U.S. companies might have to pay more in taxes to fund President Biden’s $2.3 trillion infrastructure plan. How much they owe and to whom will likely remain a mystery.
Public companies in America disclose their total tax payments and their tax rate. But they have resisted plans that would require them to break down how much they pay to the federal government, states or foreign countries. Businesses say the additional disclosure would be costly and potentially misleading.
“This is an area that most companies would prefer to keep lurking in the shadows, especially those that are not paying their fair share of taxes, so the less details the better,” said
head of Zion Research Group, an accounting and tax research firm that serves investors.
Corporate taxes are in the spotlight right now because President Biden’s infrastructure proposal calls for boosting the corporate tax rate to 28% from the current 21%.
The plan also sets a 15% minimum tax on companies with income of more than $2 billion. The tax would target firms that report large profits but low tax payments. About 180 U.S. companies meet the income threshold and an undisclosed 45 would have to pay the tax, according to Treasury estimates.
Here is what we do know about companies’ taxes and why we don’t know more.
What Do Companies Disclose About Taxes?
Public companies under U.S. Generally Accepted Accounting Principles have to disclose cash taxes they pay during a particular period. Many businesses choose to give an annual figure instead of a quarterly one because the rules don’t specify the period. The figure is usually disclosed at the bottom of the companies’ statement of cash flows or in the footnotes.
Companies also have to provide their pretax net income for U.S. and foreign operations as well as their tax expense or benefit in the income statement. Businesses don’t have to break out their foreign operations by country. They also tally up their current and noncurrent deferred tax assets or liabilities on the balance sheet.
Companies under U.S. GAAP must give an effective tax rate, reconciling their domestic statutory rate with their actual tax expense. The effective tax rate, which they usually provide in the footnotes, is essentially the ratio between their tax expense and their pretax income, or the profit they disclosed to investors. Companies don’t need to spell out which business activities and jurisdictions the total tax expense is attributable to, said
a partner at professional-services firm Grant Thornton LLP.
America’s disclosure requirements on corporate taxes are similar to those in other countries because U.S. GAAP rules on this matter are closely aligned with International Financial Reporting Standards, or IFRS, which are used in about 165 jurisdictions around the world.
Still, companies’ international operations often muddy the picture. “Once you start adding in incremental foreign jurisdictions, you may have a preferential or favorable tax structure in a particular jurisdiction that substantially reduces the amount of tax that you might pay there,” Ms. Little said.
The Treasury Department in 2016 began forcing U.S. multinational companies with annual global revenues above $850 million to provide certain tax and other financial information on a country-by-country basis. Tax authorities in more than 90 countries have a similar requirement, which was first proposed by the Organization for Economic Cooperation and Development. Companies only have to disclose this information to the Internal Revenue Service or its local equivalent, but not in publicly accessible filings.
What Are Standard-Setters and Regulators Doing?
The Financial Accounting Standards Board, which sets accounting standards for U.S. companies and nonprofits, has for years been discussing plans to require companies to disclose more about their tax bills. The first proposal came in 2016 and suggested that companies should distinguish between their U.S. and foreign income taxes, among other changes.
The FASB in 2019 updated its proposal, requiring more disclosure. It asked public companies to break out the amount of federal, state and foreign taxes they paid. The proposal also suggested that companies should disclose those figures on a quarterly basis.
More than four years after the first proposal, the FASB is still looking at the issue. The board last discussed the matter in February 2020, shortly before shifting its focus to Covid-19 pandemic-related issues. The FASB plans to address the proposal again at a coming board meeting, but the date hasn’t been set, according to a spokeswoman.
The Securities and Exchange Commission enforces the accounting rules that the FASB sets for public companies. The SEC could overrule the FASB, but rarely does, as they usually work together to align on accounting rule making. It didn’t respond to a request for comment.
Why Don’t Companies Want to Disclose More About Their Taxes?
Companies have been pushing back against the FASB’s efforts to make them share a breakdown of their federal, state and foreign income taxes. Businesses are often wary of extensive disclosures as they can cause scrutiny from investors and regulators, which is why finance executives rarely discuss their stance on tax disclosure publicly.
& Co. said the breakdown could be misleading because deadlines for paying income taxes vary. Domestic payments also could be offset by foreign taxes that are accrued, but not yet paid, which could result in a mismatch when comparing U.S. with foreign taxes,
the company’s vice president of finance and chief accounting officer, wrote in a letter to the FASB in 2019. A spokeswoman for Eli Lilly said the company didn’t have a comment beyond its letter.
said specifying income-tax expense by tax jurisdictions would require changes to its financial processes and procedures, which would likely increase costs,
the bank’s global head of accounting policy, said in a 2019 letter to the FASB. Citigroup didn’t respond to a request for comment.
said investors and other users of financial statements wouldn’t be able to use the information specifying U.S. and foreign income taxes to compare global companies. “Two entities with different countries of domicile would not provide consistent data sets for comparison,” then-Controller Loretta Cangialosi wrote in a 2019 letter to FASB. Pfizer said the letter still reflects its position.
Additional disclosures wouldn’t only inform investors but also those who enforce tax laws. “They do not want the financial-statement disclosures to make a bread-crumb trail for the IRS to follow,” said
an accounting expert and owner of R.G. Associates Inc., an investment research firm and portfolio manager.
How Does Tax Accounting Complicate Disclosure?
Tax disclosure is also opaque because companies calculate some important financial figures differently for their financial statements and tax accounting.
Many companies use the accrual method of accounting for their taxes. They have to reconcile the differences between tax accruals for an IRS filing and the accrual basis of accounting in their financial statements. Accrual accounting is conceptually the same under tax law and GAAP, in that companies generally record income when they earn it. But the requirements differ on issues such as asset depreciation and other expenses.
Companies often depreciate assets using the straight-line method in their financial statements, meaning that an asset wears out evenly over its life. But to comply with the IRS, companies have to follow a specific timetable, calculation and depreciation method known as a modified accelerated cost recovery system. Many GAAP depreciation methods result in a small residual value for assets at the end of their life, whereas the IRS system leaves no value, said
accounting professor at Texas A&M University. This means that companies can recover the entire cost of an asset for tax purposes, but not for financial reporting.
To provide clarity, some investors want the FASB to require companies to reconcile their pretax income under GAAP to the taxable income on their tax return. “That would explain plenty about the differences in the two bases of accounting and provide a view into the strategies used,” Mr. Ciesielski said.
Write to Mark Maurer at email@example.com
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