Key takeaways
- An uncertain tax position (UTP) exists whenever the entity cannot be certain that a tax authority will accept its chosen treatment.
- IFRIC 23 requires two measurement approaches: the most likely amount method or the expected value method, selected based on which better predicts the resolution.
- If the entity concludes that acceptance is not probable (below roughly 50%), it must reflect the uncertainty in its tax calculation.
- Failure to identify UTPs is one of the most common sources of material misstatement in the deferred tax balance.
What is an uncertain tax position?
On about half the mid-market engagements we have seen, the tax provision includes at least one position where nobody on the team can say with confidence whether the tax authority will accept it. The position sits in the file, often rolled forward SALY from last year, with no documented probability assessment and no measurement method selected. This is the area of the file most likely to generate review notes from the engagement quality reviewer.
An uncertain tax position (UTP) is a tax treatment where there is uncertainty over whether the relevant tax authority will accept the position. IFRIC 23.6 requires the entity to consider whether acceptance is probable, assuming the authority examines the amounts and has full knowledge of all relevant information. If acceptance is probable, the entity determines the tax treatment consistently with the position taken in its tax return. If acceptance is not probable, IFRIC 23.8 requires the entity to reflect the effect of uncertainty using whichever of two methods better predicts the outcome: the most likely amount (best for binary outcomes) or the expected value (better when a range of possible outcomes exists).
IFRIC 23 applies to current tax and deferred tax simultaneously. An entity with four open tax positions cannot evaluate them in isolation if the positions interact (IFRIC 23.9 permits grouping when positions are resolved together). The auditor's task under ISA 540.13 (a) is to evaluate the entity's identification process and its probability assessment for each position, then assess whether the measurement method selected is appropriate for the facts. Transfer pricing disputes and R&D tax credit claims are the two areas where UTPs cluster most frequently on European mid-market engagements, with cross-border withholding tax recoverability close behind.
Worked example: Rossi Alimentari S.p.A.
Client: Italian food production company, FY2025, revenue EUR 67M, IFRS reporter. Rossi claims an R&D tax credit of EUR 420,000 for process innovation in its production line. The Italian tax authority (Agenzia delle Entrate) has historically challenged R&D credits in the food sector, reclassifying process improvements as routine adaptation. Rossi also has a transfer pricing position on intra-group management fees of EUR 180,000 charged to its Spanish subsidiary. The arm's length basis for the fee is supported by a benchmarking study, but the documentation was finalised eight months after the year-end.
Step 1 — Identify the uncertain tax treatments
Two positions require evaluation under IFRIC 23.3. The R&D credit (EUR 420,000) is uncertain because the tax authority has a pattern of challenging similar claims. The transfer pricing position (EUR 180,000 management fee) is uncertain because the documentation was completed late, which weakens the contemporaneous evidence supporting the arm's length price.
Documentation note: list each UTP, the tax jurisdiction, the amount at stake, and the source of uncertainty. Cross-reference to the tax return workings and the transfer pricing file.
Step 2 — Assess probability of acceptance
For the R&D credit, management's tax adviser estimates a 40% probability that the full EUR 420,000 will be accepted and a 60% probability of partial acceptance at EUR 250,000. Acceptance is not probable for the full amount, so uncertainty must be reflected. For the transfer pricing position, the adviser considers it probable (75% likelihood) that the arm's length basis will be accepted despite the late documentation. No adjustment is required for this position.
Documentation note: record each probability assessment, the adviser's qualifications, the basis for the estimates, and any contrary evidence considered. For the R&D credit, note that the "not probable" conclusion triggers measurement under IFRIC 23.8.
Step 3 — Measure the R&D credit uncertainty
The outcome is effectively binary (full acceptance or partial acceptance at EUR 250,000). IFRIC 23.8 directs the entity to use the most likely amount method. The most likely outcome is partial acceptance at EUR 250,000. Rossi reduces the tax credit recognised from EUR 420,000 to EUR 250,000, increasing the current tax liability by EUR 170,000.
Documentation note: record the selected measurement method (most likely amount per IFRIC 23.8) and the two outcomes considered with their probabilities. Record the resulting adjustment to the tax provision and attach the tax adviser's opinion letter.
