FIN 48 2007 Seminar on U.S. Taxation of International Banks

1. FIN 482007 Seminar on U.S. Taxation of International Banks June 19, 2007 Matt Cahill D&T (212) 436-3420 Dick Harvey PWC (646) 471-8130

2. Agenda • Process Related: • General Process of Gathering Information for FIN 48 • Does FIN 48 require Probability Distribution Tables? • Need to update Accounting Policies and Procedures • Hot Topics: • Interpretations of FIN 48 • Definition of "ultimate settlement"t • Definition of "court of last resort“ • Administrative Practices and Precedents • Gross vs. Net issues - FASB Staff positions: • -Unrecognized Tax Benefits (UTBs) include temporary differences • -State tax UTBs are disclosed gross without the benefit of a federal tax benefit • -Foreign UTBs are also disclosed gross without the benefit of US FTC • What will be the impact from new FIN 48disclosures • UTBs - How are the following interested parties likely to react? • Analysts/Academia/Legislators/Taxing Authorities • Early Warning Disclosure: • Will the SEC issue comment letters surrounding early warning disclosures? • How will tax authorities use the information? • Miscellaneous: • Will foreign registrants be able to use IFRS rather than US GAAP at some point in the future?

3. Process

4. Does FIN 48 require Probability Distribution Tables? FIN 48 requires the “cumulative probability approach” for measuring the benefit of a position that meets the more-likely-than-not recognition threshold. What is the “cumulative probability approach” and is it different from the “best estimate”? The cumulative probability approach is based on the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority. Best estimate is the outcome that is most likely.

5. Does FIN 48 require Probability Distribution Tables? Question: Is this table required documentation? Answer: It depends. Documentation of the amount measured is required.

6. Need to update Accounting Policies and Procedures • Processes and internal controls • Summary of the entity’s process • Documentation of control objectives and control activities • Procedures to evaluate the design and implementation and test the operating effectiveness of internal controls • Lead schedules for all tax accounts • Consolidated lead schedule • Supporting tax jurisdictional lead schedules • Including appropriate roll forward schedules

7. Hot Topics-Effective Settlement • Paragraph 10(b) used the term “ultimately settled” • How is a tax matter “ultimately settled”? • Does it require legal extinguishment? • What if closed audit can be reopened? • Federal rules vary when an closed audit can be reopened • Significant impact for those companies whose tax years have been previously examined • No further evaluation necessary for settled tax positions

8. Effective Settlement (cont’d) • The FASB issued an FSP to address this issue • The term “ultimately settled” is changed to “effectively settled” • A tax position would be considered effectively settled through examination if: • the taxing authority has completed all of its required and expected examination procedures • the enterprise does not intend to appeal or litigate • management believes it is remote that the taxing authority would examine or reexamine the tax position presuming the taxing authority has full knowledge • A tax position must be part of an examination but does not need to be examined • Recognize full benefit if effectively settled

9. Effective Settlement (cont’d) Don’t forget about Paragraph 21(d) • Considerations in applying the FSP • Are there any reviews that still need to be performed? • The Joint Committee on Taxation • What is the likelihood of reopening a closed examination? • Look to the taxing authority’s policy for the type of agreement and tax position • Assume it has all relevant information for each tax position • Evaluate whether conditions exist that would permit reopening • If no longer remote or intent changes – derecognize tax benefit • Effective date is upon the initial adoption of FIN 48 • January 1, 2007 for calendar year-end enterprises • If FSP was not applied upon initial adoption, apply retrospectively to the date of adoption

10. Hot Topics-Court of Last Resort • Recognition step assumes resolution at the “court of last resort” • What is the “court of last resort”? • Highest court that has discretion to hear a particular case • In the U.S., generally the U.S. Supreme Court. • Consider how court of last resort would rule • Could be a question of constitutionality (economic nexus) • The likelihood that the U.S. Supreme Court will hear the case should be considered for measurement but not recognition

11. Hot Topics-Administrative Practices and Precedents • Interpretation 48 permits consideration of past administrative practices and precedents only when a tax position taken by an enterprise is technically a violation of tax law but the tax position is known to be widely accepted by the taxing authority. • Interpretation 48 does not provide guidance on when to consider an administrative practice and precedent "widely understood." An enterprise that believes an administrative practice and precedent is widely understood must have evidence to support that assertion. • Such evidence may include reliable knowledge of the taxing authority's past dealings with enterprises on the same tax matter with similar facts and circumstances. The use of administrative practices and precedents is expected to be infrequent. • Prime example-low cost capital expenditures (capitalize vs expense)

12. FASB Staff positions: Unrecognized Tax Benefits (UTBs) include temporary differences FAS 109 para13. Temporary differences that will result in taxable amounts in future years when the related asset or liability is recovered or settled are often referred to in this Statement as taxable temporary differences Fin 48 para 17As a result of applying this Interpretation, the amount of benefit recognized in the statement of financial position may differ from the amount taken or expected to be taken in a tax return for the current year. These differences represent unrecognized tax benefits, which are the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to this Interpretation.A liability is created (or the amount of a net operating loss carryforward or amount refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized pursuant to this Interpretation.

13. Gross vs. Net issues - FASB Staff positions: State tax UTBs are disclosed gross without the benefit of a federal tax benefit Foreign UTBs are also disclosed gross without the benefit of US FTC 21. An enterprise shall disclose the following at the end of each annual reporting period presented: a. A tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period, which shall include at a minimum: (1) The gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during a prior period (2) The gross amounts of increases and decreases in unrecognized tax benefits as a result of tax positions taken during the current period (3) The amounts of decreases in the unrecognized tax benefits relating to settlements with taxing authorities (4) Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations b. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate ***

14. Potential Impact from New FIN 48 Disclosures? • Unrecognized Tax Benefits • Potentially interested parties: • Analysts • Academia • Legislators • Taxing Authorities • Specific Issues Surrounding Early Warning Disclosure

15. Disclosures of Unrecognised Tax Benefits at 01/01/07

16. Analyst’s Reactions to FIN 48 • Credit Suisse Analyst’s Report • Analyzed 10Q disclosures for 368 of the Fortune 500 • Impact of adopting FIN 48 on tax reserves: • Increased 50% • Decreased 27 • Unchanged 23 • Total Unrecognized Tax Benefits for the 368 companies = $141 billion • General - Analysts are likely to view FIN 48 disclosure as positive, and possibly want even more disclosure

17. Other’s Reactions to FIN 48 Disclosure • Academia • 4 Professors have analyzed 100 companies • Many more professors are thinking about or preparing FIN 48 articles • Legislators • Will Congress view UTBs as a source of funds to close the “Tax Gap”? • Tax Authorities • Will review footnote disclosure • How will UTB disclosure impact the IRS’s Policy of Restraint?

18. Specific Issues Surrounding Early Warning Disclosure (i.e., par. 21d) • Will the SEC issue any comment letters surrounding early warning disclosures? • How will tax authorities use the information? • Will they re-open audits?

19. IFRS vs. US GAAP • SEC discussion about allowing IFRS in 2009 for both foreign companies, and possibly US companies • IFRS: • Does not use the asset recognition model • Planning on using an “expected value” model for measurement • No disclosure of UTBs, or specific early warning disclosure • Prognostication