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Disclosure Rules May Be Added for Unremitted Foreign Earnings, Taxes

The FASB wants to improve the information companies provide to investors about their foreign tax liabilities. The accounting board wants companies to break down their income taxes by country and provide more detail about how they calculate their overall income tax expense.

U.S. businesses with foreign operations could soon have to provide more information about the tax implications of their foreign earnings.

The FASB on February 11, 2015, reached a series of tentative decisions that require multinational companies to include in the footnotes to their financial statements a breakdown of income taxes associated with foreign earnings versus domestic income, and a further breakdown of “significant” foreign earnings by jurisdiction.

The disclosures would help investors, analysts, and policymakers learn more about the tax implications of U.S. companies moving, or remitting, their foreign earnings back to the U.S. Foreign taxes have emerged as a significant political and social policy issue in recent years as news stories have drawn attention to the actions major companies like General Electric Co. and Apple Inc. take to shift earnings to nations with low tax rates. After Jean-Claude Juncker was named European Commission president in 2014, many people criticized his decisions while prime minister of Luxembourg from 1995 to 2013 to help companies like Amazon.com Inc. get favorable tax treatment when they set up operations there.

The breakdown by country could give analysts more insight into the sustainability of low foreign tax rates, the FASB has said in discussions about the project.

In addition to a breakdown of taxes by country, the FASB wants more details about tax expense.

A company’s current tax expense line is made up of several items, including taxes recognized, deferred tax liabilities, and taxes on foreign earnings that were earned and remitted in the reporting period.

An analyst can easily determine domestic earnings and domestic tax breaks but has more trouble when it comes to foreign earnings, said FASB member Marc Siegel.

“This is really to me understanding and analyzing the income tax expense line. That’s what it’s about,” Siegel said.

Businesses are required under Topic 740, Accounting for Income Taxes, to disclose the cumulative amount of their undistributed foreign earnings. Analysts and investors told the FASB the disclosure would be more useful if it was broken down by country. The more detailed information would let them assess the credits that could be applied to the tax for remitting their earnings, research the advantages related to remitting earnings from certain jurisdictions, and understand the tax exposures and concentrations the company has in different countries, FASB staff accountants told the board.

FASB members agreed that it would require a breakdown of domestic tax expense that’s associated with foreign earnings and undistributed foreign earnings that are no longer considered indefinitely reinvested. Companies would have to explain why the earnings are no longer considered indefinitely reinvested and would have to break down the information by country.

Companies would further have to disclose the temporary difference for the cumulative amount of indefinitely reinvested earnings for countries that represent at least 10 percent of their foreign earnings.

The board decided not to require disclosures that would give a breakdown of deferred tax liabilities recorded for unremitted foreign earnings by country, estimates about the amount of unrecognized deferred tax liabilities, or details about conditions or events that could change a business’s plans for undistributed earnings.

A deferred tax liability represents the difference between the U.S. tax the company expects to pay once foreign earnings are brought back to this country minus the taxes paid overseas. Topic 740 requires disclosure of unrecognized deferred tax liabilities for indefinitely reinvested foreign earnings, but it provides what the standard-setters call a “practicability exception” if the number can’t be calculated.

Of the 500 largest U.S. companies, 89 percent use this break, a FASB accountant told the board. The research team said it considered asking the board if it wanted to require companies to do the calculation, or at least a simplified version of it. The full calculation would be too much work for companies, but a simplified version wouldn’t be helpful to investors, the FASB concluded.

“So instead of making a false assumption of what the timing might be… just give the total amount of unremitted foreign earnings and significant amount by jurisdiction, and let the user decide what they think the timing is, the tax strategy is,” FASB member Thomas Linsmeier said.

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