Large Companies Report Wide Variance on Uncertain Tax Positions

Many major companies are reporting big differences in the relative amounts they state for uncertain tax positions, leading tax experts to conclude the new transparency around uncertain tax positions is causing some companies to take tamer positions than others.

A recent Georgia Tech analysis of UTPs reported in financial statements by the S&P 100 shows the average company has a UTP balance that is equivalent to less than 1 percent of its total assets. Some companies, however, have much higher amounts, and in industries such as technology and pharmaceuticals the amounts can vary considerably, while others report little or no uncertain tax liability.

Consulting and technology company Accenture, for example, represents a glaring departure from the norm with a UTP balance equal to 9.6 percent of assets. Other tech giants are similarly skewed, like Microsoft at 5.6 percent, IBM at 4.8 percent, and Dell at 5.1 percent. Pharmaceutical giants also bring the average up with Eli Lilly and Merck at 4.2 percent, and Pfizer at 3.4 percent.

At the other end of the spectrum, some companies report very little UTP. Several financial services firms, for example, reported almost none. Capital One reported UTP at 0.1 percent, and Citigroup reported 0.2 percent. Retailers as a group were also at the low end on UTP, with CVS reporting 0.1 percent and Lowe's at 0.2 percent. Other big companies with low UTP include Occidental Petroleum and Southern Cos. at 0.1 percent.

Tax experts offer a number of reasons why technology and pharmaceutical giants might trend so high compared with others in the S&P 100. Technology and pharmaceutical companies are more likely to pursue research and development tax credits, a notoriously scrutinized area of the U.S. tax code, says Sheryl Vander Baan, a partner with Crowe Horwath. “It's not uncommon to claim a research credit and treat some portion as uncertain,” she says. “It's very common for credits to be studied and audited with a lot of back and forth on how much you can claim.”

Transfer pricing is another common practice among pharmaceutical and technology companies that could boost tax uncertainty, Vander Baan explains. Companies with international operations routinely buy and sell goods and services among business units across international boundaries. Tax authorities heavily scrutinize such transactions to assure the pricing is at arm's length so that taxes are computed accurately. “Tax law is very complex, and there's a lot of room for facts-and-circumstances interpretations and disagreements,” she says. “We tend to see reserves in that regard.”

Aside from being in a particular sector, the large outliers in the Georgia Tech study are large multinational companies that report low effective tax rates, says Scott Wragg, managing director for accounting firm CBIZ MHM. That naturally correlates with tax uncertainty. “It's more likely a company would have unrecognized tax benefits if they have a lower effective tax rate because perhaps they're taking more tax risk,” he says.

Al Cappelloni, a tax partner with McGladrey, agrees that the big differences might also reflect differences in tax risk tolerance. “Some companies have taken the view that they don't want to have any uncertain tax positions or related disclosures,” he says. “So unless you can get to that ‘more likely than not' threshold (the standard for determining when disclosure is required), they may not be taking those positions on their tax returns. So there's very little disclosure in financial statements.”

No Tax Uncertainty

Such risk aversion might help explain the handful of companies in the S&P 100 that reported zero uncertain tax positions, such as Lockheed Martin and General Dynamics. Timothy Burley, a partner with accounting firm WeiserMazars, says it's probably because of materiality. “Very few companies have no exposures,” he says. “It may be that they're just not big enough to report as material.”

Low or no uncertain tax positions could also reflect situations where companies are getting advance rulings on their tax decisions. Lockheed and General Dynamics both report in their financial statements that they participate in the Compliance Assurance Program offered by the Internal Revenue Service, a program that enables companies to work with tax authorities to have their tax positions reviewed as they prepare their return so that their filed tax return is automatically accepted and closed upon filing. Companies also can participate in other accelerated review processes, such as a pre-filing agreement on a specific tax issue, securing advanced pricing agreements with the IRS on transfer pricing, or getting a “Fast Track” review after filing a tax return.

“Very few companies have no exposures. It may be that they're just not big enough to report as material.”

—Timothy Burley,

Partner,

WeiserMazars

Still, there's a big difference between what gets rolled into a UTP in the financial statements and what can be settled with the IRS in a tax filing. The IRS is addressing only U.S. federal tax positions, while a UTP in financial statements encompasses all taxes, including state and local and taxes from foreign countries. Reporting zero UTPs in financial statements suggests a company takes a very risk-averse position when it comes to taxes, says Wragg. “Clearly there are companies that continue to take aggressive tax positions,” he says. But the reporting of uncertain positions has led to more transparency, both for investors and the IRS. “That has also created more consistency, and that was the goal of it.”

More Rigorous Tax Reporting

Vander Baan agrees that the financial reporting requirement, which began under Financial Interpretation No. 48 now codified in Accounting Standards Codification Topic 740, coupled with the IRS Schedule UTP that was first required for larger companies beginning in 2010 has altered the way companies address tax planning. “It has taken away a lot of the ability to manipulate those numbers,” she says. “People are a lot more deliberate in their thinking and in their documentation surrounding taking or not taking a tax position and whether you meet or don't meet the threshold for being able to put it in your financial statements. It used to be called a cushion, but that whole concept is gone now.”

On the tax reporting side, the IRS requirement for larger companies to file Schedule UTP has not necessarily produced any great surprises in terms of the types of positions that are being reported, says Mike Dolan, a director at KPMG and a former deputy commissioner for the IRS. In 2012, the IRS says it received 4,166 Schedules UTP, nearly one-fourth focused on research credits and nearly one-fifth involved transfer pricing. For the prior tax year, the IRS received nearly 6,000 Schedules UTP with a comparable breakdown of issues.

Perhaps the greatest difficulty in completing the schedule is in providing the concise description of an uncertain position that passes muster with the IRS, says Dolan. A few hundred taxpayers have received letters from the IRS indicating their descriptions should be improved in the following year, he says. “The threshold is relatively minimal,” he says. “You don't need chapter and verse or the legal reasoning explained in the description.” As tax controversies go, it's a pretty mild one, he says. “This has not proven as significant an issue or as much a source of conflict as some might have guessed from the outset.”

Michael Greenwald, a partner with accounting firm Friedman, say as the Schedule UTP requirement takes effect for the next tranche of companies, those with assets greater than $50 million, it's not clear yet what effect it might have on their tax planning. “Generally speaking, companies of that size are less likely to have the kinds of tax positions that we see in larger corporations because of the nature of the things they do,” he says.