Financial Accounting News

Companies to Offer More Income Tax Details Under Accounting Plan

March 25, 2019, 9:37 PM

Companies would have to provide more details about income taxes they pay under a proposal by U.S. accounting rulemakers.

The Financial Accounting Standards Board said its March 25 proposal is intended to help investors and analysts understand a business’s tax liabilities as well as international tax exposure—a hot topic as more U.S. companies move operations and investments overseas.

Under FASB’s proposal, businesses must break down their income tax expenses or benefits, as well as cash tax paid to domestic, foreign, and state governments.

FASB stopped short of requiring a country-by-country breakdown of income taxes—a long-standing request from investors and analysts, who want details about companies’ foreign tax exposures as a way to help them understand future liabilities. If, for example, a U.S. company has major operations—and income—in the U.K. and the U.K. is considering overhauling its tax code, that company could be on the hook for significant income tax obligations.

“There’s a lot in here that’s very positive,” said Todd Castagno, executive director and equity research analyst at Morgan Stanley. “But the piece of fruit everyone was really hoping for was more granularity toward the jurisdictions.”

No Country-by-Country

FASB acknowledged investors requested country-by-country breakdowns, and even said that providing income tax expense or benefit in such detail would be relatively simple for most companies.

“However, some stakeholders indicated that the disclosure of income taxes paid at a country level could be misleading because income taxes paid in a given year often do not represent income taxes on pretax income in that year because of other payments (for example, settlements, refunds, prepayments, and differences in tax reporting years),” FASB wrote.

FASB’s proposal also calls on companies to disclose their sources of income or loss from operations before tax expenses or benefits, broken down by domestic and foreign.

The proposal doesn’t require any new disclosures tied to provisions of the 2017 tax overhaul, including the Global Intangible Low-Taxed Income (GILTI) regime, the Base Erosion Anti-abuse Tax (BEAT), or foreign-derived intangible income.

Publicly traded companies would have to provide more details than private companies and other organizations. Public companies would have to disclose:

  • the line items in their financial statements in which unrecognized tax benefits are presented and their related amounts;
  • the amount and explanation of the valuation allowance recognized during the reporting period; and
  • the total amount of unrecognized tax benefits that offsets deferred tax assets for carryforwards.

Second Stab at Tax Disclosures

FASB’s March 25 proposal was its second stab at improving income tax disclosures. The board in July 2016 issued a set of new disclosure requirements, including requiring companies to break down income taxes by country. Businesses panned the proposal.

The plan hit a second roadblock after the November 2016 elections, when it became clear that tax law changes were a major policy goal of President Donald Trump. FASB put the project on hold as Congress in 2017 debated the tax law. Once Trump signed the tax overhaul in December 2017, FASB realized it needed to reevaluate the project because some of the proposals in its original plan no longer were relevant.

To contact the reporter on this story: Nicola M. White in Washington at nwhite@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Steven Marcy at smarcy@bloombergtax.com

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