Stephen C. Fox, CPA
U.S. International Tax
Stephen C. Fox, CPA, CMA
PO Box 880695
Port Saint Lucie,  FL  34988
+1(973) 610-5669
   International Tax      FIN 48

FIN 48

Beginning with 2009 financial statements, all U.S. companies must evaluate and disclose their tax risks under Financial Interpretation 48 (FIN 48, now codified as various parts of ASC 740).  This provision began applying to publicly traded companies for 2006 financial statements. 

Audited financial statement must conform to Generally Accepted Accounting Principles (GAAP). The financial  statements must provide for worldwide taxes on the income from continuing or discontinued operations. GAAP requires that this provision take into account the effect of uncertain tax positions (i.e., tax risks). Flow-through entities such as S corporations, pay little or no U.S. tax.  But U.S. companies, whether C corporations, S corporations, or LLCs, with operations or subsidiaries outside the U.S. must pay foreign tax and face foreign tax risks.  
 

FIN 48 Requirements

Each company must:

  • Identify its uncertain tax positions (including risk of tax where no return was filed)
  • Assume the position will be examined by tax authorities who will have all the facts
  • Determine whether each such position is more likely than not to be resolved favorably to the company (MLTN)
  • For those positions not MLTN, accrue tax as if the tax return was examined and the company lost
  • For MLTN positions:
    • Determine the possible outcomes
    • Evaluate the likelihood of each outcomes
    • Determine the tax exposure for that outcome and
    • Add up the probability weighted amounts of tax
  • Document the process
  • Accrue tax and report the outcomes in their financial statements

What You Must Do

FIN 48 represents a substantial extra burden on companies whose financial statements are audited, or even just reviewed by CPAs.  For a public company, the auditor is prohibited from doing the FIN 48 work. For private companies, it is unclear whether doing the work is a violation of AICPA rules; it appears that your auditors can do the work, IF they have the experience and knowledge to do it right.
 
Example:  Acme company makes banana peeling machines in the U.S. and sells them internationally.  Acme's salesmen visit prospective customers in eight Latin American countries, but Acme has no offices south of the border.  Acme is an LLC, and pays no Federal or state income tax.  Must Acme accrue taxes?  Possibly yes:  it has exposure to Latin America taxes.  It must determine whether the eight countries may tax it, and how likely it is.  Under FIN 48, Acme must assume it gets audited in each country, and apply local rules.  If neither Acme nor its CPA can do this, Acme must hire someone who can.
 
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