For financial year-end purposes, taxpayers consider the tax provisions as part of the company's financial position and how this will be disclosed in their annual financial statements ("AFS"). In this regard, the importance of tax certainty cannot be overstated.

The introduction of a minimum tax, the establishment of the automatic exchange of information, and the increased emphasis on tax transparency and disclosure obligations have created an environment where a wealth of tax information for taxpayers is freely available in the public domain. The increased focus by the South African Revenue Service ("SARS") to increase revenue collection has amplified the pressure on statutory auditors to ensure that they accurately conclude the correct tax position and, where appropriate, ensure that the appropriate corresponding provisions are raised. These factors, exacerbated by the fast-changing tax environment may cause auditors to adopt a more conservative view when reporting, as well as raise issues on principles that were previously accepted. It is imperative, therefore, that taxpayers are secure in their tax position.

It is within this context that IFRIC 23 becomes an important consideration. IFRIC 23 was developed by the International Financial Reporting Standards ("IFRS") Interpretations Committee and issued by the International Accounting Standards Board to guide entities on how to reflect the effects of uncertainty as regards tax treatment in an entity's AFS. This applies to any tax type, and detection risk is not considered in the recognition and measurement of uncertain tax treatments. The entity should determine the probability that a tax authority will accept an uncertain tax treatment, and to the extent that acceptance is considered probable, the entity should complete its AFS consistently with the tax treatment used. If however, it is not probable that a tax authority will accept such a tax treatment, the entity should reflect the effect of the uncertainty in its AFS using specific methods as per the guidance contained in IFRIC 23, which includes both the "most likely amount" and the "expected value" methods.

Since tax legislation, case law, and SARS practice do not always provide absolute certainty on all transactions, uncertainty exists as to the tax treatment of certain positions that are open to interpretation. IFRIC 23, therefore, requires an entity to record a liability where it is considered probable that an uncertain tax treatment would not be resolved in favour of the taxpayer if reviewed by a tax authority (SARS).

Hence, the question arises whether a company should raise a liability, and the quantum of that liability, in terms of IFRIC 23 when for example, their auditor disagrees with a position taken; or their tax advisor points out that an alternative interpretation will likely be followed by SARS, etc. The impact of raising a liability in terms of IFRIC 23 is that a theoretical tax risk will ultimately result in decreased net earnings for the company being reflected in its AFS, which could harm investor interest or the company's share price. Companies could also be required to disclose the uncertain tax position and provision raised in their transparency report, which could attract queries from SARS.

Companies should consider taking legal advice on uncertain tax positions in advance of the audit to obtain an independent opinion that confirms whether or not the tax position taken is correct and analyses the risk based on current law and interpretation. This will assist the company in having a motivated response to the auditor that an IFRIC 23 liability should not be raised.

It is important, therefore, that a taxpayer is secure in its tax position and is equipped with the tools necessary to defend such a position. To this end, taxpayers with uncertain tax positions should obtain legal advice from an appropriate tax practitioner.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.