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Newly Issued FASB Rules Require Fuller Disclosure of Taxes Paid in US, Other Countries

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

The nation’s main accounting rulemaker on December 14, 2023, published new disclosure rules that require more transparency about income taxes companies pay in the US and other countries — provisions that address about 30% of the overall net income of some companies that investors know little about.

The FASB issued the rules as Accounting Standards Update (ASU) No. 2023-09Income Taxes (Topic 740) Improvements to Income Tax Disclosures, to increase the disclosure requirements around rate reconciliation information and certain types of income taxes companies are required to pay.

For public companies, the standard is effective for annual periods beginning after December 15, 2024 (i.e. 2025 for calendar year-end filer), and a year later for private companies. Early adoption is permitted.

The guidance was developed so that users of financial statements can get better information about how the operations, related tax risks, tax planning, and operational opportunities of companies affect their tax rates and prospects for future cash flows.

Companies need to start adoption efforts now, accounting practitioners said.

“FASB’s new disclosure standard goes right to the heart of increasing tax transparency disclosures that we’re seeing happen here in the US and globally and that tax information will be used by stakeholders for various purposes, including for purposes of understanding a company’s performance with respect to ESG related measures, of which tax is one,” Kristen Gray, Americas Sustainability Tax Leader at Ernst & Young LLP, said. “This is a world that multinationals, at least here in the US, haven’t been required to operate in with respect to that level of tax transparency so it will be incumbent for companies to understand what the potential implications are with respect to reporting out this additional information,” she said. “They definitely want to understand if you’re going to have to call out certain jurisdictions in the effective tax rate reconciliation or other tax disclosures, before the rule comes into force in 2025.”

Investors Pressed for the Changes

The changes come after investor groups pressed the FASB to focus its standards-setting efforts to require more details about the income taxes companies pay, stressing that the one big chunky number being provided in footnotes – essentially the foreign tax differential – isn’t enough. Investors said they want figures broken down to reflect how a company is structuring its tax related strategies – revealing risk, increased opportunities, and the governance of the firm.

“I think personally where the FASB has gone is going to very helpful, it’s certainly going to be an improvement over what you see in the tax footnotes now,” Robert Wilson Jr., director of global ESG integration at MFS Investment Management, said. “The rate reconciliation table is the most important thing for me,” he said. “So I’m excited about that piece of what the FASB has put together, providing a little bit more detail on ‘okay at least give me some of the biggest countries that are more influential in creating that foreign tax rate differential’ so that we can break it down a bit more, understand it a bit better and use that to get a better sense for how do we feel about earnings risk or opportunity, how do we feel about the way the company is handling it from a governance perspective.”

The purpose of the rate reconciliation is to reconcile the statutory rate to the effective tax rate, which is based on the income tax expense or benefit that a company has recorded. Income tax expense is what the company is expected to pay imminently and what is expected to pay in the future.

Overall, the standard is a slightly narrower iteration of the proposal, veering away, for example, from the presentation of unrecognized tax benefits, cross-border taxes, and certain interim period requirements.

For the FASB, the changes proved more controversial than the board expected, generating pushback from trade groups who said they don’t think enough consideration was given to the broader economic effects of the changes, among other issues. Asked by Thomson Reuters on December 12 about businesses’ concerns, FASB Chair Richard Jones repeated much of what he has said in the past. “I think anytime you have the word ‘income tax,’ it gets people’s attention,” Jones said, following a hearing by the Financial Services Committee’s Capital Markets subcommittee in Washington, DC. “But if you look at our standard, it’s focused on the needs of investors, people who actually use the financial statements to make capital allocation decisions, and they needed some help with income taxes,” he said. “We looked at two existing disclosures, I think we have come up with a good way to improve those disclosures and we are looking forward to seeing them implementing it.”

More Details in the Reconciliation Table

Under the new guidance, said Ro Sokhi, partner at UHY LLP, companies need to disclose the following eight categories in the rate reconciliation table by both percentages and amounts:

  • State and local income tax in the country of domicile, net of federal income tax effect
  • Foreign tax effects, including any state or local taxes in foreign jurisdictions
  • Enactment of new tax laws
  • Effect of cross-border tax laws
  • Tax credits
  • Valuation allowances
  • Nontaxable or nondeductible items
  • Changes in unrecognized tax benefits

Within the foreign tax effects category, a further breakdown is required for individual reconciling items that meet or exceed a 5% threshold for the effects of cross-border tax laws, tax credits, and nontaxable or nondeductible items, Sokhi explained. Annually, companies need to disclose income taxes paid, net of refunds, by jurisdiction, if the amounts equal or exceed a quantitative threshold of 5% of total income taxes paid, net of refunds.

(Additional Reporting by Soyoung Ho in Washington, DC)


This article originally appeared in the December 14, 2023, edition of Accounting & Compliance Alert, available on Checkpoint.

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