Uncertain tax positions, policy, estimates, quantification of provisions

Senior PLC – Annual report – 31 December 2017

Industry: manufacturing

FINANCIAL REVIEW (extract)

Tax charge

The adjusted tax rate for the year was 17.5% (2016 – 20.1%), being a tax charge of £12.8m (2016 – £15.1m) on adjusted profit before tax of £73.1m (2016 – £75.3m). The reduction in rate is attributed to prior year adjustments following the completion of tax audits in the US as well as the geographic mix of profits in the year.

The reported tax rate was 15.5% credit (2016 – 18.2% charge), being a tax credit of £8.1m (2016 – £10.1m charge) on reported profit before tax of £52.2m (2016 – £55.5m). The reported tax credit for the year included the tax effect of items excluded from adjusted operating profit of £4.9m (2016 – £5.0m), and an exceptional non-cash tax credit related to US tax reform of £16.0m (2016 – £nil).

Following the enactment of the US Tax Cuts and Jobs Act in December 2017, Senior expects that the benefit from a reduction in the US Federal corporate income tax rate from 1 January 2018 will be largely offset by a widening of the tax base as a result of new US tax measures also introduced in this Act.

Further guidance on the Group’s expected tax rate over the medium term will be provided once we have completed our review of the full impact of changes ensuing from tax reforms in the US, UK and other jurisdictions we operate in.

Cash tax paid was £4.9m (2016 – £2.7m) and is stated net of refunds received of £1.9m (2016 – £3.5m) of tax paid in prior periods. The rate of cash tax paid is lower than our adjusted tax rate in both years due to accelerated tax relief for capital expenditure in the US, the availability of tax losses and tax deductible items that do not affect adjusted profit.

Tax policy

The Group acts with integrity in all tax matters, in accordance with the Group’s ethics and business conduct programme. It is the Group’s obligation to pay the amount of tax legally due and to observe all applicable rules and regulations in the jurisdictions in which it operates. While meeting this obligation, the Group also has a responsibility to manage and control the costs of our business including the taxes we pay for the benefit of all our stakeholders. The Group seeks to achieve this by conducting business affairs in a way that is efficient from a tax perspective, including maintaining appropriate levels of debt in the countries we operate in and claiming available tax reliefs and incentives. The Group is committed to building and maintaining constructive working relationships with the tax authorities of the countries in which it operates. Further details on our approach to tax may be found on Senior’s website at seniorplc.com.

  1. SIGNIFICANT ACCOUNTING POLICIES (extract)

Taxation (extract)

Current tax payable is based on taxable profit for the year. Taxable profit differs from profit before tax as reported in the Income Statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the Balance Sheet date.

Provisions for tax uncertainties are included within current tax liabilities on the Balance Sheet. There are transactions and activities that the Group engages in where the ultimate tax determination is uncertain and a provision may be made against the tax benefit. For example, the Group seeks to price transactions between Group companies as if they were unrelated parties in compliance with OECD transfer pricing principles and the laws of the relevant jurisdictions and this involves a degree of uncertainty. Provisions against uncertainties are established based on management judgement of the range of likely tax outcomes in open years and in consideration of the strength of technical arguments and are based on amounts that the company expect to pay following this assessment. When making this assessment, the Group utilises specialist in-house tax knowledge and experience and takes into consideration specialist tax advice from third party advisers on specific items.

Key sources of estimation and uncertainty (extract)

Income taxes

In determining the Group provisions for income tax and deferred tax, it is necessary to consider transactions in a small number of key tax jurisdictions for which the ultimate tax determination is uncertain. To the extent that the final outcome differs from the tax that has been provided, adjustments will be made to income tax and deferred tax provisions held in the period the determination is made. The carrying amount of net current tax liability and deferred tax liability at 31 December 2017 was £20.2m (2016 – £20.8m) and £32.7m (2016 – £48.6m), respectively. Further details on these estimates are set out in Notes 10 and 21.

  1. TAX BALANCE SHEET (extract)

Current tax

The current tax receivable of £1.0m (2016 – £0.7m) includes excess tax paid to tax authorities that is expected to be recovered within 12 months by way of offset against future tax liabilities or refund as well as research and development tax credits receivable.

The majority of the Group’s taxable profits arise in countries, including the US, where the estimated tax liabilities are paid in on-account instalments during the year to which they relate and are largely paid at the Balance Sheet date. The current tax liability of £21.2m (2016 – £21.5m) represents £3.6m (2016 – £1.8m) tax due on profits of the current and prior years as well as £17.6m (2016 – £19.7m) provisions for tax uncertainties that represent amounts expected to be paid but by their nature, there is uncertainty over timing and eventual settlement. The provision for tax uncertainties has decreased during the year due to the effects of exchange translation and the release of provisions following tax authority audits.

The Group recognises provisions in respect of tax for items which are considered to have a range of possible tax outcomes. These uncertainties exist due to a number of factors including differing interpretations of local tax laws and the determination of appropriate arm’s length pricing in accordance with OECD transfer pricing principles on internal transactions and financing arrangements. In calculating the carrying amount of provisions, management estimates the tax which could become payable as a result of differing interpretations and decisions by tax authorities in respect of transactions and events whose treatment for tax purposes is uncertain and establish provisions based on an assessment of the expected outcome.

 

 

 

 

 

 

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