Transfer pricing and FIN 48

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 — Accounting for Uncertainty in Income Taxes (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, Accounting for Income Taxes. FIN 48 was effective for fiscal years beginning after Dec. 15, 2006, for public companies. After two deferrals, FIN 48 is now required to be adopted by private companies for fiscal years beginning after Dec. 15, 2008, which includes all calendar year-end 2009 private company financial statements.

Smart Business spoke with Robert Verzi, CPA, international tax partner with Habif, Arogeti & Wynne, LLP, about why companies need more rigorous evaluation and documentation of their tax position to comply with FIN 48.

What is FIN 48, and how might it affect my company?

FIN 48 is intended to provide a consistent approach to the evaluation, recognition and measurement of the tax benefit related to tax positions. It requires companies to assess whether or not a tax position will be sustained upon examination by the taxing authority.

Under FIN 48, tax positions must be identified, documented, subjected to the recognition test and measured. The first step in this assessment is to identify individual tax positions. There is then a two-step recognition and measurement process. The first step (recognition) is to determine whether a position is ‘more likely than not’ to be realized upon examination by the taxing authority. If a tax position is determined to have a less than 50 percent likelihood of being sustained upon examination by the taxing authority, no benefit may be recognized for that tax position. If a tax position is determined to have a more than 50 percent likelihood of being sustained upon examination by the taxing authority, the second step in the analysis is to determine (measure) the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant taxing authority.

Companies with transfer pricing in cross-border transactions must deal with FIN 48’s more rigorous analysis and documentation procedures. Even if the company has previously performed a transfer pricing documentation study, additional analysis may still be required under the FIN 48 standards.

This represents a more rigorous and frequent process than many companies are accustomed to in evaluating and documenting their transfer pricing strategies, both in the U.S. and other countries.