Achieving Compliance with FASB Income Tax Disclosure Provisions May Prove Challenging
Get Ready for increased transparency on your tax game, pal! Thanks to the latest update approved by the Financial Accounting Standards Board (FASB) on August 30, both public and private companies will be required to divulge more info on their tax situations from 2025 (private companies have till 2026).
The new ruling involves providing details of the amount of income tax paid annually, net of refunds, to state, federal, and foreign taxing authorities. To up the transparency ante, companies that shell out at least 5% of their total tax payments to an individual country or jurisdiction must disclose its identity and the tax amount paid.
As Brett Weaver, partner and ESG tax leader at KPMG, put it, "This is a significant chapter in greater tax transparency." And why not, with ESG (Environmental, Social, and Governance) movements pushing for transparency, especially with regards to taxes?
The FACT Coalition, a group of state, national, and international organizations eager to put an end to offshore tax abuses, thinks investors need this info to assess various tax enforcement, reform, and other risks – particularly crucial for multinational companies.
However, a July letter to FASB Chair Richard Jones from Congressional Republicans called the update a "politicized effort to name-and-shame companies and influence tax policy." They also warned that the proposed disclosures could expose U.S. multinational entities to heightened foreign tax scrutiny.
Revisions made to the initial proposal in March 2023 eased up on a few requirements for companies. For instance, reporting must now be annual, not quarterly; retrospective adoption becomes optional; the effective date has been delayed, and the burdensome reporting of unrecognized tax benefits at the country level has been toned down. But don't get too comfortable, as complying won't be a piece of cake. The stiffest challenge for companies will be generating a "profit before income tax" number at a country level compatible with generally accepted accounting principles.
Notably, the FASB accounting standards update (a revision to Topic 740) isn't flying solo. On a parallel deadline, the European Union has introduced the EU Public CbCR directive (country-by-country reporting). Public and private multinationals of a certain size will need to disclose revenue, profits, taxes, employees, and assets.
With all this transparency flooding in, investors, analysts, and regulators can get a clear picture of a company's tax strategy – for example, whether they've managed to snag tax incentives in any particular country. Additionally, they can make informed predictions about a company's effective tax rate moving forward.
Here's the lowdown on the specifics:
The FASB's update requires companies to provide detailed reconciliation of the book tax rate to the effective tax rate and specify the factors causing differences, such as permanent differences and discrete items. Moreover, companies will need to disclose more information about their tax liabilities and expenses in various jurisdictions, helping investors assess risks and benefits associated with multinational operations. Countries where a company has significant tax dealings will become crystal clear.
The EU Public CbCR directive requires companies to report financial information on a country-by-country basis. Applicable to MNEs with a consolidated annual revenue of €750 million or more, it mandates inclusion of info on the number of employees, assets, and activities in each country. Reports are publicly available and must be filed with each EU member state.
By and large, both initiatives seek to enhance transparency, but the EU directive demands detailed country-by-country financial reporting, whereas the FASB focuses on overall transparency of a company's tax situation across various jurisdictions. Both directives can prove instrumental in understanding a company's tax strategy and predicting its effective tax rate.
Now, let's boogie down to the numbers: Firms should start preparing for the tax data rollercoaster as 2025 draws nigh – but beware, it's gonna be as smooth as a cactus!
- The updated financial accounting standards by the Financial Accounting Standards Board (FASB) will require companies to disclose the amount of income tax paid annually, net of refunds, to various taxing authorities from 2025.
- Companies that pay at least 5% of their total tax payments to an individual country or jurisdiction must disclose its identity and the tax amount paid, as per the updated FASB Rules.
- The new ruling will provide investors with essential information to assess various tax-related risks, particularly for multinational companies, as argued by the FACT Coalition.
- To ensure greater transparency, FASB's accounting standards update aims to offer a clear picture of a company's tax strategy, including the management of tax incentives in different countries.
- Companies will need to generate a "profit before income tax" number at a country level compatible with generally accepted accounting principles, which could pose a substantial challenge.
- In parallel with the FASB update, the European Union has introduced the EU Public CbCR directive, requiring public and private multinationals to disclose country-by-country information on revenue, profits, taxes, employees, and assets, adding another layer of transparency to the financial landscape of businesses.
