The FASB received a mixed bag of responses by its May 30, 2023, deadline to proposed income tax disclosure rules, some of which favor the changes while others strongly oppose and want them dropped.
The rules were developed to address concerns that current income tax disclosures do not provide investors with sufficient information to understand the tax provision of a company that operates in multiple jurisdictions. But more than seven major trade organizations in comment letters have asked the board to either remove the proposal or to substantially revise it.
As written, the guidance could be misinterpreted and misapplied, resulting in information that is not useful to investors—or worse, according to May 30 letters written separately to the FASB from the Tax Executives Institute (TEI), the U.S. Chamber of Commerce, The National Foreign Trade Counsel, Business Roundtable, American Bankers Association (ABA), American Council of Life Insurers, Financial Executives International (FEI), Managed Funds Association, SIFMA, and others.
The proposal “would impose unreasonable and unworkable requirements that would far outweigh the benefits enumerated by proponents and eclipse any positive aspects of the proposal” and the request for enhanced tax transparency by investors is overstated “and urge that these new requirements be revised in a manner that would minimize their negative effects,” Business Roundtable’s Vice President, Tax and Fiscal Policy Catherine Schultz wrote.
And TEI said members were concerned over “the complexity of new tax information that would be disclosed under the proposed amendments, assumptions that would be required to use the granular information in investment decision-making, and the real possibility that the information could be misinterpreted and thus misapplied, particularly when amounts are immaterial to a company’s financial position,” and suggest – at minimum – limits to the provisions.
Plethora of Concerns
The FASB proposed the changes in March to solicit public input about whether and how to boost disclosure rules in ASC 740, Income Taxes, around cash taxes that companies pay both in the U.S. and overseas. The changes stemmed from requests the board received from investors and others who have been pushing for the guidance. But industry groups said it could be tough for those that are not tax experts to apply or would pose other issues.
Specifically, SIFMA said it does “not believe that disaggregating the information in this manner is helpful; and in fact, it would likely be confusing for financial statement users,” and “would require significant expertise in accounting for income taxes, company-specific knowledge and an understanding of income tax rules and frameworks in multiple jurisdictions to be able to decipher and understand the disaggregated reconciling items.”
Further, the ABA cautioned against changing income tax disclosures, stressing it “will result in disclosures that are neither produced nor used by banks in managing the business and will, thus, be challenging for investors to consume” in a useful manner.
Moreover, the National Foreign Trade Counsel (NFTC) said the FASB should reconsider adopting the proposal, concerned that the changes would expose U.S. multinational entities to enhanced scrutiny by foreign governments, regulators, and taxing authorities and place them at a competitive disadvantage as compared with their non-U.S. peers.
Board Received 50 Comment Letters by May 30 Deadline
The FASB received 50 comment letters to Proposed Accounting Standards Update (ASU) No. 2023-ED100, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, by its deadline, including from Big Four and other accounting firms, CPA state societies, industry trade groups, analysts, investors, businesses and various other entities. Many of those groups support the proposal with suggested revisions.
The most significant items proposed would require companies to break out amounts paid for taxes between federal, state, and foreign taxing jurisdictions, rather than just disclosing a lump sum amount.
Similarly, the rate reconciliation table would need to be disaggregated into eight specific categories, with these categories further disaggregated by jurisdiction and for amounts exceeding 5 percent of their domestic tax rate. The rate reconciliation disclosures would also require both dollar amounts and percentages—currently it is either/or. (See FASB Issues Proposal that Will Boost Disclosures around Income Taxes Companies Pay in U.S., Overseas in the March 16, 2023, edition of Accounting & Compliance Alert.)
FACT Coalition, Others in Favor with Suggestions
Among those that favor the changes, include some who want the board to go a step further.
The Financial Accountability and Corporate Transparency (FACT) Coalition, for example, favors the proposal but said it falls short of providing a clear, complete picture of a given multinational enterprise’s (MNEs) tax activities and potential exposures.
Among other things, the group has asked for additional, supplementary disclosure requirements of country-by-country data for multinational filers. “Investors with more than $10 trillion in assets under management have endorsed full public country-by-country reporting to inform their investment decisions,” wrote FACT Coalition Executive Director Ian Gary, and Government Affairs Director Erica Hanichak.
Similarly, the Principles for Responsible Investment (PRI) said it supports the proposal to address the rate reconciliation, income taxes paid and related disclosures, and recommends that the FASB implement the guidance in full.
Moreover, the American Accounting Association’s Financial Reporting Policy Committee said the proposal would improve the information that is provided to investors “to assess an entity’s tax planning activities, risks and worldwide operations, and predict its future cash flows.”
The Committee “believes disclosing the amount of taxes paid by material jurisdiction is helpful, and the proposal could require additional disclosures that would help investors better predict an entity’s future cash flows,” and “also encourages the Board to avoid using a bright-line 5 percent threshold to determine whether income tax disclosure items are material.”
The AICPA’s Financial Reporting Executive Committee (FinREC) also wrote in support of the proposal with suggestions, as did the Financial Reporting Committee of the Institute of Management Accountants (IMA).
This article originally appeared in the June 1, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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