Uncertain tax positions, policy, estimates, quantification of provisions, IFRIC 23 adopted

Senior PLC – Annual report – 31 December 2019

Industry: manufacturing

FINANCIAL REVIEW (extract)
TAX CHARGE
The adjusted tax rate for the year was 14.5% (2018 – 19.0%), being a tax charge of £11.4m (2018 – £15.8m) on adjusted profit before tax of £78.5m (2018 – £83.0m). The reduction in rate is attributed to the recognition of prior year adjustments in the US as the impact on the Group of US Tax reform following the enactment of the US Tax Cuts and Jobs Act in December 2017 becomes clearer; as well as clarification as to the treatment for tax purposes of historical profits in our Malaysian aerospace business.

The reported tax rate was 1.7% credit, being a tax credit of £0.5m on reported profit before tax of £28.7m. The reported tax credit for the year included the tax credit of items excluded from adjusted operating profit of £8.3m and an exceptional non-cash tax credit of £3.6m to recognise a deferred tax asset, following a recent change in accepted practice in terms of the tax treatment related to restricted interest deductions in the US.

This recent change in accepted practice in terms of the tax treatment related to restricted interest deductions in the US has led to the comparative figures for 2018 being restated to reflect the recognition of a non-cash deferred tax asset of £3.4m. Therefore the reported tax charge for 2018 has reduced from the originally stated £11.2m to £7.8m. See Note 2 to the Financial Statements. The 2018 restated reported tax rate was 12.7%, being a tax charge of £7.8m on reported profit before tax of £61.3m. This included the tax credit of items excluded from adjusted operating profit of £4.6m and an exceptional non-cash deferred tax credit, as noted above, of £3.4m.

Cash tax paid was £5.3m (2018 – £6.0m) and is stated net of refunds received of £0.8m (2018 – £2.0m) 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 and tax deductible items that do not affect adjusted profit.

The adoption of IFRIC 23 has resulted in the recognition of tax liabilities and interest thereon of £4.8m which have been recognised through opening reserves.

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 http://www.seniorplc.com.

2. SIGNIFICANT ACCOUNTING POLICIES (extract 1)
CHANGES IN ACCOUNTING POLICIES (extract)
b) IFRIC 23 Uncertainty over income tax treatments
This interpretation clarifies the application of the recognition and measurement requirements of IAS 12 where there is uncertainty over income tax treatments. Accordingly the Directors reassessed the basis of the risk provisions for tax uncertainties to apply the principles of IFRIC 23, and on 1 January 2019 have recognised additional current tax liabilities of £3.8m, together with £1m of associated interest, as an opening retained earnings adjustment.

2. SIGNIFICANT ACCOUNTING POLICIES (extract 2)
TAXATION
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 Consolidated Balance Sheet representing Managements’ best estimate of the likely cash outflow related to the uncertainty. 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 on an arms length basis and in compliance with OECD transfer pricing principles and the laws of the relevant jurisdictions. The application of OECD principles and local tax laws requires interpretation, and accordingly involves the application of judgment and is open to challenge by the relevant tax authorities. This gives rise to a level of uncertainty. Provisions against uncertainties are established based on management judgment 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.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the Financial Statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the Balance Sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the Group’s taxable profit nor its accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying value of deferred tax assets is reviewed at each Balance Sheet date and reduced to the extent it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred tax asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax laws and rates that have been enacted at the Balance Sheet date. Deferred tax is charged or credited in the Consolidated Income Statement, except when it relates to items charged or credited to Other Comprehensive Income or directly to Equity, in which case the deferred tax is also dealt with in Other Comprehensive Income or Equity.

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 2019 was £23.1m (2018 – £18.8m) and £31.1m (2018 – £36.2m), respectively. Further details on these estimates are set out in Notes 10 and 21.

21. TAX BALANCE SHEET (extract)
CURRENT TAX
The current tax receivable of £3.5m (2018 – £2.7m) 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 £26.6m (2018 – £21.5m) represents £4.1m (2018 – £3.9m) tax due on profits of the current and prior years as well as £22.5m (2018 – £17.6m) provisions for tax uncertainties that represent amounts expected to be paid but by their nature, there is uncertainty over timing and eventual settlement. The increase in provision held over the year includes an additional tax creditor of £3.8m recognised through retained earnings on 1 January 2019 following the measurement criteria of IFRIC 23.

The Group recognises provisions in respect of tax for items which are considered to have a range of possible tax outcomes. The outcomes considered by the Board include a range of estimates that could increase those liabilities by £9.2m (2018 – £14.1m). 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.