income tax under conditions of uncertainty. In particular, it prescribes the financial statement recognition threshold and measurement of the income tax positions an enterprise takes, or expects to take, in its income tax return, as well as regular evaluations for interim period financial statements, disclosure and other matters. Entities subject to the interpretation's rules include corporations and non-profit organizations that have adopted U.S. financial accounting standards in preparing their financial statements.
As far as companies in Taiwan are concerned, the first to feel the impact will be those that have issued American depositary receipts and need to prepare consolidated financial statements in accordance with U.S. financial accounting standards, along with any worldwide subsidiaries that are among the entities included in preparing the consolidated statements. Subsidiaries or branch companies in Taiwan with U.S. parent corporations must also do as the latter will indicate and perform assessments of income tax positions under uncertain conditions.

Implementation is effective for any financial statement after the start of the accounting year beginning December 15 2006. Therefore, many companies will have to perform evaluations in conformity with FIN 48 for their first quarter 2007 financial statements. Also, in their 2006 annual financial statements, they must make appropriate disclosure of the impact that adopting the new standards is expected to have on their financial statements.

Scope

The definition of tax position as used in FIN 48 refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. A tax position can result in a permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable to future years, or a change in the expected realizability of deferred tax assets. Circumstances giving rise to tax position uncertainty encompass, but are not limited to, the following:

• A decision not to file a tax return;
• An allocation or a shift of income between jurisdictions;
• The characterization of income or a decision to exclude reporting taxable income in a tax return;
• A decision to classify a transaction, entity, or other position in a tax return as tax exempt.

• Uncertain tax position recognition, evaluation and measurement, the probability of occurring and the amount of tax benefit:
  When enterprises face uncertain tax positions, they must first determine the appropriate unit of account, based on administrative practices or precedents, and estimate the probability of different outcomes for tax positions already taken. For those whose probabilities are over 50% ("more-likely-than-not", in the language of the interpretation) and are thereby judged to have passed the recognition threshold, the tax position must be measured to determine the largest amount of tax benefit that could result from an adjustment that might be needed upon examination by the tax authorities. In addition, FIN 48 requires that a combined assessment be made of any interest and fines that may come as a result of such an examination.

• Continuous evaluation and disclosure in annual and interim period financial statements:
  As for the amount of tax benefit mentioned above, FIN 48 requires companies to disclose in each period's financial statements the beginning and end-of-period cumulative effect, as well as changes in the current period. They must also disclose in the financial statements any change in judgment that leads to a discrepancy in tax positions between earlier and later periods (due to recognition, derecognition or change in measurement).