To tax or not to tax – this question could have never been asked twenty years ago. Historically, income tax is a novel invention. Still, it became so widespread and so socially accepted that no one dared challenge it seriously. In the lunatic fringes there were those who refused to pay taxes and served prison sentences as a result. Some of them tried to translate their platforms into political power and established parties, which failed dismally in the polls. But some of what they said made sense.

The integration of UTPs under FIN 48 applies to all of the schedules required to be disclosed in the tax footnote. For example, an increase in a UTP that has a significant impact on the tax rate might have to be separately disclosed in the effective tax rate reconciliation. Likewise, the breakdown of the tax provision into federal, state, and foreign components need to reflect UTPs in each of those jurisdictions. If there are UTPs set up for temporary differences, this could impact the presentation of deferred tax balances. Under FIN 48, UTPs formerly computed under FAS 5 must now be re-viewed using new standards for identification, probability, computation, and disclosure.

Integration of UTPs with the current taxes payable account presents special challenges. Before FIN 48, tax reserves computed under FAS 5 were typically recorded in the current payable on the theory that the government could demand payment at any time. This meant that refunds and payments due with the filing of the return were co-mingled in the ending balances. Past FIN 48, these items are still included in the ending balances; however, the movement in the UTPs must be disclosed in a separate roll forward using the following prescribed categories: Beg Balance, PY Increase, PY Decrease, CY Increase, CY Decrease, Settlements Expiration.

Recently, however, some have begun to explore in more detail the theoretical framework linking VAT, tariff reform, trade and welfare, turning up some interesting and to some extent disquieting results. Analysts have also recently begun to discuss the implications for VAT of the considerably larger underground or shadow economies found in Albania as compared to developed countries. Some analysis suggests that in the presence of a substantial ‚informal‘ sector, a tax like VAT that falls on the formal sector acts to deter the growth and development of the economy as a whole. Increasing consumption taxes definitely fosters the expansion of the hidden economy if the labor-intensity of production in that sector is greater than in the formal sector. The present government need for revenues suggest that even government aware of such problems may have nonetheless choose to impose higher taxes, including VAT, on the formal sector of the economy because with their relatively weak tax administrations the best way for them to raise revenue may be to increase barriers to entry to the formal sector, thus creating ‚rents‘ that may then be taxed.

The roll forward of UTPs within the current taxes payable may give rise to a cumulative translation adjustment where activity is recorded in local currency and is translated into a different reporting currency. A cumulative translation adjustment arises because the beginning and ending balances are recorded at the beginning and ending spot rates, and the activity is recorded at the rates used in the income statement for the period. In their presentation of the UTP roll forward, companies will have to decide the best presentation of this item; i.e. should the cumulative translation be combined with the activity columns or should it be separately stated. For calendar year filers, this disclosure is not required until the 4th quarter of 2007. The roll forward of UTPs now requires companies to clearly breakout increases and decreases due to changes in judgment and the expiration of statute of limitations, both of which are offset by charges to the current tax provision. Changes in tax rates can also have a signify-cant impact on the integration of UTPs into the tax provision.

Changes in tax rates can also have a significant impact on the integration of UTPs into the tax provision. UTPs will normally be recorded at the tax rates used to file the tax return for the year in which the issue arose. For example, a potential disallowance of an expense in a prior year must be measured at the tax rates in effect for that year. This could be different from the tax rates used to compute the tax provision in the current year. This means that UTPs must be tax effected and carried forward using a unique rate structure that is not dependent upon the rates used in the tax provision for the current year. As noted above, the UTPs must be integrated into all aspects of the tax footnote disclosure. The different tax rate structures make it difficult to simply add UTPs and tax return activity together on a pretax basis. Instead, it may be advisable to tax effect the UTPs separately and then add them to the standard tax provision computations. Under FAS 109, de-ferret tax assets and liabilities arising from the return are adjusted for future tax rate changes, normally with an offset to the deferred tax provision.

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