US risk aware

Accountants say they want certainty in their lives, but those involved in tax seem to spend most of their lives creating uncertainty for all who depend upon it. They do this by using tax strategies which are of uncertain legality.

Of course, they call it tax planning but the inevitable consequence of their actions is that they will fall foul of the tax authorities on occasion.

The US Federal Accounting Standards Board has noticed this. Each company subject to US GAAP is now required to assess all the claims it has made to a tax authority and to then assess the likelihood that they will be agreed based on its past record, opinion received and the state of negotiation. If it can’t be more than 50% sure of getting the claimed benefit it has to provide for it in its accounts.

As importantly it has to disclose three things. The first is the value of tax claims it is making which it recognises might be a ‘try on’. Second it has to provide for reasonable interest and penalties due on these sums. Third it has to say when it was last subject to tax audit, so indicating the period of exposure.

This is incredibly important for investors and tax authorities worldwide. If tax liabilities or the resulting cash flows are being mis-stated because of claims for benefits to which they are unsure they are entitled, then shareholders must know if they are able to calculate the impact on the future cash flows of the company. Companies with a poor record of tax claims should now be downgraded by the market.

Tax authorities will be able to see which companies are, by their own admission, undertaking unreasonable tax avoidance. That means that those companies should be targeted and the innocent will, hopefully, be subject to a lighter touch.

But most of all this approach is important for what it requires of companies. The first requirement is that they bring tax management into the open. The second is that companies must now assume that full disclosure is the norm. To date it has being quite possible for one transaction to be presented in different ways to different tax authorities. It is clear that FASB thinks this unacceptable.

The result can only be good for investors and tax authorities. No doubt that’s why almost every letter on the draft raised an objection to the proposed approach.

Thankfully this is a case where the standard setters have acted in the best interests of society.

Richard Murphy is a Director of Tax Research LLP