Uncertain tax positions, judgements, disclosures, EU State Aid investigation and other, reconciliation of current tax liabilities

Imperial Brands PLC – Annual report – 30 September 2020

Industry: tobacco

2. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (extract)

Income taxes

Judgement is involved in determining whether the Group is subject to a tax liability or not in line with tax law. Where liabilities exist, estimation is often required to determine the potential future tax payments. The Group is subject to income tax in numerous jurisdictions and significant judgement is required in determining the provision for tax. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Group recognises provisions for tax based on estimates of the taxes that are likely to become due. Where the final tax outcome is different from the amounts that were initially recorded, such differences will impact the current income tax and deferred tax provisions in the period in which such determination is made. Consideration of the judgements surrounding certain tax positions that are applicable to the Group and consideration of the valuation estimates related to tax provisions are given in note 8 to these financial statements.

8. TAX (extract)

Movement on the current tax account

The cash tax paid in the year is £25 million lower than the current tax charge (2019: £1 million higher). This arises as a result of timing differences between the accrual of income taxes and the actual payment of cash and the movement in the provision for uncertain tax positions.

Analysis of current tax account

The Group has reclassified certain current tax assets and liabilities on the balance sheet which were previously stated gross, but which in line with IAS 12 ‘Income Taxes’ shall be stated net where there is a legally enforceable right of offset.

Uncertain tax positions

As an international business the Group is exposed to uncertain tax positions and changes in legislation in the jurisdictions in which it operates. The Group’s uncertain tax positions principally include cross border transfer pricing, interpretation of new or complex tax legislation and tax arising on the valuation of assets.

Provisions arising from uncertain tax positions taken in the calculation of tax assets and liabilities are included within current tax liabilities. At 30 September 2020 the total value of these provisions, including foreign exchange movements, was £273 million (2019: £204 million). The assessment of uncertain tax positions is subjective and significant management judgement is required. This judgement is based on current interpretation of legislation, management experience and professional advice. Until matters are finally concluded it is possible that amounts ultimately paid will be different from the amounts provided.

Management have assessed the Group’s provision for uncertain tax positions and have concluded that apart from the matters referred to below the provisions in place are not material individually or in aggregate, and that a reasonably possible change in the next financial year would not have a material impact to the results of the Group.

French tax litigation

In November 2015 the Group received a challenge from the French tax authorities that could lead to additional tax liabilities of up to £248 million. The challenge concerns the valuation placed on the shares of Altadis Distribution France (now known as Logista France) following an intra-group transfer of shares in October 2012 and the tax consequences flowing from a potentially higher value that is argued for by the tax authorities. In October 2018 the Commission Nationale, an independent adjudication body, whose decision is advisory only, issued a report supportive of the Group’s arguments for no adjustment. In December 2018 the French tax authorities issued their final assessments seeking the full amount of additional tax assessed (£248 million). In January 2019 the Group appealed against the assessment. In August 2020, the French tax authorities rejected the Group’s appeal and the matter will now proceed to litigation. Given there are no substantive developments in the case it is appropriate to maintain the £44 million (2019: £42 million) provision for uncertain tax positions in respect of this matter.

State Aid UK CFC

The Group continues to monitor developments in relation to EU State Aid investigations. On 25 April 2019, the EU Commission’s final decision regarding its investigation into the UK’s Controlled Foreign Company regime was published. It concludes that the legislation up until December 2018 does partially represent State Aid. The UK Government has appealed to the European Court seeking annulment of the EU Commission’s decision. The Group, along with a number of UK corporates, has made a similar application to the European Court. The UK Government is obliged to collect any State Aid granted pending the outcome of the European Court process. Although the Group believes that it has no liability in respect of this issue, under a range of different interpretations of the EU Commission’s decision the Group has previously disclosed that preliminary calculations indicated a range of potential liabilities depending on the basis of calculation of up to £300 million.

In December 2019 HMRC issued guidance on the quantification of any potential State Aid, and subsequently requested the Group, in line with other corporates, submit an assessment of potential State Aid. Whilst the Group’s position remains that no State Aid has been received, based on its submission to HMRC a potential liability of c. £100 million was reported. Based on HMRC accepting our assessment, it is expected they will seek recovery of the £100 million. On the basis the Group

believes no State Aid arises, no provision has been made at this time. If payment is required, based on current advice a receivable in the same amount would be recorded. Interest would be chargeable on any recovery.

Based upon current advice the Group does not consider any provision is required in relation to any other EU State Aid investigation.

Transfer Pricing

The Group has tax audits in progress, relating to transfer pricing matters in a number of jurisdictions, principally UK, France and Germany. The Group estimates the potential gross level of exposure relating to transfer pricing issues is approximately £800 million (2019: £530 million). The Group holds a provision of £207 million (2019: £155 million) in respect of these items.

In August 2020 the Group notified HMRC of a potential Diverted Profits Tax (DPT) issue relating to brand rewards. On 25 September 2020, HMRC issued a preliminary notice under the DPT regime in respect of the year ended 30 September 2016 indicating a potential liability of c. £6 million. Collaborative discussions on the issue continue and it is the Group’s belief the issue is a transfer pricing one, and will be resolved as such. If the transfer pricing discussions are not concluded by end of December 2020, HMRC will issue a final DPT notice, which the Group will be required to pay within 30 days. On conclusion of the transfer pricing discussions, an appropriate refund would be anticipated. Whilst the issues discussed affects all subsequent periods, no further DPT notices are anticipated.

The Group believe the transfer pricing provision held above appropriately provides for this and other transfer pricing issues.