FASB Income Tax Disclosure Framework: Benefits & Complexities — Part 1

Four years ago, the Financial Accounting Standards Board embarked on its journey to provide a final Accounting Standards Update for changes to disclosure requirements for income taxes.

Since then, the board has sought comment on proposed changes, seen the entire corporate tax world upended with the passage of the Tax Cuts and Jobs Act, revised its proposal, sought comment yet again, and now been set back by the global pandemic. However, change is coming. And before it does, it’s worthwhile to explore the perceived investor benefits of disclosures and insight into the complexity and evolving landscape of proposed changes for a multinational enterprise.

The ultimate goal should be simple: sustainable consistency for reporting in current and future periods. The question is, how do we get there?

First, let’s look at how we got here. Why is FASB considering the change in the first place?

The amendments to the disclosure requirements for income taxes are part of the board’s larger effort to improve the effectiveness of disclosures on income taxes. The amendments are intended to result in more meaningful, effective, and decision-useful information, as there may be a current diversity in practice for this issue.

Companies generally agree with updates increasing the usefulness of income tax disclosures, although they are cognizant of cost/benefit considerations and potential misunderstandings of how such disclosures may be interpreted.

The potential benefits of disclosures include providing clear and usable information that, consistently applied, will minimize deviations in interpretation of the disclosures.

However, some disclosures aren’t intuitively matched to the amounts reported in financial statements. For example, determination of a valuation allowance attributable to deferred tax assets in a reporting jurisdiction is based on all available evidence—both positive and negative.

All evidence is considered, and potential scheduling of future taxable income or deferred tax liabilities is applied as a prescribed tool meant to match the offset of potential future tax deductions.

Subjectivity is an inherent part of this determination, which is very difficult to discern in financial statements that may include different tax jurisdictions and tax return filing groups with dissimilar tax attributes.

How Did We Get Here?

In July 2016 FASB issued a proposed Accounting Standards Update addressing the complexities of current disclosures for income taxes, requesting comments for certain changes.

But in 2017 the board suspended work on the proposal as the Tax Cuts and Jobs Act was progressing to enactment in December of that year. After that, the board reviewed TCJA changes and prior comments on its disclosure proposal, ultimately deciding a revision was in order.

The board made its second attempt public in March 2019, again asking for comments. Following the second round of comments, the board met in February 2020 and concluded more research was in order. And then there was Covid-19.

Presently FASB staff is tasked with research and outreach on potential alternatives to disclose certain disaggregated income tax information. The board also has directed the staff to research various other proposed amendments but, as of now, the disclosure issue has yet to make it onto a meeting agenda.

Evolution of Taxes

Understanding the TCJA’s impact on FASB’s proposal is key. The world of taxes—especially international—has experienced a tsunami of changes in the last three years that overshadows the last 50 years of expected norms. These changes exacerbate the disclosures of income taxes, as the bases for state, federal, and international taxes are further commingled and interdependent.

Starting in the U.S., the TCJA introduced significant complexities including the determination of interest. These provisions were added to the former U.S. rules of domestic and international taxation, and not as a substitute. As a result, the U.S. currently has a “pseudo-territorial” regime of taxation, whereby income from certain foreign activities and operations are incremental to the regular federal and state tax rates of its U.S. operations.

Income of foreign affiliates is determined for inclusion in the U.S. federal tax base via previously enacted Subpart F rules and the Global Intangible Low-Taxed Income provision of the TCJA, as technical rules for applying this concept are still being issued in the form of proposed and final regulations. The GILTI component results in additional US tax and a higher effective tax rate.

Additionally, there are TCJA incentives for foreign source income via the Foreign Derived Intangible Income rules that may result in a corresponding U.S. tax benefit.

State rules on deductible interest, GILTI, and FDII are continually evolving, providing further disparity between federal and state taxes in current and future years, including the timing and recognition of tax carryovers and carrybacks to other years.

Additionally, the EU is working earnestly to draft new rules for taxation among its 27 member states. These rules have a direct impact on federal, state, and international tax provisions and related disclosures.

Compounding all that on the global front are continuous efforts by the Organization for Economic Cooperation and Development to fight tax inequities and perceived tax abuses under its project to crack down on base erosion and profit shifting begun in 2013 under Pillar One, addressing taxation of a digital economy, and Pillar Two, which introduces a global minimum tax regime. These proposals include relevant allocations and apportionment of taxes to different tax jurisdictions that are not intuitively evident.

Additionally, the UN Committee of Experts on International Cooperation in Tax Matters recently released a proposed model to tax automated digital services. The proposal, when finalized, represents a new Article 12B to the UN Model Double Tax Convention between Developed and Developing Countries.

Guiding Principles

Recent and evolving complex rules are continually changing the landscape for income tax disclosures.

The new income tax disclosure framework should adopt guiding principles that help investors with useful requirements that don’t include irrelevant granular data that can’t be used for practical interpretation.

Part 2 of this series will discuss a principles-based approach that would avoid duplicative and non-relevant disclosures, while aligning with SEC Regulation S-X, which details financial reporting requirements.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information
Keith Brockman is a CPA, CGMA, and authors a Best Practices international tax blog at strategizingtaxrisks.com. He is a frequent presenter at international tax conferences, having over 30 years of experience as a corporate tax executive. He has served on tax committees in the U.S. and Europe with Tax Executives Institute and Manufacturers Alliance for Productivity and Innovation.