Challenging Task of Meeting FASB Income Tax Disclosure Requirements Not a Walk in the Park
Spilling the Beans on Tax Transparency: FASB's Latest Update
In a groundbreaking move, the Financial Accounting Standards Board (FASB) has approved an update to income tax disclosures as of August 30. This update compels both public and private companies to provide a more intricate breakdown of income taxes paid in the US and abroad, starting from 2025.
As things stand now, US corporations only reveal the total cash taxes they've shelled out, without disclosing state-by-state or international details. Under the new rules, these companies will be obligated to furnish extensive information about their tax scenarios.
Beginning in 2025, publicly listed companies will be required to submit various tax-related details, while private companies have until 2026. This includes presenting the annual amount of income tax paid, net of refunds received, to state, federal, and foreign taxing authorities. If a company pays at least 5% of its total tax payments to an individual country or jurisdiction, the amount and the country/state concerned must be disclosed.
"This update is a significant stride towards greater financial transparency," said Brett Weaver, partner and ESG tax leader at KPMG.
Public companies will be expected to share critical details that reconcile their domestic statutory and effective tax rates. These details include foreign tax effects, enactment of new tax laws, the impact of cross-border tax laws, tax credits, valuation allowances, and nontaxable or nondeductible items.
"This update is a significant stride towards greater financial transparency," Weaver reiterated. "ESG has long advocated for more transparency in the tax sector, focusing on the disclosure of companies' tax strategies and the jurisdictions where taxes are paid."
The FACT Coalition, an influential alliance of state, national, and international organizations combating tax evasion, emphasized the importance of investors having access to information about their portfolio companies' tax practices, especially multinationals.
However, some vocal critics, including Congressional Republicans, have lambasted the update, calling it a "politicized attempt to name-and-shame companies" with the potential to drive foreign tax audits.
The update, first proposed in 2016, has undergone revisions since its initial proposal in March 2023. Some requirements have been eased, such as postponing the effective date and making retrospective adoption optional. Furthermore, the disclosure requirements for unrecognized tax benefits at the country level have been relaxed.
While the changes have alleviated some of the initial concerns, adhering to these new standards won't come easy. Although the 2025 deadline appears distant, we're racing against time, said Weaver. He expects few businesses to adopt early compliance, as you won't usually see with new accounting standards. Currently, most companies lack the necessary processes to disclose this information accurately and effectively.
One significant hurdle companies will face is generating a "profit before income tax" number at a country level that conforms to generally accepted accounting principles. Additionally, the FASB accounting standards update, a revision to Topic 740, coincides with the European Union's introduction of the Public CbCR directive (country-by-country reporting). Public and private multinationals will need to disclose revenue, profits, taxes, employment numbers, and value of assets.
"When you layer these requirements, you'll easily understand a company's tax strategy," Weaver concluded. Investors, analysts, and regulators will now be privy to critical tax details such as negotiated tax incentives, increasing their ability to assess tax risks and opportunities more efficiently.
- In response to the FASB's update on income tax disclosures, Brett Weaver, a partner at KPMG, stated that this is a significant step towards financial transparency.
- Weaver further expressed that the update aligns with ESG's long-standing advocacy for transparency in the tax sector, focusing on disclosing companies' tax strategies and the jurisdictions where taxes are paid.
- The FACT Coalition, an alliance against tax evasion, highlighted the importance of investors having access to information about their portfolio companies' tax practices, especially multinationals.
- Critics, including Congressional Republicans, have criticized the update as a "politicized attempt to name-and-shame companies" with the potential to drive foreign tax audits.
- The update, initially proposed in 2016, has been revised since its initial proposal in March 2023, with some requirements eased and the effective date postponed.
- One challenge companies will face is generating a "profit before income tax" number at a country level that conforms to generally accepted accounting principles.
- The FASB accounting standards update coincides with the European Union's introduction of the Public CbCR directive, requiring public and private multinationals to disclose revenue, profits, taxes, employment numbers, and value of assets.
- Adhering to these new standards won't come easy, said Weaver, as most companies lack the necessary processes to disclose this information accurately and effectively.
- Beginning in 2025, publicly listed companies will need to submit various tax-related details, including foreign tax effects, enactment of new tax laws, the impact of cross-border tax laws, tax credits, valuation allowances, and nontaxable or nondeductible items.
- In 2025, publicly listed companies will be required to provide a more intricate breakdown of income taxes paid in the US and abroad, starting from that year.
- To ready their finance departments for the changes and understand the implications on their business policies and legislation, companies are readying themselves for the future, amidst the ongoing uncertainties and isolation brought about by politics and general news.