Step 4 — Disclosure and presentation
IAS 12.88 requires disclosure of significant judgments made in applying the entity's accounting policy for income taxes. Rossi discloses the existence of the R&D credit uncertainty and the measurement method applied. It also discloses that the outcome depends on the tax authority's interpretation of qualifying R&D activities. IFRIC 23.B6 confirms that the entity is not required to disclose a specific provision amount for uncertain tax positions, but it must comply with IAS 1.125 on sources of estimation uncertainty if the position could result in a material adjustment within the next financial year.
Documentation note: verify the disclosure against IAS 12.88 and IAS 1.125 . Confirm that the sensitivity of the R&D credit position (potential range of EUR 250,000 to EUR 420,000) is disclosed as a source of estimation uncertainty.
Conclusion: the tax provision reflecting EUR 250,000 rather than EUR 420,000 for the R&D credit is defensible because the measurement uses the most likely amount method supported by a documented probability assessment from an external tax adviser, and the transfer pricing position passes the probability threshold with supporting (if late) documentation.
Why it matters in practice
Teams frequently identify UTPs only at the entity level and miss positions embedded in intercompany transactions. IFRIC 23.9 permits (but does not require) grouping of positions, which some practitioners misread as a licence to bundle all tax uncertainties into a single assessment. Each position requires its own probability evaluation unless the positions are genuinely resolved together by the same authority in the same process. Rolling forward last year's working papers (WPs) without revisiting each position is a classic tick box exercise that inspectors catch immediately.
The measurement method selection is often undocumented. IFRIC 23.8 offers two methods (most likely amount and expected value), and ISA 540.18 requires the auditor to evaluate whether the method the entity selected is appropriate for the facts. We have seen engagements with range-based outcomes (transfer pricing adjustments, for instance) where auditors accept the most likely amount method without considering whether an expected value calculation would better predict the resolution. The file should tell a story: why this method, for this position, given these facts.
Uncertain tax position vs. provision (IAS 37)
| Dimension | Uncertain tax position (IFRIC 23) | Provision (IAS 37) |
|---|---|---|
| Governing standard | IFRIC 23, applied alongside IAS 12 | IAS 37 |
| Scope | Income tax treatments only | All obligations of uncertain timing or amount except those within scope of other standards |
| Recognition threshold | Probable that the tax authority will accept the treatment; if not, reflect the uncertainty | Probable outflow of resources, reliable estimate, present obligation from a past event |
| Measurement | Most likely amount or expected value (whichever better predicts the outcome) | Best estimate of the expenditure required to settle |
| Discounting | Follows IAS 12 rules; no separate discounting requirement for the uncertainty component | Required when time value of money is material (IAS 37.45) |
The practical difference matters because IAS 37.2 explicitly excludes income taxes from its scope. An auditor who tests a disputed tax assessment as a provision under IAS 37 instead of a UTP under IFRIC 23 applies the wrong recognition test and the wrong measurement method. On engagements with both tax disputes and non-tax litigation, separating the two frameworks in the WPs prevents the standards from being conflated.
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Frequently asked questions
How do I document uncertain tax positions in the audit file?
Record each position separately with the tax jurisdiction, the amount at risk, the probability assessment (with supporting evidence from management or a tax adviser), and the measurement method applied. IFRIC 23.B2 requires the entity to reassess its judgments whenever facts and circumstances change, so the file should also note whether any positions were reassessed during the period and what triggered the reassessment.
Do uncertain tax positions apply to deferred tax as well as current tax?
Yes. IFRIC 23.4 applies to both current tax and deferred tax. If the uncertain treatment affects the tax base of an asset or liability (for example, an uncertain deduction that changes the carrying amount for tax purposes), the entity reflects the uncertainty in its deferred tax calculation using the same probability and measurement framework as for current tax. ISA 540.13(a) applies to both the current and deferred tax components of the position.
When should I reassess an uncertain tax position?
IFRIC 23.B2 requires reassessment whenever new information becomes available that changes the probability or measurement of a position. Common triggers include a tax authority opening an audit, a court ruling on a comparable case, a change in tax law, or expiry of the statute of limitations. The reassessment may result in recognising additional tax expense or reversing a previously recorded liability.