Presentation uncertainty in transfer pricing

Example—The expected value method is used to reflect the effect of uncertainty for tax treatments considered together

These examples accompany, but are not part of, IFRIC 23.

These examples portray hypothetical situations illustrating how an entity might apply some of the requirements in IFRIC 23 based on the limited facts presented. In all the examples, as required by paragraph 8 of IFRIC 23, the entity has assumed that the taxation authority will examine amounts it has a right to examine and have full knowledge of all related information when making those examinations.

Entity A’s income tax filing in a jurisdiction includes deductions related to transfer pricing. The taxation authority may challenge those tax treatments. In the context of applying IAS 12, the uncertain tax treatments affect only the determination of taxable profit for the current period.

Entity A notes that the taxation authority’s decision on one transfer pricing matter would affect, or be affected by, the other transfer pricing matters. Applying paragraph 6 of IFRIC 23, Entity A concludes that considering the tax treatments of all transfer pricing matters in the jurisdiction together better predicts the resolution of the uncertainty. Entity A also concludes it is not probable that the taxation authority will accept the tax treatments. Consequently, Entity A reflects the effect of the uncertainty in determining its taxable profit applying paragraph 11 of IFRIC 23.

Entity A estimates the probabilities of the possible additional amounts that might be added to its taxable profit, as follows:

Estimated additional amount, CU(a)Probability, %Estimate of expected value, CU
Outcome 15%
Outcome 22005%10
Outcome 340020%80
Outcome 460020%120
Outcome 580030%240
Outcome 61,00020%200
100%650

(a) In these Illustrative Examples, currency amounts are denominated in ‘currency units’ (CU)


Outcome 5 is the most likely outcome. However, Entity A observes that there is a range of possible outcomes that are neither binary nor concentrated on one value. Consequently, Entity A concludes that the expected value of CU650 better predicts the resolution of the uncertainty.

Accordingly, Entity A recognises and measures its current tax liability applying IAS 12 based on taxable profit that includes CU650 to reflect the effect of the uncertainty. The amount of CU650 is in addition to the amount of taxable profit reported in its income tax filing.