In what has become an annual tradition, the Financial Accounting Standards Board (FASB) has once again placed corporate tax transparency at the top of its governance agenda for the coming year. The new proposal, which is the third such proposal in the last seven years to focus on getting companies to disclose more details about the amount of tax they pay, will introduce strict new reporting requirements. about American companies.
Currently, public companies must declare – at least once a year – the amount of tax they pay, together with the total income before tax for the operation in the United States and abroad, as well as their expenses or benefits. But companies don’t have to publish their tax and profit data by country.
According to the new proposal, both public and private companies will need to cut the amount of taxes they pay at the federal and state levels, but also on the amount they pay in foreign jurisdictions. everyone who works. This information needs to be submitted quarterly and annually. And, if a particular jurisdiction represents more than 5% of their total taxes for the year, they need to include this information in their financial statements.
Increased partial transparency of larger trends
The FASB’s recommendations should come as no surprise to anyone watching the evolution of corporate standards on everything from taxes to investments to environmental practices. environmental, social and governance (ESG). As a general rule, regulators, standards bodies and legislators around the world are moving towards a more is more corporate transparency philosophy.
In reality, this is not a bad thing. Whether talking about the payment of corporate leaders, risk management, carbon emissions or other topics in the strategic roadmap, increasing the visibility of the company’s operations can only help investors and reassure them. responsibility among business leaders. But the new proposal’s emphasis on country-by-country reporting raises the level of complexity in tax authorities in a way that companies may not be prepared to deal with. many.
Companies are already struggling to meet the demands of new and evolving regulations. In particular, the Inflation Reduction Act, signed last summer, which adds minimum tax requirements to companies with revenues of more than $1 billion. It’s a requirement that introduces many new challenges for tax and finance departments at a time when many are already struggling under the burden of increased workloads and talent shortages.
A third issue with the railroad is historical reporting
Of course, there is no guarantee that the FASB’s proposal will be clear. The FASB introduced a similar proposal in 2016, which required companies to clearly disclose their U.S. income taxes and foreign taxes. The standards body updated that recommendation in 2019 to include a more frequent quarterly reporting requirement. In each case, companies have successfully challenged the rules, citing everything from overly burdensome reporting requirements to the threat of increased confusion caused by different tax rates and systems in different jurisdictions. different countries.
It is a debate that dates back to 2003 and the creation of the Multinational Reporting Standard, which was proposed as a way to create a centralized way to monitor the activities of multinational companies abroad. It became the basis of the Organization for Economic Cooperation and Development (OECD) guidelines for national reporting in 2015. In more than two decades, regulators, tax authorities, NGOs and multinational companies have debated everything from the validity of global tax reporting to reduce transfer costs and corporate tax evasion to the risk of a threat to national security.
Regardless of the specific argument made, the conclusion is always the same. American companies have dodged the bullet with each country’s requirements, but the FASB continues to approach the request with every new proposal. Will this be the last year?
It is not certain. But, for tax and finance professionals who read the tea leaves, it is certain that the trend towards more – not less transparency will be with us in the future. This puts the onus on teams to start getting the data, analytics and resources they need to meet these growing demands, or to implement them formally this year, next year. or in another decade. Ultimately, whether tax authorities need to report quarterly, annually, locally or globally, they still need to be transparent about what they do to get there. For those who wait to force it, it may be too late.