The Financial Accountability and Corporate Transparency (FACT) Coalition has petitioned the Securities and Exchange Commission (SEC) to write a rule that would require more tax disclosures from public companies in light of increasing tax evasion efforts. Investors are also concerned about the potential ramifications of the Organisation for Economic Co-operation and Development’s (OECD) global 15% minimum tax, which is being adopted in the European Union and other jurisdictions.
“When multinational companies gamble on risky tax-planning strategies, it’s their investors that ultimately pay the price,” Ian Gary, executive director of the FACT Coalition, said in a statement. “The message sent by today’s petition is clear. The SEC must act to give investors the information they need to determine whether these companies are building sustainable, long-term earnings based on genuine competitive advantage, or prioritizing short-term profits through aggressive tax avoidance.”
While the FASB’s new December 2023 accounting standard on corporate income tax will improve disclosures, the FACT Coalition said that is not enough. (See Newly Issued FASB Rules Require Fuller Disclosure of Taxes Paid in US, Other Countries in the December 15, 2023, edition of Accounting & Compliance Alert).
The FASB requires companies to provide more information on their total cash taxes paid at the state, local, federal, and foreign levels, as well as more effectively break down the calculation of their effective tax rates.
But the organization said it needs full, mandatory public country-by-country reporting (CbCR) of basic tax and other financial information from publicly listed multinational companies in the U.S.
The “new rate reconciliation disclosures are limited (because the rates are generally reconciled only to the United States tax rate, the FASB disclosure would do little to reveal tax risks relating to profits shifted among other countries) and overall not as useful for investors as CbCR,” the petition states. “FASB’s revised tax disclosure standard falls short of public CbCR, as it is limited in scope with regard to the types of companies and metrics it covers. It is up to the Commission to build on this progress and close the remaining gaps.”
Global Reporting Initiative Tax Standard
In particular, the organization said the SEC should adopt the Global Reporting Initiative (GRI) Tax Standard 207-4 because it presents a higher disclosure standard than required by the commission today. Under GRI 207-4, companies must report income cash taxes paid, income tax accrued, related-party revenues, third-party revenues, net profit or loss, tangible assets, and employee headcount.
The coalition said that this standard is more suitable for investors than the confidential CbCR developed by the OECD for tax authorities.
The reform group filed the rulemaking petition with the SEC on July 31, 2024, on behalf of 87 institutional investors with more than $2.3 trillion in assets under management. Boston Common Asset Management, the AFL-CIO, and Trillium Asset Management are some of the notable investors who signed the petition.
In the U.S., the FACT Coalition, a group of more than 100 organizations which promotes policies to combat illicit finance and fair international tax system, for years has been pressing the SEC and the FASB to provide more transparency into corporate income tax. And this is its latest effort.
The stakes for investors are too high for the SEC not to write a rule, the FACT Coalition said.
“The urgent need for greater tax transparency – brought into stark contrast by high-profile, ongoing transfer pricing cases against household names including Apple, Microsoft, Coca Cola, and Amgen – has spurred a wave of direct, company-level advocacy from investors in recent years,” the reform group said.
The organization noted that 21% of Amazon shareholders voted in favor of proposed a resolution calling for country-by-country tax reporting in 2022. Shareholders have subsequently brought similar resolutions at Microsoft, Cisco, ConocoPhillips, ExxonMobil, and other major U.S. multinational corporations.
Moreover, the demand for tax transparency has led to lawmakers in some jurisdictions to pass laws related to public CbCR.
“As headquarters to the most major multinational corporations, and as a market for thousands more, the U.S. has an opportunity to lead a sea-change in global tax transparency,” said FACT Policy Director Zorka Milin in a statement. “Decisive action by the SEC to require public tax disclosures will not only help to protect investors, but also promote a fairer, more robust global market where success is based on innovation, not tax dodging and accounting gimmicks.”
Legislation
In the meantime, legislative efforts by some Democrats in Congress to require multinational companies to disclose information related to the tax jurisdiction, income, and assets on a country-by-country basis have stalled.
The U.S. Chamber of Commerce had opposed the FASB’s standard-setting activities on tax disclosure. And Republicans who tend to be sympathetic to corporate concerns are trying to exert pressure on the SEC to nix the FASB’s standard.
For example, in a rare move, the House Appropriations Committee inserted a rider in a bill funding the SEC’s fiscal 2025 prohibiting the commission from approving the FASB’s budget unless it withdraws its income tax disclosure rule. The SEC oversees the accounting standard-setter. (See As House Targets FASB Income Tax Rule, SEC Chair Gensler Cites ‘Risk’ of Politicizing Accounting Standard Setting in the June 14, 2024, edition of ACA.)
It is unclear if that rider will ultimately survive, however, as the counterpart committee in the Senate did not include the same language. The exact figures and language for the SEC’s budget for fiscal 2025 are yet be determined.
This article originally appeared in the August 8, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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