Significant judgements and estimates in respect of uncertain tax positions, IAS 1 paras 122,125

Euromoney Institutional Investor PLC – Annual report – 30 September 2017

Industry: financial services

2 Key judgemental areas adopted in preparing these financial statements (extract)

Taxation

The Group’s tax expense on profit is the sum of the total current and deferred tax expense. The calculation of the total tax charge necessarily involves a degree of estimation and judgement in respect of certain items whose tax treatment cannot be finally determined until resolution has been reached with the relevant tax authority or, as appropriate, through a formal legal process. The final resolution of some of these items may give rise to material profit and loss and/or cash flow variances.

The Group is a multinational with tax affairs in many geographical locations. This inherently leads to complexity in the Group’s tax structure and makes the degree of estimation and judgement challenging. The resolution of issues is not always within the control of the Group and it is often dependent on the efficiency of the legislative processes in the relevant taxing jurisdictions in which the Group operates. Issues can, and often do, take many years to resolve. Payments in respect of tax liabilities for an accounting period include payments on account and depend on the final resolution of open items. As a result, there can be substantial differences between the tax expense in the Income Statement and tax payments.

The Group has significant open items in several tax jurisdictions and as a result the amounts recognised in the Group financial statements in respect of these items are derived from the Group’s best estimation and judgement. However, the inherent uncertainty regarding the outcome of these items means eventual resolution could differ from the accounting estimates and therefore affect the Group’s results and cash flows.

The Group considers each uncertain tax matter on the technical merits of the case in law, taking into account all relevant evidence, including the known attitude of tax authorities in making an assessment of the likelihood a matter will crystallise. The uncertain tax provisions are calculated by determining the single most likely cash flow for each issue rather than by applying a probability threshold and this methodology has been applied consistently year-on-year.

Direct tax

There are two main areas of direct tax risk within the Group as follows:

  • Permanent establishment risk: the Group operates in multiple jurisdictions and has internationally mobile employees. There is a risk that operating activities could inadvertently create a taxable presence in countries where the Group does not have an entity. The Group proactively manages this risk and has a transfer pricing policy in place for intercompany transactions. It held an uncertain tax provision at 30 September 2017 of £1.9m (2016: £2.6m) in respect of this risk.
  • Challenges by tax authorities: where arrangements that have been adopted on the basis of professional advice are challenged by tax authorities and there is an expectation that there is more likely than not to be a cash outflow, this risk is provided for. The Group held a provision in respect of this risk at 30 September 2017 of £8.3m (2016: £9.9m). The Group had been challenged on: whether certain business disposals should give rise to capital gains; a number of internal financing arrangements between different jurisdictions that give rise to asymmetrical tax outcomes; and whether tax deductions taken for costs arising within the Group’s treasury function are permissible.

The maximum potential additional exposure for the Group in relation to challenges by tax authorities not provided for is approximately £28m if all cases were to be settled at the maximum potential liability. These additional exposures include challenges by: the Canadian Revenue Agency (‘CRA’) on a foreign currency trade in 2009, which has a maximum exposure of £20m; and the UK’s HMRC on a share-for-share exchange related to the Group’s investment in Dealogic, which has a maximum exposure of £11m of which £2.8m has been provided. On 23 October 2017, the CRA issued a Notice of Reassessment to BCA Research Inc (‘BCA’) based on the CRA view that the loss sustained by BCA on an intra-group derivative transaction cannot be deducted in computing income. Management is confident that BCA will be able to overturn these reassessments through the normal litigation process, which has already begun. Nonetheless, BCA is obligated either to pay one-half of the consequential tax owing amounting to £3.5m or to provide security for payment satisfactory to the CRA.

Indirect tax

In 2016, an incremental provision of £7.9m in relation to open indirect tax items (including interest) was recognised as an exceptional item increasing the Group’s provision for this exposure, including interest, to £9.5m. This represented the maximum estimated liability in relation to a potential overseas sales tax exposure based on an adverse tax ruling. In 2017, £3.9m of this provision was released to exceptional items (note 5) following settlement of £4.0m leaving a provision of £1.6m to cover open audit periods. In addition, the Group reviews and assesses other indirect tax exposures across the Group and a £4.4m provision is the Group’s best estimate of the most probable outflow relating to these exposures.

 

 

 

 

 

 

 

 

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