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

Euromoney Institutional Investor PLC – Annual report – 30 September 2018

Industry: financial services

2 Key judgemental areas adopted in preparing these Financial Statements (extract)

Judgements (extract)

Taxation

EU Commission investigation into state aid

In October 2017, the European Commission opened a state aid investigation into the Group Financing Exemption in the UK controlled foreign company rules. The Group Financing Exemption was introduced in legislation by the UK government in 2013. In common with other UK-based international companies whose arrangements are in line with current UK CFC legislation, the Group may be affected by the outcome of this investigation and is monitoring developments. If the preliminary findings of the European Commission’s investigation are upheld, the estimated maximum potential liability is approximately £8m. Based on the current assessment, no provision is being made in respect of this issue as it is not probable that the Group will suffer an outflow of funds.

Estimates (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 especially where tax law has changed in the year, for example, the Tax Cuts and Jobs Act enacted in the US. 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 2018 of £1.9m (2017: £1.9m) 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 2018 of £11.0m (2017: £8.3m). 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 different tax outcomes; and whether tax deductions taken for costs arising within the Group’s treasury function are permissible.

The Group has previously disclosed a potential exposure relating to an HMRC enquiry, which has a maximum exposure of £10.7m of which £2.8m had been provided in prior periods. Following receipt of a closure notice from HMRC on 21 September 2018 confirming that the tax being pursued is £10.7m, the associated provision has been increased for accounting purposes to £10.7m at 30 September 2018. A notice of appeal was filed with HMRC on 16 October 2018. The charge for this additional provision relating to prior periods has been excluded from adjusted tax.

The maximum potential additional exposure for the Group in relation to challenges by tax authorities not provided for is approximately £20m which is for the challenge by the Canadian Revenue Agency (CRA) and the Quebec Tax Authorities (Revenu Quebec) on a foreign currency trade in 2009.

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. Based on external legal advice, management is confident that BCA will be able to overturn these reassessments through the normal litigation process, which has already begun. The Company filed a notice of objection with the CRA in November 2017 and a notice of appeal with the Tax Court of Canada in March 2018 to which the Tax Court of Canada replied in June 2018. BCA has provided satisfactory security for payment to the CRA for 50% of the tax being contested of £3.5m. Revenu Quebec issued a Notice of Reassessment to BCA in December 2017 based on the CRA view that the loss sustained by BCA cannot be deducted in computing income. In July 2018, BCA provided security to Revenu Quebec for 50% of the tax owing amounting to £3.2m. 

Indirect tax

The Group reviews and assesses other indirect tax exposures across the Group and a £4.6m provision is the Group’s best estimate of the most probable outflow relating to these exposures.

 

 

 

 

 

 

 

 

 

 

 

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