Investors, Businesses Face Off on Income Tax Disclosure Plan

US accounting rulemakers’ third attempt to force companies to reveal more details about their income taxes is just as controversial as the prior two efforts.

Business groups want the Financial Accounting Standards Board to scale back or even scrap a plan that would require businesses to include in their financial statement footnotes a detailed breakdown about the income taxes they pay; investor groups object that the proposal doesn’t go far enough.

“We have serious concerns,” the Business Roundtable wrote to FASB. The US Chamber of Commerce described the plan’s “infirmities” as “sufficiently extensive” and called on the standard-setterto abandon the proposal altogether.

The proposal “reflects the efforts of politically driven activists in seeking to compel firms to disclose information—using GAAP under the guise of providing decision-useful information for investors—to name, shame, or otherwise vilify companies, influence tax policy, increase taxes on businesses, and deter investment,” the chamber wrote, referring to the use of generally accepted accounting principles.

Investors, conversely, have complained for years that current requirements that companies disclose a total of the cash taxes they pay—without any information about the country or state jurisdiction—offers little to no insight into their tax exposure. For companies with overseas operations, that’s a big problem; if a country raises tax rates where a company operates, investors want to know how much money is at risk.

FASB in March released a proposal for companies’ quarterly reports to include the year-to-date amount of income tax they paid, net of refunds received, to state, federal, and foreign taxing authorities. They would have to provide even more details in annual reports. If they pay at least 5% of total tax payments to any country or jurisdiction, they’d have to individually list the country or state and to disclose the amount of tax paid in annual reports.

MFS Investment Management, which manages $500 billion in assets, encouraged FASB to approve the proposal “as soon as possible.” “In addition to understanding earnings risks and opportunities, we believe improved tax disclosures will help us evaluate the governance of companies we own on behalf of our clients. We believe more aggressive management of tax issues could, at times, provide evidence that a company’s management team and board may have a risk tolerance that is greater than we would prefer,” the investment firm wrote.

Others encouraged FASB to go further, requiring country-by-country breakdowns of taxes, regardless of whether payments meet a certain threshold. Norges Bank Investment Management, which is responsible for investing the Norwegian pension fund, said it wanted disclosure of taxes paid across all jurisdictions, as did Vision Super, an Australian pension fund. “This information would help us to assess tax risk,” the fund wrote.

The Financial Accountability and Corporate Transparency (FACT) Coalition, which long has lobbied for more tax transparency, also called for country-by-country breakdowns, but indicated FASB’s plan moved in the right direction.

“Nevertheless, the proposed revisions to rate reconciliation and income taxes paid disclosures that are the subject of this comment represent an imperfect step towards greater transparency for U.S. filers,” the group said.

Third Plan in Seven Years

FASB’s plan marks the third time in seven years that the board has tried to make businesses divulge details about one of the most complex areas of their financials. After FASB in 2016 issued its first plan, but multinational companies balked at the idea of sharing so many new tax details. The 2017 federal tax overhaul then made parts of the plan obsolete, so FASB shelved the proposal, anyway. The accounting board regrouped in 2019 with a new proposal, but companies and investors presented a rare united front: nobody liked it.

The latest proposal aims to balance increasingly loud calls for companies to increase transparency about the taxes they pay with what’s practical for businesses to provide. FASB in its proposal touts improvements to what’s called the rate reconcilation table, a table that reconciles businesses’ statutory tax rates to the effective tax rate. The proposal also streamlines some of the wording companies use so it will be easier for analysts to compare companies.

In the table, public companies would be required to disclose state and local income tax, net of federal income tax effect, foreign tax effect, enactment of new tax laws, effect of cross-border tax laws, tax credits, valuation allowances, nontaxable or nondeductible items, and changes in unrecognized tax benefits.

Financial Executive International’s committee on corporate reporting, which represents major companies like Bank of America Corp. and Walt Disney Co., raised concerns about potentially significant one-time costs companies will incur to draw up the proposed rate reconciliation table, but said it it believed provisions in the proposal were “generally operable.”

Tax Executives International, an organization that represents in-house tax professionals at major corporations, said its members were concerned about the complexity of new tax information that would be disclosed under the proposed amendments and “the real possibility that the information could be misinterpreted and thus misapplied.” It urged FASB in its deliberations to consider not only how disclosures could improve financial decision-making but also how it could be misused.

The American Bankers Association also raised concerns about financial statement readers misinterpreting new information.

The Big Four accounting firms—Ernst & Young LLP, Deloitte & Touche LLP, KPMG LLP, and PricewaterhouseCoopers LLP—said they generally supported FASB’s plan, with all of the firms asking for specific clarifications to make the proposal easier to follow.

Comments on the proposal were due May 30.